A PROPOSED REGULATORY FRAMEWORK FOR ISLAMIC MICROFINANCE: ADOPTING THE IFSA 2013 APPROACH

For an accurate implementation of Islamic microfinance, there needs to be a true understanding of the terms ‘Islamic’ and ‘microfinance’. Unlike conventional microfinance, Islamic microfinance is based on the underlying tenets of Islam which define its functions and operations. While both conventional and Islamic microfinance are guided by the principles of microfinance, Islamic microfinance has the added dimension of compliance with the Sharīʿah (Islamic law) when defining its activities.

Microfinance is typically defined as “the provision of financial services and products to those whose low economic standing excludes them from conventional financial institutions or programs” (Chowdhry, n.d.). It allows the poor to have access to an alternative means of financing and thus serves as an effective mechanism to reduce poverty and build self-dependence among the poor. Microfinance usually provides small loans for working capital purposes, involves informal appraisal of borrowers and investments, requires group guarantees instead of physical collateral, gives access to repeat and larger loans based on repayment performance, and allows for streamlined loan disbursements (Ledgerwood, 1999: 1).

According to reports, the microfinance industry, including Islamic microfinance, is growing rapidly. However, the industry appears to lack an appropriate regulatory framework which would set the parameters within which it should function. Different approaches could be adopted in establishing a regulatory framework for the microfinance industry. Currently, the only binding regulation in the Islamic finance industry is the Islamic Financial Services Act (IFSA) 2013 of Malaysia, which is a robust and comprehensive regulatory framework. This research therefore identifics IFSA 2013 as a suitable model for drafting a regulatory framework for the Islamic microfinance industry.