Islamic Microfinance: A Shariah-Compliant Tool for Poverty Alleviation and Social Welfare

Abstract

Islamic Microfinance has emerged as a pivotal tool in alleviating poverty and hunger by adhering to Shariah principles. Predominantly implemented in Muslim nations with lower per capita incomes, this financial model offers services that conform to Islamic laws by eschewing interest. This study examines various models of Islamic Microfinance, assessing their contribution to societal welfare and their compliance with Islamic Shariah. It also identifies gaps in the accessibility and implementation of these services. The research methodology includes a comprehensive literature review, analyzing scholarly discussions on the operational mechanisms of Islamic Microfinance. Prominent databases and academic platforms were utilized to gather and evaluate relevant studies. The findings highlight several challenges that diminish the effectiveness of Islamic Microfinance institutions, including credit risks, ethical dilemmas, and economic sustainability. The analysis extends to both charity-based and profit-based instruments within Islamic Microfinance, underscoring the need for critical evaluation in the face of modern challenges. Ultimately, the study confirms that Islamic Microfinance significantly supports impoverished communities by redistributing wealth in accordance with Islamic Shariah. This approach not only combats poverty and hunger but also fundamentally bolsters the broader social welfare framework.