LITERATURE REVIEW

‘Islamic microfinance is being an ever more important instrument in fighting rural poverty in
many countries. It has been trying to improve the welfare of the poor people through increasing
their level of income, expenditure on consumption and improving the overall living standard.
This study is, therefore, aims to survey the impact of Islamic microfinance on borrowers. By
using systematic literature review, this study provided a descriptive analysis of the gathered
articles. Then a comprehensive analysis on the impact of Islamic microfinance executed. This
study also provided a summary of the existing prominence of work by systemized way. Further,
this study focused on the areas of lacking for further study and explained the importance of the
study’.

In paper. ‘Determinants of attitude among people in micro financing’ author, Musab talks about
the concept.of awareness and knowledge among people. Islamic finance refers to a financial
service or product that is consistent or principally implemented to comply with the principles of
Shariah or Islamic law (Musab 2008). Mudarabah (partial-equity partnership or profit sharing)
and Musharakah (full equity partnership or partnership financing) are the two profit-
sharing.arrangements or partnership contracts preferred under Islamic law.

Moreover, there is another factor.which comes into play for micro financing is the element of
trust and belief the people have over the new concept. The stature of the model is new. However,
the people who have tried and tested the new concept now have a firm.belief over the concept of
micro.financing. Contrary to the.belief in micro.financing, the speculation.of scam lies more in
the minds of common community. The basis on which they don’t agree to believe the concept is
that the payable.amount will over burden the lives in accordance to the.facility provided. In
paper, Review Attitude studies on Islamic finance.have been exhausted to understand the
significant factors that influence the entrepreneurs.perception and disposition towards Islamic
banking and methods of finance.”

Another factor, which comes in for micro finance as a challenge is poverty alleviations, It makes
the stakeholders get into a uncertain scenario, the confusion that arises is which party to cater
and which path to follow for the aid. As the uncertainty grows and the rise of poverty has a
bearish trend, the idea and the mechanism is not specifically designed to cater the mass. In
another paper there is a discussion about poverty allevation in which the author says, The
literature on impact studies of microfinance shows that microfinance helps the poor borrowers to
improve their living standard. For example, Morduch (1999) found that borrowers’ income
increased five times from $1 finance. Karlan and Zinman (2010) found in South African studies,
that household who receive a loan, their poverty decreased and in Manila studies in 2009 shows
that borrowers’ welfare improved. The findings also show that the impact of savings is normally
positive because savings tend to help smooth consumption patterns, and they also help poor
households to accumulate working capital. Moll (2005) studied the effect of microfinance on
household impact studies. The author highlighted three aspects to assess the impact; saving
mobility, consumption expenditure to adequate the food intake and invest the loan in income
generating activities. Pitt and Khandker (1998), also assess the consumption trend of borrowers
and found a positive impact on consumption expenditure. Microfinance also focused on women.
Literature shows that women are empowered in terms of involvement in income generating
activities, the capability to spend for family, assets ownership and decision-making ability
(Hashemi et all, 1996, Cheston and Kuhn 2002, Nader, 2008). This improvement ultimately
enables women borrowers to improve their child education and awareness of health etc.
Consequently, this evidence indicates that microfinance has become a success to help a huge
number of poor peoples (Morduch and Haley, 2002). Therefore, microfinance borrowers’
welfare improvement was defined as those who had improved their income, assets, their child
education, health, increasing assets, living standard and who are able to repayment the loan etc.

The major concern for the holding party, especially this issue was faced by Grameen bank,
which was the 1st micro finance bank opened in Bangladesh was of impact of borrowers and
scam by the infidels who demand help from the parent organizations. There have been cases in
the past, where the parties have taken the donations but they have refused for the post
consequences. This has been a major hit for the company. However, with growing competition,
these businesses are pressured to operate under cost-effective circumstances. It was reported by
PricewaterhouseCoopers LLC that the financial services sector is among the first to fell victim
towards cybercrime (Clark et al., 2014). As risks continue to grow and evolve in parallel with the
advancement of technology in our new era, risk profile assessment and management capability
are also improving towards becoming more complex and versatile (Bodur, 2012). This
environment does no longer allow board of directors in these financial service institutions to take
risks lightly and treat them on case by case basis. As Islamic microfinance is one part of the
global financial services sector, Islamic microfinance providers are not excluded from being
exposed to various types of risk as other financial institutions in the market. Findings from
studies of Ab Manan et al. (2014); Churchill and Coster (2001); also Hussain et al. (2012) found
credit risk to be the most common and serious risk to both conventional and Islamic
microfinance. This is due to the nature of microfinance products itself, which mostly based on
business loans and financing. On top of that, the most recent Microfinance Banana Skin Report
by Centre for the Study of Financial Innovation had revealed that client over-indebtedness pose
the largest threat to the entire industry, which leads to the increment of credit risk towards
microfinance providers worldwide (Lascelles, Mendelson, & Rozas, 2014)”.

“The Islamic banking system has an in-built dimension that promotes financing activities to the
poor, as it resides within a financial trajectory underpinned by the forces of Shariah injunctions.
These Shariah injunctions interweave Islamic financial transactions with genuine concern for
poverty eradication, social justice and equal distribution of wealth at the same time as prohibiting
involvement in illegal activities, which are detrimental to social and environmental well-being.
Perhaps, after more than 30 years of impressive growth, it is time for the industry to be
reoriented to emphasize on issues relating to social and economic ends of financial transactions,
rather than overemphasizing on making profits and meeting the bottom line alone. There are
fundamental differences between Islamic banking and conventional banking, not only in the
ways they practise their business, but above all, the values which guide Islamic banking whole
operation and outlook. This demands the internalisation of Shariah principles on Islamic
financial transactions, in its form, spirit and substance. By doing so, it epitomises the objectives
of Shariah in promoting economic and social justice. Among others, building human capacity
through social intermediation and designing group-based lending programmes are proven to be
among the effective tools to reduce transaction costs and lower exposure to numerous financial
risks in relation to providing credit to the rural poor. Groupbased approach also fosters a better
flow of information between lenders and borrowers and hence less adverse selection and moral
hazard in the credit market. The success of various approaches used in microfinance programme
worldwide should be emulated by Islamic banks”.