February 20, 2010
A possible “Islamic” alternative to Microlending

Islamic Values


5 min read

Muhammad Yunus having won the Nobel prize for economics, Microfinance has become a hot item for many seeking to make money and “lend” a helping hand. Much criticism has surrounded Microfinance, from Muslims and Non-Muslims alike, questioning the ethics and viability of the practice.

Objections generally center on the fact that it is an interest (Riba) based system, loaning out small amounts of money at a very high rate. Exploitation of women is another big concern. The majority of Microfinance and Micro-credit agencies cater solely to women, even though this apparently is a good thing, many of those women act merely as collection agents for the male members of their families who spend the money while the women bear the credit risk. Additionally, dependence on loans leads to circular borrowing and may constitute a minor form of debt slavery, forcing people out of waged work and into the informal economy.

These points aside, the objective here is not to dwell on the objections to or attempt to dismantle this system, but instead to promote a more ethical and credit-safe alternative to such practices.

Many proponents of “Islamic Finance” promote profit-sharing schemes that reduce credit risk and ensure profit-loss equity among the involved parties. One such method that may provide an alternative is called “Credit-Based Mudarabah”.

Mudarabah is an Arabic word for silent partnership,

Sharikat alMuDarabah: a partnership of two parties in which one provides capital and the other provides labor. (For more on partnerships look here)

One method that the researcher mentioned was “credit-based Mudarabah” i.e. a credit-based silent partnership.

Credit-based Silent Partnership

Parties involved:

There will be one party that will provide the labor, known here as the “Agent”. The other party will provide capital, known here as the “Financier”.

How it works:

  1. The agent and the financier enter into a partnership agreement
  2. The two parties agree that the financing will not be provided until
    the business deal is arraigned with the various other parties involved.
  3. Once proof of the deal is presented to the financier, payment is made
    to the third party selling the goods, and profits are shared between the
    financier and the agent.

An example:

  1. Take into consideration this scenario:
  2. An agent purchases concrete for re-sale with the option to
    return or cancel within 48 hours.
  3. He then signs agreements with the purchasers of the concrete for delivery at the specified date.
  4. Upon closure of the deal, he presents proof of purchase for re-sale and
    closure of re-sale to the financier, who then would issue payment to the
    concrete salesman.
  5. Profits from the re-sale would be divided up between
    the agent and the financier.

Benefits of this method:

  1. Cancellation of the last deal would cancel the first, and sales risk
    is minimized.
  2. Credit-risk and risk of failure are brought to a minimum, as are the
    problems of misreporting

Additional considerations:

  1. The method is applicable for both wholesale and retail
  2. If the trade between the suppliers, the agent, and the retailers is constant, then there would only have to be an agreement to supply, with order amounts on a case by case agreement, an OCO (one cancels the other) agreement can be done in case the retailers or the financier defaults, so safety guards are in place.


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