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A theory and contractual framework of Islamic micro-financial institutions ’ operations

Edib Smolo and Abdul Ghafar Ismail

ABSTRACT Microfinance is seen as a ‘ new paradigm ’ for bringing about development and eradicating poverty. Many studies prove that the provision of small amounts of credit to the poor is crucial in this new paradigm. However, these studies mainly focus on the conventional microfi nance institutions (MFIs) which have already existed for a couple of decades. Their role in helping the poor to achieve higher income and higher standards of living has been well recognized. Currently, there are quite a few MFIs that are operating based on Islamic principles. Although a few studies have been conducted on this subject, the literature lacks a comprehensive theoretical framework to describe the Islamic microfinance institutions (IMFIs). This article explores the contractual framework in modelling the IMFIs, on the one hand, and discusses the role of IMFIs via various modes of financing in providing capital to micro-enterprises, on the other.

Journal of Financial Services Marketing (2011) 15, 287 – 295. doi: 10.1057/fsm.2010.24

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