A Comparison of Interest-Free and Interest-Based Microfinance in Bosnia and Herzegovina

Abstract

Microfinance has long been used a developmental tool to fight poverty. It has been operational since the 1960s. Recent studies have shown positive impacts of microfinance with respect to generating income and smoothing consumption of its clients. On the other hand, a number of critics argue that microfinance has not been able to achieve its main objective of fighting poverty. This is due to the shift that has taken place in the industry from poverty-focus to profitoriented business-focus. Above all, microfinance faces other challenges on its way to succeed. One of the major challenges is that the product is not universally applicable or it does not tailor with the belief system of the Muslims despite the fact that one third of the world poor are Muslims. There has been a growing effort to create an "Islamic" model of microfinance. The Islamic Model of Microfinance represents a new paradigm of social enterprise in which profit and loss sharing replaces interest-based financing. The growth of Islamic microfinance has led organizations such as the Consultative Group to Assist the Poor (CGAP), a multilateral organization distributing knowledge about Islamic microfinance, and the Islamic Development Bank (IDB) to begin understanding this new way of approaching poverty. The objective of this paper is to review the existing Islamic microfinance institutions (IMFIs) in Bosnia and Herzegovina (BH), and to propose a Shariah compliant microfinance product in Islamic microfinance operations particularly in BH.

Experiment on interest-free microfinance products

“…A number of critics argue that MF has not achieved its primary goal in the fight against poverty (Hamad and Duman, 2014). This is because the sector has shifted from a poverty focus to a profit-oriented focus and has adopted commercial objectives, moving further away from meeting the more difficult social objective of poverty alleviation.…”

“…Moreover, El-Komi and Croson (2016) argued that women are significantly more likely to comply with contract terms than are men. At the Grameen Bank in Bangladesh (Gibbons and Kassim, 1990, cited in Hamad and Duman, 2014), women reported that 95% of debtors were made up and were more reliable than men in terms of repayments.…”