212 AN INTRODUCTION TO ISLAMIC FINANCE
stimulation and, at the same time, provide the leasing company with an
attractive fl ow of fi xed monthly income. Given this asset - backed modus ope-
randi, leasing companies play an important role in strengthening linkages
between the fi nancial and real sectors of an economy. Since the workings
of Islamic forms of leasing are similar to those of interest - based models,
Islamic leasing companies have enormous potential to tap both markets.
A key concern which leasing companies must grapple with is developing
liquidity for leased assets, or for the fi nancial claims created as a result of
leasing. With proper management, lease securitization can play a leading
role in enhancing the liquidity status of these companies.
Microfi nance Institutions^4
It is clear that within the present dominant economic system there are a
number of serious market failures that cannot be resolved without external
intervention. One such failure is the inability of the prevailing credit system
to satisfy loan demands from segments of the population that cannot access
formal credit channels or do not have suffi cient collateral against which they
can borrow. These “non - banked” or “non - bankable” groups include not
just the poor; would - be entrepreneurs with projects or ideas with potentially
high rates of return also fall within this category.
A solution to this market failure came in the form of the Grameen Bank,
which has been a phenomenal success since its inception in the mid - 1970s.
Information economics, developed by Joseph Stiglitz, explains that informa-
tional problems underlie many failures of the market system. In particular, the
failure of credit markets is due to the fact that the collection and analysis of
information is a high - cost activity for fi nancial intermediaries (such as banks),
making it expensive to decide whether to extend a loan, and then monitor
the behavior of the borrower to ensure compliance with the loan’s terms and
conditions as well as its repayment. If information costs are too high, banks
extend loans only to those clients with a good credit record and/or high - valued
collateral to make defaults costly. Underlying this is the notion of asymmetric
information, that the borrower may have information regarding the project’s
purpose and chances of success that the lender lacks. This may lead to the
lender extending loans to risky borrowers willing to pay high interest rates,
or to moral hazard problems where the borrower will use the proceeds for
purposes other than those stated or with the intention of defaulting.
Microfi nance (MF) gets around these problems by resorting to group
lending. In its original conception (Grameen I), no collateral was required
and only the poor could borrow, but each client had to be a member of a fi ve -
person group which, in turn, belonged to an eight group “center” within a
village. While the loans would be granted to individuals within the group
for their own independent projects, failure to repay the loan would lead to
collective punishment: the entire fi ve-member group would lose its member-
ship in the bank. While there was no explicit requirement for the group to
pay off a loan default by one of its members, implicitly there was a strong