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Towards adopting Zero Interest Loan (ZIL) and Profit and Loss Sharing (PLS) principle in Islamic microfinance: the case of Amanah Ikhtiar Malaysia

Md Saad, Norma and Omar Mohammad, Mustafa and S. Le, Long and Haneef, Mohamed Aslam and Abd Ghani, Mazanah (2013) Towards adopting Zero Interest Loan (ZIL) and Profit and Loss Sharing (PLS) principle in Islamic microfinance: the case of Amanah Ikhtiar Malaysia. Journal of Islamic Finance, 2 (2). pp. 38-50. ISSN 2289-2117 (O), 2289-2109 (P)

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Abstract

Microfinance institutions evolved to alleviate poverty by providing micro-credit to the poor. There have been few poverty alleviation success stories from institutions such as Amanah Ikhtiar Malaysia (AIM). For the majority however, there is no solid evidence to support the positive impacts of microfinance institutions on the poor (Kono and Takahashi, 2010; as cited by Aliyu, 2012). One factor that hinders the positive impact of microfinance institutions on the poor is the inherent nature of the microcredit scheme which charges fixed and high interest rate due to high administrative cost (IRTI, 2007, as cited by Aliyu, 2012). Islamic microfinance evolved to provide alternative to the interest based conventional microfinance. However, the financing modes being used by the Islamic micro-finance institutions (IMFIs) are mostly debt based, which have resemblance to the interest based conventional modes. IMFs shun away from using the PLS scheme, which they consider risky. Theoretically, it is argued that PLS mobilizes factors of production, encourages risk sharing and ensures distributive equity in income and wealth. There is hardly any literature that has shown that PLS is workable in a pristine environment of zero interest. Furthermore, there is hardly any studies that have discussed on the feasibility of financing the poor using a combination of PLS and zero interest financing (ZIF). This study will experiment on the feasibility of providing small financing using a combination of PLS and ZIF to empower the working poor. The research incorporates literature survey, field study and business model applications in its methodology to achieve the desired objectives. The results of this pioneering project are expected to promote the local socio-economic welfare of the poor and provide opportunities in applied areas for future research. © 2013 The IIUM Institute of Islamic Banking and Finance. Keywords: Poverty; Islamic microfinance; Amanah Ikhtiar Malaysia; Equity-based financing; Interest-free financing.

Item Type: Article (Journal)
Additional Information: 1304/35586
Uncontrolled Keywords: Poverty; Islamic microfinance; Amanah Ikhtiar Malaysia; Equity-based financing; Interest-free financing.
Subjects: H Social Sciences > HG Finance
Kulliyyahs/Centres/Divisions/Institutes: Kulliyyah of Economics and Management Sciences > Department of Economics
Depositing User: Dr Norma Md Saad
Date Deposited: 14 Feb 2014 08:04
Last Modified: 17 Feb 2015 04:18
URI: http://irep.iium.edu.my/id/eprint/35586

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