214 AN INTRODUCTION TO ISLAMIC FINANCE
these funds to provide productive, consumer, and social loans to their mem-
bers. They are often supported by personalities and organizations that exert
a strong religious and social infl uence on the community. In Indonesia, a
network of approximately 4,500 cooperatives offer savings products based
on mudarabah and musharakah, and fi nancing based on murabahah, muda-
rabah, and qard - ul - hassan contracts. However, a majority of these coopera-
tives have either gone bankrupt or lie dormant (Seibel 2007).
Syria’s Islamic cooperatives or “Village Banks” have been quite suc-
cessful. They are fi nanced through members’ share capital, run by elected
members, and offer only murabahah fi nancing. Returns are shared among
members based on musharakah principles, or are retained as capital.
Rahman and Ahmad (2010) examine a Shari’ah - compliant microfi nance
scheme in Bangladesh and show that household income increased signifi -
cantly as a consequence of the program. Islami Bank Bangladesh Limited
(IBBL) launched a rural development scheme (RDS) aimed at alleviating
rural poverty in 1995. This Shari’ah - based microfi nance program provides
welfare, moral, and ethical services to the rural population in 60 districts.
Of the membership of more than half a million, some 94 percent are women.
The RDS practices murabahah and bay’ al - muajjil contracts to purchase
goods and sell them to the clients at a fl at profi t rate of 10 percent, with a
rebate of 2.5 percent for timely payment. This compares with conventional
microcredit, which charges 15–22 percent interest. It is claimed that the
investment recovery rate of the RDS is 99.57 percent.
Credit Union - style Microfi nance Another Islamic microfi nance model is based
on the concept of mutuality and is similar to a conventional credit union
(CU). A CU is a non - profi t fi nancial cooperative owned and controlled by
its members and engaged in mobilizing savings, offering loans to its mem-
bers who have a common goal or objective. CUs are quite popular in Asia,
notably in Sri Lanka.^5
Qard - ul - hassan - based Microfi nance Qard - ul - hassan funds are socially oriented
organizations which provide community members with interest - free loans.
A qard - ul - hassan (benevolent loan) is the only type of loan permitted under
the Shari’ah. It is often considered a form of charity, because the lender is
encouraged to forgive borrowers if they default and repayment is a fi nan-
cial burden on them. According to the Central Bank of Iran’s March 2008
estimates, Iran’s 6,000 qard - ul - hassan funds had a total of US$5.5 billion
in outstanding loans. Since these institutions are heavily reliant on donor
funds, they are unsustainable in the long run (Karim et al. 2008).
The scope, scale, and product portfolio of each type of institution dif-
fers from the next. Nonetheless, there are some discernable trends. A vast
majority of Islamic microfi nance institutions cater to a higher percentage of
women than men, use murabahah as the predominant fi nancing instrument,
and have far lower outreach than their conventional counterparts operating