This document compares traditional and Islamic microfinance approaches to poverty alleviation. It discusses how Islamic microfinance is based on Islamic principles of avoiding interest and ensuring fairness. Key Islamic microfinance tools discussed are zakat, which requires charity for the poor, and waqf, where wealth is contributed for public benefit. The document argues that by sharing risks and ensuring equity, Islamic microfinance can more effectively help the poor compared to traditional interest-based microloans.

1. POVERTY ALLEVIATION:
A COMPARATIVE STUDY OF TRADITIONALAND ISLAMIC
MICROFINANCE WITH SPECIAL REFERENCE TO ZAKAT
AND WAQF
Abul Basher Khan & Muhammad Obaidullah
Manarat International University, Gulshan, Dhaka.
abkhan1155@yahoo.com / obaidiub@yahoo.com.

2. 1. Introduction
O Microfinance has been recognized by the United
Nations (UN) and International Monetary Fund
(IMF) as one of the important instruments of
poverty eradication.
O Islamic Microfinance, on the other hand, is an
effective alternative to traditional system of
microfinance for reaching the poor, raising their
living standards, creating jobs, boosting demand
for other goods and services, contribute to
economic growth and alleviating poverty.

3. POVERTY: A CONCEPTUAL
IDEA
O Kakker, analyzed poverty in the following
way:
O Monetary Term;
O Deterioration of living conditions;
O Instability to meet basic need;
O Lack of resources and access to
resources; and
O Lack of living with human dignity.

4. POVERTY: AN ISLAMIC
PERSPECTIVE
O The Qur’an states eight beneficiaries of zakÉt
which deals with the concept of poverty and
its level. It states:
O “Alms are for the poor and the needy, and
those employed to administer the (funds); for
those whose hearts have been (recently)
reconciled (to Truth); for those in bondage and
in debt; in the cause of Allah; and for the
wayfarer: (thus is it) ordained by Allah, and
Allah is full of knowledge and wisdom.”

5. MICROFINANCE: SIGNIFICANCE
AND ROLE
O Microfinance is retail banking for developing
countries, in other words, providing financial
services for poor but economically active people.
O Thus, it has been recognized that Micro-Finance is
one of most important indicators to achieve
Millennium Development Goals (MDGs).
O Microfinance has direct role on the eradication of
extreme poverty, hunger, universal Primary
education, gender equality and empowerment of
women, child mortality, maternal health,
HIV/AIDS, malaria and other disease
environment, global partnership etc.

6. Microfinance Act as Powerful
Instrument Against Poverty
O Easy access to sustainable micro-credit
directly helps the poor to increase their
income, builds assets and reduces their
poverty. In order to achieve full potential of
poor people, Microfinance should become
an integral part of the financial sector
Financial sustainability is necessary to
reach large number of poor people.

7. Micro Finance Services:
O Microfinance services are characterized by:
O Small, short term loans and secure saving product;
O Streamlined, simplified borrower and investment
appraisal;
O Alternative approaches to collateral;
O Quick disbursement of repeat loans after timely
repayment ;
O Above market interest rates to cover the high
transactions cost inherent to microfinance;
O High repayment rates; and
O Convenient location and timing of services. (A.M.A.
Muhith)

8. TRADITIONAL Vs. ISLAMIC
MICROFINANCE: DIFFERENCES
Traditional Micro
Finance Islamic Microfinance
O Tradition Micro
finance is free from
all ideology and
beliefs.
O Interest Based
microfinance
O Traditional
Microfinance does not
exercise ‘Adal and
IÍÎÉn
O Islamic Micro finance is
based on Islamic sharia
O All sorts of RibÉ’is
strictly prohibited in any
Islamic Microfinance.
O Adal and IÍÎÉn are
beauties of Islamic
Microfinance.

9. TRADITIONAL Vs. ISLAMIC
MICROFINANCE:
DIFFERENCES…
Traditional
Microfinance Islamic Microfinance
O Conventional Microfinance
pays prefixed interest to its
depositor which is
contradictory to Islamic
Microfinance.
O Profit is the ultimate aim of
traditional Microfinance.
O Conventional Microfinance
is based on the debtor-
creditor relationship.
O All kinds of exploitation in
nature of financial system
are prohibited in Islam.
O But Islamic Microfinance
ensures balance growth of
the entire economy.
O Islamic Microfinance
plays the participatory role
between client and
financier.

10. Comparison with Traditional
Lending
Issues Islamic Microfinance Traditional Lending
Busines
s Risk
Shared in MushÉraka and MudÉraba,
and not shared in MurÉbaha
Assumed by the borrower, the
loan transaction is not linked to
any other factor
Repay
ments
Peer pressure and moral obligation to
pay are present, besides collateral
In many programs, post-dated
checks and promissory notes are
the only collaterals
Admini
strative
Costs
High, due to more time spent in the
field by officers to execute the
transactions.
Fast loan disbursement is
essential to the clients and
should be continuously sought
by lenders
Growth Institutions do not access commercial
lines of credit, but could enter into
MudÉraba agreements with
institutional investors
Financially sustainable
Microfinance Institutions could
access lines of credit and
leverage its financial resources

11. PROBLEMS AND LIMITATION OF
TRADITIONAL MICROFINANCE
O A serious problem is the potential for loan default if
business income declines or if the business fails.
O Microcredit institutions may have difficulty in
reaching the poorest members of society because
most of them conduct the bulk of their work in urban
areas, where loan clients are concentrated in close
proximity, lowering the costs of monitoring and
collecting loans.
O Another underling problem with loan-based Programs
is the conflicting goals of the Program.

12. PROBLEMS AND LIMITATION OF
TRADITIONAL MICROFINANCE…
O The high repayment rates claimed by some agencies
may be a reflection of this process.
O It is also noted that with respect to microcredit
Programs, their appropriateness as a strategy for
poverty reduction in the case of the poorest people is
questionable.
O Conventional microfinances impose draconian
interest rate levels which is a major impediment to
many borrowers becoming truly self-sufficient.

13. ISLAMIC MICROFINANCE
O Islamic Microfinance products emphasize the concern for
risk sharing between the user and provider of funds.
O These include but are not limited to “mudÉraba” (trustee
financing) and “mushÉraka” (equity participation).
O Islamic Microfinance has much provision to help the poor
on charity basis. As the Holy-Qur’an declares “And in their
wealth there is a right for the beggar and the deprived.”
(Al-Dhariyat: 51:16)
O Islamic financial institution ensure equity and justice to all
categories of clients.

14. ROLE OF ZAKÓT
AS A TOOL OF ISLAMIC MICROFINANCE
O The main objective of zakÉt is to alleviate
poverty.
O Five out of eight prescribed heads of
expenditure of zakÉt are meant for the
alleviation of poverty, that is, for the poor, the
needy, the debtors, the slaves and the travelers
in need.

15. ROLE OF ZAKÓT
AS A TOOL OF ISLAMIC MICROFINANCE …
O Estimates show that about 3-4 per cent of GNP can be
collected as zakÉt in the Sudan, about Tk. 2500 million
(approx. US$71 million) from agriculture alone in a
low-income country like Bangladesh.
O In case the extent of poverty reaches a level that makes
the poor starve, the recommended charity beyond zakÉt
becomes obligatory. “And in your wealth are
obligations beyond ZakÉt.”
O Allah says: “In their wealth, there is a known right for
those who ask for it and for the deprived” (SËrah al-
DhariyÉt: 28)

16. ROLE OF AWQAF AS A TOOL OF
ISLAMIC MICROFINANCE
O Like zakat, the Awqaf property is very important to
alleviate poverty in the Muslim world.
O The rich and philanthropist people contribute their
property and asset (Awqaf) for the cause of mankind.
O The Awqaf state of ×aji Mohammad Muhsin and Nabab
Faizunnesa is very remarkable in Bangladesh which
contributed significantly to our poor people.
O All Awqaf states scattered all over the Muslim countries
can directly contribute to eradicate poverty through
education, health employment and income generating
activities as did earlier.

17. CONCLUSION
O In spite of superiority of Islamic microfinance,
the modern Islamic microfinance institutions
have not yet fully developed, rather their
growth is still slow and discouraging in terms
of need and economic development in Muslim
countries.
O Considering the great role of microfinance to
eradicate poverty and to achieve Millennium
Development Goals (MDGs), Islamic
Microfinance should be flourished very rapidly
especially for the economic, social and
political emancipation of Muslim ummah.