Development and Challenges in Islamic Microfinance in Malaysia.

Development and challenges in Islamic microfinance in Malaysia

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Student Name: Aidar Zhanturin

Student ID: 1900147

Content

1. Short overview about the topic
2. The role of Islamic microfinance in poverty reduction
3. Malaysia's experience in development of microfinance modes of financing
4. Recommendations for improvement of the microfinance industry in Malaysia
5. Summary

Short overview

Poverty is the central problem to sustainable human development.

• Nearly 1/2 of the world’s population — more than 3 billion people — live on less than $2.50 a day. More than 1.3 billion live in extreme poverty — less than $1.25 a day^[1].
• While 22% of world’s total poor lived in the Organization of Islamic Cooperation (OIC) countries, they were home to over one third (33.1%) of world total poor^[2].
• Thus, approximately 22,3% of the total population of 57 OIC member countries lives below the poverty line of USD 1.25 per day.
• 1 billion children worldwide are living in poverty. According to UNICEF, 22,000 children die each day due to poverty^[3].
• The World Food Programme says, “The poor are hungry and their hunger traps them in poverty.” Hunger is the number one cause of death in the world, killing more than HIV/AIDS, malaria, and tuberculosis combined^[4].
• More than 750 million people lack adequate access to clean drinking water. Diarrhea caused by inadequate drinking water, sanitation, and hand hygiene kills an estimated 842,000 people every year globally, or approximately 2,300 people per day^[5].
• 1/4 of all humans live without electricity — approximately 1.6 billion people^[6].

Based on the above, it is obvious that poverty is the biggest moral challenge of this present time. In this regard, it was observed that microfinance is recognized as a developmental tool to fight poverty. In the last 3 decades microfinance has been exist recognized as an effective in poverty reduction, income enhancement and health and education improvements. The impact of microfinance is more visible in countries where poverty is high mainly developing countries such as Asia, Latin America and African continent.

Recent studies have shown positive impacts of the microfinance on the income and health of the clients. It has started in Bangladesh and spread to other continents of the world. However, there is agitation that microfinance has not been able to achieve its objective of fighting poverty. Microfinance itself is not a magic or panacea to poverty but rather it facilitates its reduction significantly. This is more effective when the services are widely defined to include not only credit but also insurance, remittance, savings and deposits.

        The role of Islamic microfinance in poverty reduction

The traditional microfinance approach has proven to be unproductive, costly and even perilous in tackling the problems of impoverished segments of the society, while the Islamic microfinance is rooted in a desire for economic growth and prosperity of socio-political system based on Islamic principles and carries similar principles that have been applied to trade, business, investment and mortgages within the Muslim communities.

Islamic principles of equal opportunity, advocacy of entrepreneurship, risk sharing, disbursement of collateral free loans, and participation of the poor, are supportive of microfinance principles^[7].

As the Islam provides the complete code of life, the religion covers poverty reduction as one of the premier agendas. Islam considers that poverty induces other indecent acts; therefore, poverty should be treated with much care.

Islamic microfinance institution is at the central of economic growth and development of most societies today because of its key roles in developing human resources. It also makes significant contributions towards poverty alleviation and bridging the gap between the rich and the poor.

Malaysia's experience in development of microfinance modes of financing

With a population of more than 32 million of which 61 percent is Muslims, Malaysia stands as a large consumer market for micro-entrepreneurial development. Since the beginning of the development of microfinance industry, Malaysia has witnessed its remarkable growth in terms of the number of institutions and clients.

In Malaysia, there exist a huge number of financial service providers, some in form of formal bank, others are non-governmental organisations (NGOs) or government-based agencies that specialise in supplying finance to individuals and businesses.