Islamic Law and Development: Examining the law and practice of Islamic microfinance

Abstract

In Muslim-majority countries, financial exclusion, which is driven in part by the non-compliance with Sharīʿah of available financing services, worsens poverty and inequality. Consequently, this thesis argues that to improve development impact, policymakers, regulators and practitioners must tailor law and development programs, such as microfinance, to the socio-economic conditions of beneficiary communities.

The existence of both conventional (interest-bearing) and Islamic microfinance in Muslim-majority nations has created opportunities for competition and raises questions about whether policymakers ought to promote either one of them for development. However, the literature in microfinance and Islamic banking and finance is yet to examine the policy case for Islamic microfinance based on a detailed socio-legal evaluation. This thesis seeks to fill that gap. Through an interdisciplinary research approach, combining doctrinal and fieldwork analysis in Bangladesh and Indonesia, this thesis argues that Islamic microfinance, as a law and development program that adheres to Sharīʿah, addresses the underlying criticisms of microfinance and has the potential to fulfil the needs of impoverished Muslim communities.

However, the fieldwork and regulatory landscape analysis of Bangladesh and Indonesia highlighted the importance of developing regulatory frameworks that cater for Islamic microfinance. In either country, weak compliance and implementation, especially regarding Sharīʿah regulation and oversight, has produced lower growth and performance outcomes within the Islamic microfinance sector compared to its conventional counterpart. Notwithstanding, regulatory excellence is not a precursor to enabling Islamic microfinance. Where a Muslim-majority country lacks political will or has limited state capacity, the Government can empower independent Islamic non-government organisations to improve the effectiveness of Islamic microfinance law and development programs.