Chapter – 9

ISLAMIC MICROFINANCE

True / False Questions

1. Islamic microfinance could be defined as “the process of providing small scale

financial services based on Sharī‘ah concepts to the poor or low-income individuals
who have been excluded from the formal financial services”.
Answer: True
Diff: 1
Page Ref: 330
LO: 1

2. The principal objective of the Islamic microfinance is to provide sustainable micro-

credit facilities to the poor who may be excluded from the formal financial services.
Answer: True
Diff: 1
Page Ref: 330
LO: 1

3. Microfinance aims to empower the low income entrepreneurs by providing them with
credit facilities that would enable them to fulfil their consumption wants.
Answer: False
Diff: 2
Page Ref: 330
LO: 1

4. The history of modern Islamic finance started with a microfinance in the remote
village of Mit Ghamr in Egypt back in 1960s.
Answer: True
Diff: 1
Page Ref: 330
LO: 1

5. Early initiatives to alleviate poverty in Islam include the institution of zakat, waqf,
and the praiseworthy qard hasan.
Answer: True
Diff: 2
Page Ref: 330
LO: 1

6. Early initiatives to alleviate poverty in Islam include the institution of zakat, waqf,
and the praiseworthy qard hasan were called microfinance.
Answer: False
Diff: 2
 Page Ref: 330
LO: 1

7. One major difference between conventional microfinance and the Islamic

microfinance framework is the prohibition of interest-bearing credit facilities and
interest-yielding deposits.
Answer: True
Diff: 2
Page Ref: 330
LO: 1

8. The three components of Islamic microfinance are: micro-lending, micro-saving, and

micro-credit.
Answer: False
Diff: 2
Page Ref: 332
LO: 1

9. The concept of wadi’ah (safekeeping) in Islamic finance is the underlying concept of

savings account (deposits) in the formal banking system.
Answer: True
Diff: 2
Page Ref: 332
LO: 1

10. Micro-credit schemes are also called micro-takaful agreements.

Answer: False
Diff: 2
Page Ref: 333
LO: 1

11. The two terms, microfinance and micro-credit, are the same in terms of meaning,
scope, and application.
Answer: False
Diff: 2
Page Ref: 333
LO: 1

12. Modern microfinance schemes, even in some Muslim countries, dominated by

interest-based products, originally meant to provide access to credit for the poor, may
end up further impoverishing them.
Answer: True
Diff: 2
Page Ref: 333
LO: 1

13. It is likely high interest rates will have productive impact on microfinance schemes.
Answer: False
Diff: 1
Page Ref: 333
 LO: 1
14. Conventional microfinance has developed multiple sources of income through
partnership and entrepreneurial commercial activities between the financial institution
and the clients.
Answer: False
Diff: 2
Page Ref: 333
LO: 1

15. High interest rates violate the fundamental basis of Islamic commercial law while low
rates are tolerable since they do not exploit the borrowers.
Answer: False
Diff: 2
Page Ref: 334
LO: 1

16. The main reason for the prohibition of riba is to avoid financial exploitation and
oppression by the few rich.
Answer: True
Diff: 1
Page Ref: 334
LO: 1

17. An Islamic microfinance institution adopts debt or equity modes of finance for its
financing requirements.
Answer: True
Diff: 2
Page Ref: 336
LO: 2

18. The debt-creating modes of Islamic microfinance include mudarabah (trust

partnership), musharakah (joint venture partnership), and musaqah (share-cropping).
Answer: False
Diff: 3
Page Ref: 336
LO: 2

19. Salam is the main Islamic finance product for the deferred delivery mechanism is also
regarded as the most viable tool for agricultural microfinance.
Answer: True
Diff: 2
Page Ref: 336
LO: 2

20. Salam is regarded as the most viable tool for financing house purchasing.
Answer: False
Diff: 1
Page Ref: 336
LO: 2
21. The pro-interest advocates putting a cap on interest rates (interest rate ceilings) in
microfinance schemes as a solution to combat the rising interest rates.
Answer: False
Diff: 3
Page Ref: 333
LO: 2

22. The pro-interest advocates argue that the microfinance institutions must rely on high
interest rates to be able to carry out their objectives.
Answer: True
Diff: 2
Page Ref: 333
LO: 2

23. The interest-free Islamic microfinance framework satisfies the need to establish
sustainable microfinance institutions that are user-friendly.
Answer: True
Diff: 1
Page Ref: 334
LO: 2

24. It is permissible for the parties to stipulate that the salam contract will be affected on
the produce of a particular field of farm or fruits from a particular tree.
Answer: False
Diff: 3
Page Ref: 337
LO: 2

25. Salam is a contract where the Islamic bank is the buyer of the commodity and the
farmer is the seller who undertakes to embark on future delivery.
Answer: True
Diff: 2
Page Ref: 337
LO: 2

26. Parallel salam is a separate contract distinct from the initial bai salam where the
Islamic bank is the seller of the commodity based on deferred payment.
Answer: True
Diff: 2
Page Ref: 336
LO: 2

27. Both bai salam and parallel salam contracts are contingent upon the other.
Answer: False
Diff: 3
Page Ref: 336
LO: 2
28. If the exact specification of the goods cannot be specified such as precious stone, it
cannot be a subject matter of a salam contract.
Answer: True
Diff: 2
Page Ref: 337
LO: 2

29. Mudarabah as a mode of Islamic microfinance does not only give jobs to the
unemployed but it is also a means of creating jobs.
Answer: True
Diff: 3
Page Ref: 338
LO: 2

30. Mudarabah trust financing may be utilised in housing microfinance.

Answer: False
Diff: 2
Page Ref: 338
LO: 2

31. Mudarabah al-mutlaqah (unrestricted trust financing) is the case where the bank or
Islamic microfinance institution (the capital provider) specifies or restricts the
business in which the capital finance may be invested.
Answer: False
Diff: 1
Page Ref: 338
LO: 2

32. Micro-takaful is put in place in order to minimise the business risks while
implementing the mudarabah microfinance contract.
Answer: True
Diff: 2
Page Ref: 338
LO: 2

33. Profit realised under mudarabah microfinance model is distributed between the
Islamic MFI as the capital provider and the client as the entrepreneur based on
predetermined ration as contained in the underlying contract.
Answer: True
Diff: 2
Page Ref: 338
LO: 2

34. Bai muajjal-murabahah is one of the least commonly used microfinance products by
the Islamic MFIs.
Answer: False
Diff: 2
Page Ref: 340
LO: 2
35. Musharakah mutanaqisah (diminishing partnership) is an Islamic finance product
structured exclusively to provide the poorest in the society who lack shelter to own a
property for their personal use.
Answer: False
Diff: 3
Page Ref: 341
LO: 2

36. Under the terms of the musharakah mutanaqisah (diminishing partnership) contract,
the client buys a number of specified units every month out of the shares of the
Islamic MFI which automatically decreases the capital ownership of the MFI.
Answer: True
Diff: 1
Page Ref: 341
LO: 2

37. ‘Diminishing Partnership’ mode of microfinance entails that the share of one of
parties (microfinance institution) diminishes until it finally ceases to exist while
complete ownership is conferred on the other party (the poor client).
Answer: True
Diff: 2
Page Ref: 341
LO: 2

38. Islamic finance products are structured in such away to suit the requirements of the
modern microenterprises and microcredit schemes.
Answer: True
Diff: 1
Page Ref: 343
LO: 2

39. The operational and functional differences between the Islamic microfinance
institutions (IMFIs) and the conventional microfinance institutions justify making a
case for the consideration of the IMFIs as alternative microfinance institutional
model.
Answer: True
Diff: 2
Page Ref: 343
LO: 3

40. A primary objective of the zakat institution is to realize absolute equality in income
distribution amongst Muslims so that everyone has the same amount of income.
Answer: True
Diff: 3
Page Ref: 346
LO: 3
41. While the conventional MFIs utilise interest-based modes of financing, the Islamic
MFIs utilise Islamic financial instruments which are exclusively equity-based.
Answer: True
Diff: 3
Page Ref: 345
LO: 3

42. The frameworks of the conventional MFIs as well as the Islamic MFIs ensure that no
segment of the population is excluded from the microfinance net.
Answer: False
Diff: 2
Page Ref: 346
LO: 3

43. The mechanism of zakat and sadaqah may be combined with the microfinance
activities in order to manage the default of repayment that might be occasioned by
extreme poverty.
Answer: True
Diff: 2
Page Ref: 346
LO: 3

44. In both conventional and Islamic MFIs, the repayment of the loan remains the sole
responsibility of the borrower.
Answer: False
Diff: 2
Page Ref: 346
LO: 3

45. In the Islamic MFIs, group guarantee in the repayment of the loans take the
form of kafalah.
Answer: True
Diff: 2
Page Ref: 346
LO: 3

46. The majority of the clients of MFIs are women.

Answer: True
Diff: 1
Page Ref: 346
LO: 3

47. The Islamic MFIs consider women seeking microcredit as a means of women
empowerment (to raise their income level and earn them more respect in the society).
Answer: False
Diff: 2
Page Ref: 346
LO: 3
48. Recent research suggests that (within the conventional microfinancing context) men
spend the borrowed money while the women are held responsible for the repayment
of the instalments since they got the credit facilities.
Answer: True
Diff: 2
Page Ref: 346
LO: 3

49. The target group in both Islamic and conventional microfinance instructions (MFIs)
is the family.
Answer: False
Diff: 2
Page Ref: 347
LO: 3

50. The work incentive of the staff of both the conventional and Islamic MFIs is mainly
monetary gains from salary.
Answer: False
Diff: 2
Page Ref: 347
LO: 3

51. In addition to earning a living, the staffs of Islamic MFIs also perform a socio-
religious duty of alleviating poverty within the society.
Answer: True
Diff: 1
Page Ref: 347
LO: 3

52. Although the social development programme of the conventional MFIs is secular, it
always goes along with the ideals of Islam.
Answer: False
Diff: 1
Page Ref: 347
LO: 3

53. The Islamic MFIs put in place a social development programme where the ethical,
social, and behavioural aspects of Islamic ideals are brought to the fore.
Answer: True
Diff: 2
Page Ref: 347
LO: 3

54. The conventional MFIs may go as far as threatening the defaulting party and the
sale of assets to deal with defaults and settle the outstanding balance.
Answer: True
Diff: 2
Page Ref: 347
LO: 3
55. Both schools of thought regarding the financing of microenterprises by Islamic
banks consider financing microenterprises as part of the CSR role of the Islamic banks
and financial institutions.
Answer: False
Diff: 3
Page Ref: 355
LO: 5

56. The institutional sources of credit facilities include the banks and other financial
institutions, money lenders, friends, and family members.
Answer: False
Diff: 2
Page Ref: 355
LO: 5

57. In-practice, the institutional sources of credit exclude the microenterpreneurs from
formal financial services
Answer: True
Diff: 1
Page Ref: 355
LO: 5

58. The functions of Islamic banks and financial institutions are limited to accepting
deposits, managing savings and current accounts for their customers and engaging in
partnership financing.
Answer: False
Diff: 2
Page Ref: 356
LO: 5

59. The social function of Islamic banking is an aspect that relates to modern corporate
social responsibility (CSR) roles.
Answer: True
Diff: 2
Page Ref: 356
LO: 5

60. The concept of fair dealing and justice in financial matters does not prevent the
Islamic banks from excluding a low-income class from its services.
Answer: False
Diff: 2
Page Ref: 360
LO: 5

61. It is imperative that Islamic banks establish, manage and consolidate the
microfinance institutions in order for them to fulfil their social role.
Answer: True
Diff: 2
 Page Ref: 356
LO: 5

62. It is recommended that a department or division of the Islamic bank should be

dedicated to Islamic microfinance. Alternatively, a separate Islamic bank for the poor
should be established to cater for their needs.
Answer: False
Diff: 3
Page Ref: 356
LO: 5

63. Grameen Bank’s credit facilities do not involve any interest.

Answer: False
Diff: 2
Page Ref: 356
LO: 5

64. While banks require borrowers to have physical collateral to secure funding,
microfinance institutions emphasis are on social collateral through groups and centre
formation
Answer: True
Diff: 2
Page Ref: 359
LO: 5

65. Among the differences between banks and MFIs in the provision of credit facilities is
that clients come to the microfinance institution while bank goes to the clients.
Answer: False
Diff: 2
Page Ref: 359
LO: 5

66. The clients of the bank are relatively well-off whereas the clients of microfinance
institutions are poor.
Answer: True
Diff: 1
Page Ref: 359
LO: 5

Multiple Choices Questions

1. Micro and small enterprises in the majority of Muslim countries are by and large
excluded from the formal financial services industry because:
a) Small enterprises do not qualify to get financing from traditional sources
b) Religious beliefs of entrepreneurs prevent them from seeking interest-bearing loans
c) Banks usually prefer to extend their services to large and well-established businesses
d) All of the above
Diff: 2
 Page Ref: 330
LO: 1

2. The early initiatives to alleviate poverty and promote security in the Muslim
communities include:
a) the institution of zakat (compulsory alms)
b) waqf (charitable endowment)
c) the benevolent loans (qard hasan)
d) all of the above
Diff: 2
Page Ref: 330
LO: 1

3. Entrepreneurial poor are:

a) the people who do not have the ability to work and carry out legitimate business
activities and lack the means to undertake such activities
b) the people who have the ability to work and carry out legitimate business
activities but lack the means to undertake such activities
c) the people who do not have the ability to work and carry out legitimate business
activities but have the means to undertake such activities
d) the people who have the ability to work and carry out legitimate business activities
and also have the means to undertake such activities
Diff: 3
Page Ref: 330
LO: 1

4. Islamic microfinance is an umbrella concept that consists of the following

components EXCEPT:
a) micro-lending
b) micro-saving
c) micro- enterprising
d) micro-insurance (preferably known as micro-takaful) sadaqah
Diff: 2
Page Ref: 332
LO: 1

5. ____________________ increased the awareness in the Muslim-populated countries of

the need to establish inclusive financial institutions that would cater for the low-income
individuals in the Muslim world and beyond:
a) the financial initiatives undertaken in the remote village of Mit Ghamr in Egypt back
in 1960s
b) the pioneering efforts of the Grameen Bank
c) the establishment of Dubai Islamic bank
d) the joint partnership initiative of Grameen-Jameel
Diff: 3
Page Ref: 331
LO: 1
5. Which of the following attributes is NOT a feature of micro-lending?
a) micro-lending involves the provision of credit facilities based on the institutions
of waqf and zakat
b) flexibility in terms of repayment of the loan
c) micro-lending is provided for the entrepreneurial poor in order to assist them to grow
their income with the expectation of greater return
d) micro-lending is provided for the low-income individuals in order to assist them to
grow their physical asset base such as housing loans to generate income through
leasing such houses to third part
Diff: 3
Page Ref: 332
LO: 1

6. Micro-savings is based on the concept of:

a) wadi’ah (safekeeping)
b) waqf (charitable endowment)
c) zakat (compulsory alms),
d) sadaqah (charitable alms)
Diff: 2
Page Ref: 332
LO: 1

7. _____________________ is the small loans or financial assistance extended to the

poor families who are practically excluded from the formal financial services:
a) microfinance
b) micro-credit
c) micro saving
d) none of the above
Diff: 2
Page Ref: 333
LO: 1

8. The Islamic management of micro-credit schemes stipulates that:

a) clients who are not able to redeem their loans within the contractual period be given
additional time
b) a penalty not exceeding 10 percent of the loan value should be imposed
c) in some extreme cases, the loans may be written off completely
d) a and c
Diff: 3
Page Ref: 334
LO: 1

9. Unique features of Islamic microfinance include all the following EXCEPT:

a) equal opportunity, entrepreneurship, risk sharing and participation of the low income
individuals
b) interest-free micro-credit schemes where equity financing or debt financing modes are
used
 c) excluding the poor from the participation in the housing market
d) kind treatment of poor borrowers and in some cases debt cancellation
Diff: 2
Page Ref: 334
LO: 1

10. _________________ modes of Islamic microfinance include mudarabah (trust

partnership), musharakah (joint venture partnership), musaqah (share-cropping), etc.
a) the equity financing
b) the debt-creating
c) the credit-creating
d) none of the above
Diff: 2
Page Ref: 336
LO: 2

11. The most commonly used modes of Islamic microfinance include:

a) salam
b) mudarabah
c) diminishing partnership
d) all of the above
Diff: 2
Page Ref: 336
LO: 2

12. __________________is an Islamic finance product regarded as the most viable tool
for financing agriculture.
a) mudarabah
b) salam
c) diminishing partnership
d) bai muajjal
Diff: 3
Page Ref: 336
LO: 2

13. _____________is a contract where the seller undertakes to supply specific goods to
the buyer at a future date in exchange of advance price which is fully paid on the spot.
a) salam
b) parallel salam
c) bai salam
c) istisna
Diff: 2
Page Ref: 336
LO: 2

14. Salam contract is used in Islamic commercial transactions:

a) to create employment opportunities
b) to meet the financial needs of small farmers who require liquidity to cultivate
their land and grow their crops until harvest time
 c) to provide working capital for the entrepreneurs
d) all of the above
Diff: 1
Page Ref: 336, 337
LO: 2

15. In the salam contract:

a) the contractual terms of the contract are subject to the interpretation of the parties (the
Islamic bank and the farmer)
b) price and the date of delivery are to be agreed upon within 30 days from the date of
signing the salam contract
c) quantity and quality of the commodity with exact description or specification
must be stated in the underlying contract
d) all of the above
Diff: 2
Page Ref: 337
LO: 2

16. The profit realised by the Islamic bank as a result of entering into salam contract is
a) a predetermined percentage of the total value of the crops sold in the open market:
b) the difference between the selling price at the open market and the cost price of
the crops as concluded with the farmer
c) administrative fees and service charges paid by the farmers
d) all of the above
Diff: 3
Page Ref: 337
LO: 2

17. _______________ as a trust partnership financing mechanism may be structured as a tool

to combat unemployment in an economy.
a) mudarabah
b) murabahah
c) musharakah
d) salam
Diff: 3
Page Ref: 338
LO: 2

18. The two types of Mudarabah contractual arrangements are:

a) mudarabah al-Mutlaqah and Mudarabah al-Muqayyadah
b) mudarabah al – Mutazayedah and Mudarabah al-Mutanaqesah
c) muradarah al-Mutlaqah and Mudarabah al-Mutazayedah
d) none of the above
Diff: 2
Page Ref: 338
LO: 2

19. _______________________________ can be used for providing working capital:

a) diminishing partnership
 b) bai muajjal-murabahah mode of finance
c) salam and parallel salam mode of finance
d) mudarabah trust financing
Diff: 2
Page Ref: 339
LO: 2

20. Bai Muajjal-Murabahah mode of microfinance is more appropriate for:

a) financing agriculture
b) combating unemployment
c) providing working capital
d) financing real estate contracts
Diff: 2
Page Ref: 339
LO: 2

21. The non-for-profit modes of Islamic microfinance which are specifically meant to target
the poorest in the society are:
a) zakat
b) waqf
c) qard hasan
d) all of the above
Diff: 1
Page Ref: 341
LO: 2

22. The integration of zakat with microfinance involves the following provisions EXCEPT:
a) providing the poor from the zakat funds for consumption
b) granting the poor benevolent loans (qard hasan) for their entrepreneurial needs
c) extending credit facilities to all business regardless of their size and financial
status
d) nurturing the spirit of unity and cooperation between members of society thus paving
the way to the emergence of more productive society
Diff: 3
Page Ref: 346
LO: 3

23. Differences between Islamic MFIs and conventional MFIs include:

a) source of fund
b) mode of financing
c) target group
d) all of the above
Diff: 2
Page Ref: 345
LO: 3

24. Islamic MFIs are similar with conventional MFIs in:

a) the objective of targeting women
b) work incentives of employees
c) dealing with default
 e) None of the above
Diff: 3
Page Ref: 345
LO: 3

25. The conventional MFIs get their funds from

a) interest-bearing loans
b) foreign donors
c) central Banks
d) all of the above
Diff: 2
Page Ref: 344
LO: 3

26. Which of the following is NOT a source of funding for Islamic MFIs funds?
a) central banks
b) Islamic charitable sources such as waqf (charitable endowment), zakat (compulsory
alms) and sadaqah (charitable alms)
c) interest-bearing loans
d) all of the above
Diff: 3
Page Ref: 345
LO: 3

27. _______________________________ may be used for a microenterprise where the

microenterprenur and the MFI share the profit.
a) a profit-sharing mode of finance
b) salam and parallel salam mode of finance
c) a Mudarabah trust financing
d) diminishing Partnership
Diff: 2
Page Ref: 345
LO: 3

28. ______________________________ is more appropriate for micro-farming.

a) profit-sharing mode of finance
b) bai muajjal-murabahah mode of finance
c) salam and parallel salam mode of finance
d) a mudarabah trust financing
Diff: 2
Page Ref: 345
LO: 3

29. ______________________________ may be utilised in order to combat the curse of

unemployment.
a) diminishing partnership
b) profit-sharing mode of finance
c) salam and parallel salam mode of finance
d) mudarabah trust financing
 Diff: 2
Page Ref: 345
LO: 3

31. Once a loan has been approved by a conventional microfinance institution then:
a) a part of the principal is deducted by the institution for different funds such as group
and emergency funds
b) the beneficiary pays interest on the total amount approved
c) the beneficiary may divert the funds to non-productive means
d) all of the above
Diff: 3
Page Ref: 346
LO: 3

32. Within the framework of Islamic MFIs, should any member default on his/her
repayment of the loan in accordance to the instalments, then the group members:
a) agree to make personal donations (sadaqah) towards the repayment of the outstanding
balance
b) may agree to give the defaulting member qard hasan to pay his or her
instalments
c) contact his/her family and friends in order to recover the due amount
d) all of the above
Diff: 2
Page Ref: 346
LO: 3

33. Which of the following statements apply as to the target group of Islamic MFIs?
a) the target group of Islamic MFIs is the family
b) the women and their spouses sign the contract since the target is the family and not the
women alone
c) both parties (women and their spouses) are liable for the repayment of the instalments
d) all of the above
Diff: 3
Page Ref: 346-347
LO: 3

34. The Islamic microfinance institutions’ method in dealing with defaults and arrears
involves:
a) members in a group guarantee one another through kafalah
b) in the event of default or arrears, the group may provide qard hasan to such defaulting
member in order to settle the arrears
c) threatening the defaulting member and selling his/her assets
d) a and b
Diff: 3
Page Ref: 346
LO: 3
35. Traditionally, the sources of credit facilities have been broadly classified into two
major areas:
a) formal and non-formal sources
b) institutional and non-institutional sources
c) conventional and non-conventional sources
d) high credit and low credit sources
Diff: 3
Page Ref: 355
LO: 5

36. The institutional sources of credit, such as the banks, are usually reluctant to finance
microenterprises, and in many instances they exclude the microentrepreneurs from
formal financial services because:
a) microentrepreneurs are unable to provide the demanding physical collateral for such
loans
b) microenterprises are considered ‘high risk’ business entities because of the high rate
of failure among newly established small business
c) extending credit facilities to microenterprises is considered uneconomical due to the
high running cost involved per unit of credit.
d) all of the above
Diff: 2
Page Ref: 355
LO: 5

37. Which of the followings is not a function of Islamic microfinance?

a) accepting deposits
b) managing savings and current accounts for their customers
c) extending credit facilities for large enterprises
d) engaging in partnership financing
Diff: 3
Page Ref: 356
LO: 5

38. The following statements are true regarding the social role of Islamic banks EXCEPT:
a) all classes of people in the society are accommodated within the general sphere of
Islamic financing
b) the social dimension of the objectives of Islamic banks is the promotion and support
of Small and Medium Enterprises (SMEs) to further bridge the gap between the rich
and the poor in the society
c) Islamic banks demonstrate their social role through the extension of their credit
facilities to big businesses with the aim of having more equitable distribution of
wealth amongst all members of society
d) any Islamic microfinance scheme must have the potentiality of providing the poor
with reasonable credit facilities to finance their microenterprises
Diff: 3
Page Ref: 356
LO: 5
 39. Differences between banks and MFIs in the provision of credit facilities include:
a) banks are profit-maximising institutions while microfinance institutions are non-profit
government/non-government organizations
b) banks do not have social and educational programs while microfinance institutions
consider such programs as part of their social role
c) the majority of banks’ clients are men and the majority of microfinance institutions’
are women
d) all of the above
Diff: 3
Page Ref: 357-359
LO: 5

40. Similarities between banks and MFIs in the provision of credit facilities include:
a) repayment frequency
b) amount of the loan
c) clients’ gender
d) None of the above
Diff: 2
Page Ref: 357-359
LO: 5

41. Which of the following statements regarding the differences between banks and MFIs
in the provision of credit facilities is untrue?
a) both banks and microfinance institutions require borrowers to have physical
collateral to secure funding
b) clients come to the bank while microfinance institution goes to the clients
c) the clients of the bank are relatively well-off whereas the clients of microfinance
institutions are poor
d) all of the above
Diff: 3
Page Ref: 359
LO: 5

Short answers

Question 1
Differentiate between microfinance and micro-credit.

Although the concepts of microfinance and micro-credit are generally used interchangeably,
the two terms differ in their meaning, scope, and application.
 microfinance refers to the whole range of small-scale financial services that are
provided for the benefit of the poor or low-income individuals
 microcredit refers to the small loans or financial assistance extended to the poor
families who are practically excluded from formal financial services.
Microcredit is a part and parcel of microfinance; it is one of the three components of
microfinance.

Page Ref: 335 LO: 1

Question 2
Describe the main features of Islamic microfinance.

 microfinance allows the poor to participate in the housing market

 equal opportunity, entrepreneurship, risk sharing and participation of low-income
individuals
 empowerment of the poor, particularly women, and improving access to credit
facilities for social development
 interest-free micro-credit schemes where equity financing or debt financing modes are
used
 compassionate treatment of poor borrowers, and in some cases debt cancellation.
Page Ref: 335 LO: 1

Question 3
Name the debt and equity modes of financing used by Islamic MFIs.

An Islamic microfinance institution adopts debt or equity modes of finance for its financing
requirements.
 The debt-creating modes used by some Islamic microfinance institutions include:
- qard hasan (benevolent loan)
- murabahah (mark-up sale)
- ijarah (lease contract)
- salam (forward sale)
- bay’-bithaman ajil (deferred payment sales).
 The equity financing mechanisms used in Islamic microfinance institutions include:
- mudarabah (trust partnership)
- musharakah (joint venture partnership)
- musaqah (sharecropping).
Page Ref: 336 LO: 2

Question 4
Define the "diminishing partnership" and explain the concept for housing microfinance
through a comprehensive example.

A diminishing partnership is known as musharakah mutanaqisah and is an Islamic financial

product structured to strategically provide access to housing for the poor.
1. The Islamic MFI and the client enter into a partnership contract whereby they
purchase a property and lease it for a specified term
- the poor client’s share is minimal, the Islamic MFI provides the bulk of the capital
share for the transaction
 - When they lease the property, the parties share the profit based on predetermined
contractual ratios
2. The client buys a specified unit every month out of the Islamic MFI’s shares, which
automatically gradually decreases the MFI’s capital ownership until the client has
bought the total capital share in the property out of the profits over a period of time
3. The title then passes to the client, who fully owns the property.

In situations where poor clients do not have funds to buy a small portion of the capital share,
qard hasan, zakat, or waqf funds may be provided for the purpose. If qard hasan is given, the
client only needs to repay the capital amount. If it is a zakat or waqf grant, there is no need
for repayment.
Page Ref: 341 LO: 2

Question 5
Among the differences between Islamic MFIs and conventional MFIs is the
source of funding. Discuss briefly.

Apart from being an interest-free system, Islamic MFIs differ from conventional MFIs in a
number of ways. Conventional MFIs get their funds from interest-bearing loans, foreign
donors, central banks, and governments. Islamic MFIs are also funded from these sources,
with the exception of interest-bearing loans, but, in addition, they get their funds from equity
finance products applied in the finance of micro-enterprises, Islamic charitable sources such
as waqf, zakat and sadaqah whose funds can be channeled to the poorest within a particular
community. This takes care of the social financial mediation role of the MFIs.
Page Ref: 344 LO: 3

Question 6
List at least five differences between Islamic MFIs and conventional MFIs.

1. Sources of funds
 Islamic MFIs
External funds, clients’ savings, Islamic charitable sources (waqf and
zakat)
 Conventional MFIs
External funds, clients’ savings, interest from loans

2. Assets (modes of financing)

 Islamic MFIs
Islamic financial instruments (equity and debt instruments)
 Conventional MFIs
Interest-based

3. Financing the poorest

 Islamic MFIs
Poorest can be included by integrating zakat with microfinancing
 Conventional MFIs
Poorest are left out
4. Target group
 Islamic MFIs
Family
 Conventional MFIs
Women

5. Liability of the loan (when given to women)

 Islamic MFIs
Recipient and spouse
 Conventional MFIs
Recipient

(Refer to table 9.2, page 345 of the text book)

Page Ref: 345 LO: 3

Question 7
Describe how funds are transferred to beneficiaries under both Islamic and
conventional MFIs.

In conventional MFIs, once a loan has been approved, a part of the principal is deducted by
the institution for various purposes, such as group and emergency funds. Despite this, the
beneficiary pays interest on the total amount approved. In addition, once cash is received, the
beneficiary may divert the funds to non-productive means. These are considered as unfair
practices on both sides of the contract. In contrast, it is difficult for cash to be handed out by
Islamic MFIs, which precludes diversion of the funds to nonproductive means. Besides, when
goods are transferred by Islamic MFIs, no deductions can be made as either group funds or
emergency funds.
Page Ref: 346 LO: 3

Question 8
Describe how both conventional and Islamic MFIs deal with defaults.

In conventional MFIs:
 group and center pressure is used to deal with arrears and default
 in the event this pressure does not work, the MFIs resort to threats and sale of assets.
These steps may be too harsh for low-income individuals within a developing society.

In contrast, Islamic MFIs have more sustainable and reasonable ways to deal with defaults
and arrears:
 members in a group guarantee one another through kafalah. So, in the event of
default or arrears, the group may provide qard hasan to a defaulting member, which
may be used to settle the arrears. This is motivated by the spirit of fellowship. It is
also a sin in Islam to refuse to pay back a loan, motivating members to fulfill their
obligations
 a member’s spouse may also assist in paying off arrears.
Page Ref: 347 LO: 3
Question 9
Why it is often difficult for micro-entrepreneurs to obtain credit facilities for their
microenterprises from institutional sources?

The institutional sources of credit, such as the banks, are usually reluctant to finance
microenterprises, and in many instances they exclude the microentrepreneurs from formal
financial services because:
 the inability of microentrepreneurs to provide the demanding physical collateral for
such loans
 microenterprises are considered ‘high risk’ business entities because of the high rate
of failure among newly established small business
 extending credit facilities to microenterprises is considered uneconomical due to the
high running cost involved per unit of credit.
Page Ref: 355 LO: 5

Question 10
Discuss briefly the role of 'Grameen-Jameel' credit facility for the poor.

Grameen Bank in Bangladesh is one of the pioneering MFIs established to assist low-income
individuals who are ordinarily financially excluded from formal financial services. Although
Grameen Bank’s credit facilities involve some interest, it provides the entrepreneurial poor an
exceptional opportunity to gain access to credit facilities without the formal requirement of
physical collateral.
Grameen-Jameel was launched in 2003 through a joint venture between Bangladeshi
Grameen Foundation and the Saudi Arabian Abdul Latif Jameel Group. Grameen-Jameel has
formed strategic partnerships with MFIs in the Middle East and North African (MENA)
countries by increasing their capacity through the provision of financial support, technical
assistance, training, and access to best practices in the field. Grameen-Jameel focuses on
MFIs rather than the individuals but it indirectly reaches more low-income individuals
through its outreach across those countries.
Page Ref: 356 LO: 5

Question 11
Identify major differences between banks and MFIs in the provision of credit facilities
include:

Major differences between banks and MFIs in the provision of credit facilities include:
 banks are profit-maximising institutions while microfinance institutions are non-profit
government/non-government organizations
 banks do not have social and educational programs while microfinance institutions
consider such programs as part of their social role
 the majority of banks’ clients are men and the majority of microfinance institutions’
are women
 while the banks’ clients are relatively well, MFIs' clients are overwhelmingly poor.
Page Ref: 357-359 LO: 5