Special Issue : Towards Financial Inclusion

Re-thinking Microfinance Practices: Lesson Learned for Sustainable Islamic Microfinance Institutions

Zahoor Khan, Shafiullah Jan, Karim Ullah

Centre for Excellence in Islamic Finance, Institute of Management Sciences, Peshawar-Pakistan

The last decade witnessed the popularity and appreciation of microfinance practices, against poverty alleviation, all across developing and underdeveloped countries. However, there is still deficiency of rigorous studies, to affirm the claims of microfinance products and services against the alleviation of absolute poverty. Over three decades have been passed yet even the  champion of microfinance could not prove the effectiveness of microfinance services across their different operational regions consistently. This paper aims to investigate what are the  fundamental flaws resulting in unsuccessful or ineffective microfinance operations against poverty. There are numerous psychological, experimental and empirical studies suggesting that poor  are often involved in excessive borrowing behaviors. Thus the demand of the poor for credit and recovery rates as a proxy of successful operations are misleading indicators resulting  from the psychological behaviors and ‘social and peer pressure’ respectively. The literature further suggests that irrespective of the financing methodology (whether conventional or Islamic)  there is less chance of success for microfinance due to many technical reasons. Moreover, microfinance often result in destroying social capital and solidarity, pushing the poor to pay the full  cost of credit supply and promoting the financers’ interest while less attention is paid to transfer the benefits of microfinance institutions to financially excluded class. Findings of the study  caution stakeholders to rethink about poverty alleviation models which should be feasible and sustainable to alleviate poverty effectively on a wider socioeconomic scale.
Keywords:  Microfinance, Poverty, Financial Exclusion, Financial Services.


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