An Islamic microfinance institution (IMFI) is a financial institution that operates according to the principles of Islamic finance. These institutions strictly forbid the payment or receipt of interest (riba); instead, they encourage ethical and socially responsible financial practices. Besides this, it has been documented that these Islamic microfinance institutions have played a vibrant role in social development and women’s empowerment. If we look around the world, we see these Islamic finance institutions on a large scale, like:
Al Baraka Bank: is a global Islamic bank that offers microfinance products and services in over 30 countries.
Islamic Relief: is a non-profit organization that provides microfinance services to poor people in over 40 countries.
Microfinance International: is a non-profit organization that provides microfinance services to poor people in over 20 countries
Muslim Fund Trust Deoband: In India, it is the financial institution that works on an interest-free loan model. This institution helps the needy and subaltern people with no interest.
These Islamic microfinance institutions could become a path or thread to connect unbanked people with the financial sector, especially in Kashmir, which could lead to financial inclusion and a source of financial empowerment among the people.
The beauty of these Islamic financial institutions, which makes them different from conventional financial institutions, is that they are significantly based on risk and profit-sharing models. Under this model, both the lender and borrower share profits and losses.
ISLAMIC MICROFINANCE AND ITS POTENTIAL BENEFITS
• It can help reduce poverty by providing financial services to people who would otherwise be unable to access them.
• It can help promote entrepreneurship by providing small businesses with the capital they need to start or expand their operations.
• It can help improve financial inclusion by providing people with access to savings and insurance products.
KASHMIR AND ISLAMIC MICROFINANCE INSTITUTIONS
The natives of the erstwhile state are significantly linked with the conventional banking sector, which results in a vast section of the people being submerged in the conventional banks’ debt traps, and these people are not able to repay their loans to the banks, which makes their lives restless. The volatile situation in the erstwhile state, especially in Kashmir, that appeared in 1989 shattered a business ecosystem in the valley and laid a strong negative impact on the business sector of the erstwhile state, as a result of which a large number of the people who took loans for their businesses fell into a deep well of debt. Due to the frequent past shutdowns and curfews. This huge debt can sometimes be turned fatal for their mental peace and the family environment. This unpleasant and stress full home environment badly influence on the quality of education of their children.
Keeping this past uncertainty of the erstwhile state in mind and the magnitude of the conventional bank debt of these businessmen. The people of the valley need the web of these Islamic microfinance institutions. These Islamic microfinance institutions act as financial therapy for those who have become victims of a bad situation in the valley and are trapped under the hills of conventional bank debt.
Second, these Islamic microfinance units or cooperatives could play a vital role in enriching the cultural occupation and traditional business in Kashmir by providing them with small loans with no interest under suitable Islamic microfinance models. Besides, this these Islamic microfinance institutions can provide the finance to establish green start-ups and green projects that will work for the preservation of the ecology of the valley. These microfinance institutions could also be fruitful for those who want to establish their start-ups, especially youth. These start-ups could change the landscape of the valley if they work with dedication and honesty.
Furthermore, these established start-ups will attract unemployed youth and, in this way, become the centers of employment in the valley.
Apart from the above discussion, one of the most important reasons why the people of the Valley should connect with these institutions being a Muslim erstwhile state, there is a bulky section of people who want to do their business as per the Islamic banking model, so for them, it is the best and most sustainable option to boost their business and fulfill their financial aspirations and needs as per the Islamic teachings. In this way, these conventionally unbanked people could also be connected with the financial system, which could be helpful in the process of financial inclusion.
Islamic microfinance institutions offer services to members or customers through the below-mentioned methods
MUDARABAH
It works on the basis of a profit-sharing partnership in which the institution provides the finance to the member or customer. In reply, the member or customer manages the business using his or her skills and labor. After one year or six months, profits are shared between the institution and the member as per agreed ratios.
MURABAHA
According to this approach or model, the Islamic financial institution purchases the asset from the market, then sells the same asset to the needed member or customer at the agreed markup.
MUSHARAKAH
It is the business venture of two or more parties, the finance is provided by this Islamic microfinance institution. Later the profit generated by the business is distributed among the partners according to the ratio of investment.
QARD, AL, HASAN
To cater to the emergency needs of customers or members, Islamic financial institutions provide a special loan.
IJARAH
Under this model, the Islamic financial institution leases an asset to the member for a specific period of time.
These are some modes that are used by micro-Islamic financial institutions while providing their services to their members or customers.
If we look at the impediments and challenges faced by these interest-free financial institutions, they include
• Lack of awareness among the people.
• Lack of efficient workforce and infrastructure.
Despite challenges, Islamic microfinance has the potential to play a significant role in poverty alleviation and financial inclusion. These institutions could rejuvenate the traditional business industry and also act as fuel for local start-ups. Furthermore, these interest-free financial institutions could address the unemployment crises as well and can induce energy into the entire progress wheel of the erstwhile state. This results in, this progress will finally contribute to the prosperity of the nation.

The writer is a Ph.D. in Political Science and has worked in the Parliament of India. He can be reached at [email protected]

Dr Farooq Ahmad Bakloo