Analysing Shariah-Compliant Microfinance: A Case Study Of Uganda

This study focuses on the impact of microfinance on the income and vulnerability of poor
rural households. In order to clarify this question, the study examines household participation
and access to credit through Joint Liability Lending (JLL) programmes, the allocation of
household credit, and subsequent loan repayment. The study, the first of its kind conducted
through extensive fieldwork in Uganda, concentrates on Joint Liability Lending programmes,
instead of looking at other models of microfinance, because the Joint Liability Lending model
targets the poorest segments of the population. Although the objective of poverty reduction is
clearly included in most microfinance models, not all microfinance institutions have poverty
reduction as a primary mission. Today’s microfinance industry consists of a wide range of
institutions serving different market niches with the aim of providing small-scale financial
services to businesses and households that have been traditionally kept outside the formal
financial system. But these institutions do not necessarily have as their mission reducing
poverty.
The models described in this thesis provide clear evidence that Shariah-compliant financial
principles can be compatible with microfinance and technical standards can be put in place,
for example, through standard Shariah-compliant microfinance arrangements such as a
murabaha agreement, or possibly even a mudaraba agreement. As shown too, the leasing or
purchase of property or other goods can be accomplished via an ijara agreement. Elsewhere
in microfinance, we have seen that bank accounts can be offered by banks under an amanah
or wadia contract, while the community-based solution found in a takaful contract is ideal for
providing microinsurance.