Author: Mohamed Hamza Ghaouri
Finterra was built on the concept of Cash-Waqf mobilization for the social and economic development of the underprivileged and the needy. Based on blockchain technology, Finterra was able to raise funds in different countries around the world and allocate them to predetermined projects or to finance specific businesses. Through WaqfChain, multiple Cash-Waqf campaigns have been launched, bringing together projects holder and Cash-Waqf donors in transparency and security.
Microbusinesses play a crucial role in developed and developing economies. They contribute mainly to poverty reduction, provision of goods and services adapted to the local need, employment and wealth creation, as well as the redistribution of wealth and the mobilization of local resources. Their role can be measured in terms of different scales, such as social (poverty reduction), economic (income generation) and political (wealth redistribution) contributions.
Over the past decades, the problem of access to external finance by micro-enterprises has been one of the main concerns of academic researchers and practitioners. Around the world, small and especially micro enterprises have limited access to finance mostly because of their high risk of failure and reimbursement. From the other hand, the provision of funding is expected to help micro-enterprises and micro-entrepreneurs to start or to strengthen their businesses.
Access to capital is essential to the success of small and micro enterprises, but as this range of borrowers are excluded from the banking system, and to cover their financial needs, a new parallel industry has emerged. Without assets and stable income, most of the poorest borrowers are turned away by traditional lenders. Alternatively, microfinance has become the lifeline for many poor people. The emergence of many microfinance institutions gives microenterprises opportunities to obtain additional capital.
In order to achieve financial inclusion, many conventional social finance institutions provide loans and charge an interest rate for the client. In most cases, this interest rate is higher than the one charged by the banks considering the high default risk of the client. Granting loans at very high-interest rates does not really help small and micro-enterprises to develop their business and increase their income. This makes it even more difficult for the borrower to discharge all of his financial obligations. Charging a high interest rate is a burden on them since they have to pay back their loan plus high interest whether they get a profit or a loss.
Microfinance is represented by a set of services provided to financially excluded and disadvantaged people. It responds to the financing needs of the poor to ensure their survival, as well as socio-economic mobility to achieve a successful and sustainable exit from poverty (Shaikh, 2020). However, microfinance have been long criticized for the use of high interest rates that they charge to microenterprises and microentrepreneurs to compensate for the greater risk of failure, the higher costs of information gathering as well as the smaller volume of external financing.
The role of some microfinance institutions is limited to providing microcredit access to some of the poor and needy people using extremely high-interest rates, with no contribution to the fight against poverty. Profit orientation has taken on greater importance compared to socially impactful microfinance products and services. The only outcome of these institutions is the indebtedness of poor households. Therefore, the claim that microfinance to reduce poverty is contradicted due to the excessive loan burden leading to exploitation and over-indebtedness of poor clients.
In fact, the high interest rate charged by microfinance institutions is one of the main reasons of the failure of businesses and indebtedness of business owners. Researchers argue that the high-interest rate, lending procedures are considered as the most important factors limiting access of small and micro-businesses to external finance.
In parallel, within the social component of Islamic finance, a variety of shariah compliant products are provided by Islamic microfinance institutions in order to fill the gap and cover the financial needs of micro-businesses and micro-entrepreneurs. Islamic microfinance institutions have recently evolved with the hope of overcoming the financial, ethical, religious, and human capital deficiencies faced by their conventional counterparts. According to the literature, Islamic social finance, through microcredit programs, has a great impact on reducing poverty.
Additionally, within the Islamic microfinance frame institutions offer microfinance by establishing a sharia-compliant relationship between borrowers and donors. These relationships are established through various contracts such as lease (Ijara), partnerships (Musharakah, Mudarabah), benevolent loan contracts (Qard Hassan) or Zakat and Waqf.
Studies have shown that the funds raised by Zakat, Sadqah and Waqf would enable the Islamic microfinance institution to provide financial support even without charging commercial fees. As part of the redistributive approach, Zakat, Sadaqah and Awqaf have been used to reduce poverty through the provision of health services, educational and infrastructure facilities, and job creation. Different approaches, depending on the period and the country concerned, are proposed to reduce poverty, which can be a catalyst for reducing poverty and helping to achieve Sustainable Development Goals (SDGs).
Accordingly, Finterra launches a microfinance initiative called HAL microfinance. This innovative model is designed to address the challenges of microfinance in a feasible and Shariah-compliant manner to contribute to financial inclusion by providing access to finance for all. This Microfinance initiative was born out of the urgent need for an alternative model that could improve the performance of micro-enterprises in obtaining financial services.
The establishment of an Islamic Microfinance ecosystem is not only helpful in freeing society from the riba system and establishing social justice, but it should also become a bridge for the development of small and micro-enterprises and poverty reduction. Living in poverty, financial instability or having financial difficulties has a detrimental impact on individuals, their households and society at large. IMFI has the ability to significantly improve the business performance of small and microenterprises by increasing the revenues and profits of businesses.
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