Following is the brief deliberation DR. M. NEJATULLAH SIDDIQI, eminent Islamic economist and scholar, made while initiating a workshop on microfinance held recently at Aligarh.
The crucial question we have to answer in the design of microfinance in Islamic framework is: In place of lending, is it possible to use equity based instruments?
Lending at interest can be replaced by murabaha. Islamic Microfinance Institution (IMI) can provide the needed equipment or raw material for its client at a stated price to be paid at a set date. This leaves the IMI with debt papers and creates a string of payment obligations. Default is difficult and costly to handle. One drawback is that murabaha cannot be used to provide the client with working capital, i.e. cash.
Equity finance will involve cash transfer with the condition of repayment with an agreed share of profits at conclusion of the project being financed. This will require monitoring by the IMI to prevent false reporting and / or unauthorised spending. In some cases this problem was handled by routing all payment through a visible channel. Going further along the same line provisions can be made for audits and accounts that minimise false reporting. We need to know if these methods were tried anywhere, and if so, what was the result.
Another possibility is using a variant of Salam / Istisna. In both cases funds can be advanced against deliveries to be made. Again we need to know who tried these methods and to what effect.
Regaining the role of Qard Hasan (interest-free loans) in microfinance, someone has to guarantee repayment and someone has to bear administrative costs, besides the corpus from which interest-free loans are to be given. This grafting of grants to exchange or that of charity to business does not solve the basic problem noted in the beginning. It only adds to them.