Sustainable Micro-Financing under Islamic Banking System – An Alternative to Traditional Micro Finance Institutions (MFIs)

Although micro credit for helping poor in the context of Bangladesh is not a new idea, yet question remains on the sustainability of such institutions which are mostly backed by donor funds or government funds with high risk of insolvency along with high transaction cost due to high cost of capital for example, at 26.5 per cent on loans and advances. In addition, combining all their resources, the existing micro finance institutions (MFIs) in Bangladesh are unable to serve the greater portion of the needy populations. Under such circumstances there are calls for alternative institutions to innovate new ways of micro-finance so that the finance could be reached to greater population leading to poverty alleviation. One of the recent innovative solutions that came out of such crises is the Islamic micro-finance activities and anecdotal evidence suggest that these Islamic micro- finance activities are able to reach the finance needy poor very quickly and able to expand their scope of operational areas quickly. Purpose: The main research objectives of the current study to explore the performance of the micro-finance activities of an Islamic bank (hereafter, the researched bank) as a potential alternative to traditional MFIs in maximising the customer outreach and reducing poverty. On the basis of the research objective the following research question will be explored: Is the Islamic banking micro-finance system is able to complement the existing traditional micro-finance institutions in Bangladesh through overcoming the limitations faced by the traditional micro-finance institutions? Findings: The researched organization has developed a three sector participatory banking model to address the needs of various stakeholders along with the very poor population. It has been observed that the organization is generating four set of funds for the social welfare activities under four areas with 32 purposes. The researched bank has adopted unique strategy to develop a sustainable banking model for the poor in Bangladesh.