A recent article written by Bhagwan Chowdhry, Professor of Finance and Faculty Director at UCLA Anderson School of Management, explores traditional microlending contracts and considers microequity as an alternative method of providing microfinancing.
Taking into account the current high cost incurred by both microlenders and loan recipients and the typically high repayment rate of microloans, Mr Chowdhry discusses whether a self-enforcing model in which customers are motivated with incentives, such as less costly financing, would allow for a less costly microfinance model. A microequity model would consist of an investment made to the entrepreneur by the financier, which would receive a return on its investment as a portion of the receipient’s earnings, as opposed to repayment of a microloan with interest.
The article cites several benefits of microequity, including its reduced financial burden to entrepreneurs when business is slow, compliance with Islamic finance regulation and aligning interests of financiers and entrepreneurs. For example, microequity contracts can be designed to comply with the Musharaka and Mudaraba principles of profit and loss sharing within Islamic financial regulation.
By Jennifer Shevock, Research Associate
Sources and Additional Resources:
“Microequity: A New Model for Financing Microentrepreneurship” June 4, 2010. http://www.huffingtonpost.com/bhagwan-chowdry/microequity-a-new-model-f_b_596329.html
MICROCAPITAL PAPER WRAP-UP: “Islamic Microfinance: An Emerging Market Niche, by Nimrah Karim, Michael Tarazi and Xavier Reille” Octobor 28, 2008
https://www.microcapital.org/microcapital-paper-wrap-up-islamic-microfinance-an-emerging-market-niche-by-nimrah-karim-michael-tarazi-and-xavier-reille/
Bhagwan Chowdhry: http://www.anderson.ucla.edu/x1931.xml
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