Islamic Microfinance

Islamic Microfinance

by MSC

In May 2017, The Microfinance Support Centre Ltd (MSC became the first institution to implement Islamic Microfinance in Uganda, having been identified by the Government as the most suitable agency to champion its implementation.

This new mode of financing was as a result of Government of Uganda’s efforts, through the Ministry of Finance, Planning and Economic Development, to seek strong partnerships in the implementation of the Rural Income and Employment Enhancement Project.

Such partnership was found in the Islamic Development Bank, which supported the Government to roll out Islamic microfinance to benefit up to 5000 people.

What is Islamic Microfinance?

Islamic Microfinance is a type of financial service that is guided by the principles of Islamic (Shari’ah) law. Islamic law emphasizes moral and ethical values in all dealings, prohibiting the payment or receipt of interest (riba). It also prohibits investment in businesses dealing in pigs, alcohol and gambling, among others. Uncertainty (Gharar) and market speculation (Maysir) are not practiced either under Islamic Microfinance.

How does it work?

Islamic Microfinance has the same purpose as conventional microfinance except that it operates on a profit and loss sharing principle. For instance, when a financial institution (MSC in this case) invests in a client’s project, the proceeds from the project will be shared on an agreed ratio.

Is it only for Muslims?

No Islamic Microfinance is open to anyone as long as he/she abides by the financing principles.

Why Islamic Microfinance?

With Islamic Microfinance, MSC added to its already long menu of products, thus expanding choice for its clients. Unlike conventional microfinance, the Islamic modes of financing promote a fair sharing of risk between the financier (MSC) and its client. Through this, we hope to see more Ugandans accessing financial services.

Modes of Islamic Microfinance

Is a transaction of sale of goods at their capital cost plus an agreed profit mark up. In this mode of financing, the seller declares the cost at which the good was purchased, and stipulates the amount of profit in addition to this. The purchase price and the profit should be known to the purchaser.

Means a joint enterprise or venture between two or more partners, in which the partners contribute capital (Musharaka capital) and share the profits and losses generated by the venture in accordance with the percentage contribution to the Musharakah contract.

Is a form of partnership where one party, the financier or the investment capital owner (Rab-Almal), provides the investment capital; while the other party, who operates the business (Mudarib), provides expertise and effort to run the business. Rab-Almal may not engage in the management process, but will periodically monitor the progress of the project that has been financed.

Means a contract in which advanced payment is made for good to be delivered at an agreed future date. The price is referred to as salam capital/fund and the good as the salam good. The salam capital could be in cash or in kind.

Is a contract in which one party undertakes to manufacture an item or perform work for compensation.

Is a long-term contract whereby a party undertakes to manufacture, build or construct an asset, with an obligation from the manufacturer to deliver them to the customer on a future date for a fixed, agreed-upon price and with product specifications that both parties agree to.