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Microfinance: Credit for the poor
Robust economic growth cannot be achieved without putting in place well focused programmes to reduce poverty through empowering the people by increasing their access to factors of production, especially credit. The latent capacity of the poor for entrepreneurship would be significantly enhanced through the provision of microfinance services to enable them engage in economic activities and be more self-reliant; increase employment opportunities, enhance household income, and create wealth.

Microfinance is about providing financial services to the poor who are traditionally not served by the conventional financial institutions. Three features distinguish microfinance from other formal financial products. These are: (i) the smallness of loans advanced and or savings collected, (ii) the absence of asset-based collateral, and (iii) simplicity of operations.

Even while the principles reflect a consensus, they do not imply or advocate a single and uniform approach to microfinance. As Consultative Group to Assist the Poorest (CGAP), World Bank emphasizes, "diverse approaches are needed - a one-size fits-all solution will not work”. Diverse channels are needed to get diverse financial services into the hands of a diverse range of people who are currently excluded. Making this vision a reality entails breaking down the walls - real and imaginary that currently separate microfinance from the much broader world of financial systems.

In the context of Muslim societies, building inclusive (comprehensive) financial systems would most certainly require integration of microfinance with Islamic finance. This requires the expertise of microfinance institutions in financial intermediation combined with a robust product design that is not only shariah compliant but based on the tenets of Islamic finance. The product has to focus on lending towards income generating activities and creation of productive assets. In essence, the Islamic microfinance provider has to focus on creating avenues for the clients to repay regular instalments and create long term wealth at the bottom of the pyramid.

The author is Mr Sunil Agarwal, Managing Director, S.E. Investments Ltd. - A Microfinance Institution based in Agra, Uttar Pradesh. S.E. Investments has pioneered Islamic Microfinance in India.
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