Written by Aliyu Dahiru Mohammed and Zubair Hasan and released in April 2008 as part of University Library of Munich’s Munich Personal RePEc Archive (MPRA) Paper Series as number 8127, 18 pages, available at http://mpra.ub.uni-muenchen.de/8127/1/MPRA_paper_8127.pdf.
This paper examines the potential for microfinance in Nigeria and the specific challenges of aligning microfinance with Islamic law. It proposes that if an Islamic version of microfinancing could be implemented in Nigeria, as it is in other countries, the microfinance industry would see greater growth and success.
The paper begins by classifying the majority of Nigerians as poor people working within micro and small-sized enterprises. It traces the country’s previously unsuccessful attempts at offering finance and admits that though microfinance institutions (MFIs) exist in Nigeria, 65 percent of the population still lacks access to financial resources (p 4).
The paper continues by pointing out the religious conflict with providing microfinance, as 55 percent of Nigeria is Muslim. Direct quotes from the Qur’an provide examples of the conflict between charging interest and Islamic Law. As interest is seen as religiously unjust and therefore forbidden (p 7), traditional microfinance is in conflict with a huge sector of the Nigerian population. The authors propose diversity and sector specific microfinance as the solution to Nigeria’s shortcomings in microfinance.
Finally, the paper explores studies and examples of successful Islamic banking in Bangladesh, Sudan, Malaysia and Yemen, specifically through Islamic Microfinance Institutions (IMFIs). Joint liability and profit sharing are especially highlighted as they align with Islamic prohibition against usury (which restricts interest rates). One example is of the “benevolent loan” (Qardhul Hasan) whereby the lender may not demand interest, but the borrower may offer it as a form of gratitude. Another example cites a fee for “protection” of a limited form of collateral in exchange for a loan (p 10).
The study concludes by asserting that the Nigerian microfinance market is unexploited, and with more diversified microfinance opportunities, the country could offer much opportunity for investors.
By Sarah Knapp
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