RISK MITIGATION AND FINANCING CONSTRAINTS: TOWARDS THE DEVELOPMENT OF SUSTAINABLE ISLAMIC MICROFINANCE INSTITUTIONS IN BANGLADESH

Studies on Islamic microfinance sustainability and its development are an important contribution to thought in the Islamic finance arena. The concept of Islamic microfinance is relevant given the global socioeconomic problems which have negatively impacted the Muslim ummah (community) and society in general and widened the gap between the poor and the rich. The Muslim ummah is in need of an economy that will bridge the gap between the various strata of society. Islamic microfinance is considered an alternative Sharīʿah-compliant tool for Muslims to redistribute their wealth in a way that will make the nation productive.

This study tries to address two main issues that affect the sustainability of Islamic microfinance institutions (IMFIs), namely, the financing constraints faced by these institutions and the issue of customer default. Studies show that due to the lack of sufficient funds in IMFIs, the institutions have had limited reach to their target groups as compared to their conventional counterparts. In addition, this has also affected their financial performance (Ahmed, 2002; Abdul Rahman & Dean, 2013). On the other hand, borrowers may face unexpected circumstances such as illness, death, fire or theft that may cause setbacks in settling their debts. Such probable issues and risks are defeating the reasons for the establishment of IMFIs and affecting their sustainability (Siti Khadijah et al., 2013).

In view of the above, this paper proposes an innovative model for IMFIs in Bangladesh to obtain a source of perpetual funding and mitigate the risk of default by getting different financial institutions and other corporations to work together. These institutions are involved in activities relating to waqf (endowment), zakāh (charitable giving), qarḍ ḥasan (interest-free loan), corporate social responsibility (CSR) and micro-takāful (micro-insurance) (Mohsin, 2015; Alhabshi, 2016).