Issues and Challenges 387
Islamic fi nance that claims to promote social justice and advocates
equal opportunity for less - fortunate segments of society needs to develop
an SME and microfi nance industry. A well - developed microfi nance industry
will promote economic development in underdeveloped Islamic countries.
As poor segments of society become economically empowered, they will
expand the base of depositors and investors. While microfi nance institutions
have been successful in conventional markets, there are only a few cases
of such institutions operating on Islamic fi nance principles. Their phenom-
enal success within conventional fi nance has forced even private investors
to regard microfi nance as a potential and viable asset class. In an Islamic
system, instruments such as qard - ul - hassan, sadaqat, and zakah can play a
vital role in serving the poor, and the role each instrument can play needs
to be reviewed.
The emergence of Islamic fi nance in modern times began with non - bank
fi nancial institutions such as Tabung Haji in Malaysia, and Mitghamr and
Nasser Social Bank in Egypt. The objective of these institutions was to fi ll
the gap left by conventional banking institutions. Research over the last
couple of decades shows how signifi cant are the contributions of non - bank
fi nancial institutions that complement the activities of banks by providing
various services to different segments of the economy. Research also docu-
ments the diversifi cation benefi ts of non - bank fi nancial institutions, adding
to the stability of the fi nancial services.
Conventional non - banking fi nancial institutions have grown to cover a
wide range of activities such as private equity, joint venture, credit unions,
advisory services, and specialized fi nance houses. In addition, specialized
forms of fi nancing are in practice as well, including trust fi nance, endow-
ment funds, and cooperatives. Such institutions have special relevance to
Islamic fi nance. For example, today’s trust fi nancing or endowment funds
have their roots in the Islamic institution of waqf (endowments), which has
made enormous contributions to the economic development of Muslim soci-
eties throughout their history. In addition, the Islamic system offers unique
instruments which do not have any direct points of comparison in con-
ventional fi nance. Qard - ul - hassan (interest - free loans), for instance, have
proved to be effective in promoting economic development and a means of
alleviating poverty.
The objectives of socioeconomic justice and the equitable distribution
of wealth separate Islamic economic principles from others. As we have
seen, the Qur’an places great emphasis on the redistribution of income and
wealth, and mandates institutions for this purpose. The most important of
these are the institutions of inheritance — sadaqat, zakah, waqf and qard - ul -
hassan, which all have wide - ranging implications for economic develop-
ment and are necessary for the welfare of society. These instruments are
vehicles for ensuring just conduct and maintaining a healthy level of wealth
distribution. A major reason for the inadequate levels of economic growth
and the existence of widespread poverty in many Muslim societies is non -
compliance with the rules of just conduct in the economic sphere. It is also