Interest-free micro financing business models for micro-enterprise development: Case studies from Malaysia, Indonesia and Pakistan

Abstract

The Islamic economic advocates inclusive models that aim at poverty alleviation, economic empowerment and the financial inclusion of the needy. In Islamic countries where Islamic Finance has been implemented for a long time, models of interest free micro financing have been developed. Such models embrace the usage of tools discussed in the Quran such as Zakat, Awqaf and Qard Al Hassan. In the case of entrepreneurship programs, the use of such schemes aims at pushing for the development of micro-enterprises in order to reduce poverty, positively impact recipients’ businesses, and as a consequence, impact their socio-economic status. In this article, we study the different business models that implement interest-free financing in Malaysia, Indonesia and Pakistan. We are looking at the common grounds between the business models as well as their differences; and analyse the challenges they face. Most specifically, we identify the main success factors that explain the success of such business models as we analyse the questionnaire submitted to professionals amongst Islamic microfinance institutions across the selected countries.