ISLAMIC (MICRO)FINANCE

‘true’ nor ‘false’ nor absolute. Ijtihad (independent reasoning in light of the Qur’an, Sunnah, and
hadith) creates intelligibility between a complex modern financial landscape and Islam.
Shari’a boards: One understudied aspect of IBF is the role is IBFI’s own Shari’a boards, charged
with ensuring Shari’a compliance of operations. An exceeding small pool of scholars is adequately
trained in both Shari’a and finance/economics; these individuals are recruited to multiple IBFI
boards. There are no disclosure requirements, safeguards against conflicts of interest, common
compensation standards, or transparency in vetting and selection. Shari’a advisors or board
members can be full-time employees, external volunteers, or serving on a contractual basis. This
leads to scenarios where, as one reporter put it, a required fatwa simply goes to the highest
bidder. 46 Decision-making on the boards is similarly non-transparent, leading to industry-wide
disagreement about products and services, creating consumer confusion and hampering
institutional efficiency and nimbleness. In other cases, Shari’a advisors are theologians or Islamic
jurisprudential experts who lack training in capital markets or consumer finance and regulation.
This can lead to Shari’a compliant policies that do not promote institutional growth or stability.
FEATURES OF ISLAMIC FINANCE
PROMOTES:
• Social justice, repudiation of self-interest in favor of more equitable resource
distribution
• Basing transactions on assets/equity, rather than debt
• Acquiring assets instead of stockpiling money
• Sharing risk, including between the institution and client
PROHIBITIONS OR STRONG INCLINATIONS AGAINST:
• The collection or payment of riba (typically interest or usury, but any form of
unfounded ‘increase’)
• Engagement with haram (forbidden) entities
• Excessive gharar (uncertainty), but risk or speculation is not universally unlawful
• Maisir (gambling), as probabilities can unfairly disadvantage one party
KEY CHALLENGES:
• Lack of standardized regulatory, accounting, auditing, external ratings, and
Shari’a compliance procedures
• Lack of standardized oversight or monitoring of Shari’a board members; conflicts
of interests remain unchecked
• Lack of standardized or accredited IBF certification or education programs
• Over-reliance on new Islamic financial contracts and forms to compete with
conventional finance, and diversion from social justice goals
• New forms of risk are being created (e.g. new moral hazards regarding intention)
• Most commonly used products tend to have short or medium-duration maturities
46 Foster 2009
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ISLAMIC MICROFINANCE: CONTEXT, CULTURE, PROMISES, CHALLENGES | www.gatesfoundation.org