A New Institutional Approach in Explaining the Underdevelopment of Islamic Microfinance

Abstract

The progress of Islamic microfinance is very slow despite the fact that mainstream Islamic finance has been growing marvellously. This paper explains the logic of underdeveloped Islamic microfinance, placing an emphasis on the supply side of funds. It argues that Islamic altruism appears to be dependent on reciprocity backed by mutual belief in the omnipotence and omniscience of the absolute power. Strong reciprocity however, may create a ‘dilemma’ - to be or not to be unconditional altruist - on the actors which might ironically drain the supply of funding to the poor. Evidence to support this hypothesis has been provided explaining some cases and other anecdotal facts. The research proposes that besides relying on actors’ belief towards omnipotence and omniscience, appropriate safeguards against potential violation of cooperative and other Islamic social norms should be devised ex ante; otherwise Islamic microfinance is unlikely to thrive in the future.