Towards Adopting Zero Interest Financing (ZIF) and Profit and Loss Sharing (PLS) Principle in Islamic Microfinance: The Case of Amanah Ikhtiar Malaysia

Abstract

Microfinance institutions evolved to alleviate poverty by providing micro-credit to the poor. Islamic microfinance evolved to provide alternative to the interest based conventional microfinance. However, the financing modes being used by the Islamic micro-finance institutions (IMFIs) are mostly debt based, which have resemblance to the interest based conventional modes. IMFs shun away from using the PLS scheme, which they consider risky. Theoretically, it is argued that PLS mobilizes factors of production, encourages risk sharing and ensures distributive equity in income and wealth. There is hardly any literature that has shown that PLS is workable in a pristine environment of zero interest. Furthermore, there is hardly any studies that have discussed on the feasibility of financing the poor using a combination of PLS and zero interest financing (ZIF). This study will experiment on the feasibility of providing small financing using a combination of PLS and ZIF to empower the working poor. The research incorporates literature survey, field study and business model applications in its methodology to achieve the desired objectives. The results of this pioneering project are expected to promote the local socio-economic welfare of the poor and provide
opportunities in applied areas for future research.