According to Research Paper by Muhammad Mohsin (1995) two of the most important needs of MME

for their growth are financing fixed asset and financing business operations which can be fulfilled
through Islamic instruments. The debt-based modes of fixed assets financing are Bay'al Salam and
Murabahah. Under these terms the owner of a small business is obliged to pay back the entire amount
at agreed terms. The debt-form may be without any charge (Qard Hasan) or it may carry some nominal
administrative charges known as `service charges'. Murabahah-based transactions may include cost-plus
or they may be a markup-based. The non-debt modes of financing are Mudarabah and Musharakah. The
debt-creating modes impose a burden on the borrower irrespective of the profitability of the Enterprise
and in equity financing (Mudarabah and Musharakah), the payment is based upon the earnings. Various
features of financial instruments and types of finance can be used to suit the circumstances of MME as
borrower. One of feature of Islamic instrument is level of participation in management of MME by
Islamic bank. This level of management vary in each instrument so MME depending upon its need can
utilize any one of instrument. Both in Mudarabah and Bay'al Salam, once the funds have been handed
over, the SSB enterprise is free to use them according to it's discretion. The Islamic bank has no
participation in the management. Musharakah provides an opportunity under which the Islamic bank
has a role in the management of funds. Similarly, in Murabahah (markup-based) financing and Ijarah
(leased-based) financing, the Islamic bank has full control over the use of funds. So if the MME
entrepreneur feel that for proper growth and development of his business he needs some of guidance
and managerial assistance he can utilize Musharakah, Murabaha e.t.c. Similarly another feature is cost
of capital. The cost remains uncertain until the completion of the contract under Mudarabah,
Musharakah and Bay'al Salam. In Ijarah (leasing) and Murabahah (mark-up based), financing is
predetermined and fixed. Islamic instruments also help in financing MME business operations. These
operational issues can be day-to-day problem which have to be carefully managed. Many conventional
small-scale enterprises fail due to the improper management of inventory. Overinvestment causes a
considerable erosion of profits and capital. Generally, firms build up stocks of raw material in order to
ensure the continuity of production and the availability of quantity discounts. On the other hand if MME
consult Islamic banks for use of Islamic instruments then Islamic bank will buy raw material from
supplier on the basis of Murabaha or Musharaka and then sell raw material to the users (MME) on the
basis of "Bay Muajjal" or "Bay Bithaman" (deferred sale). Under the system of transaction, the raw
material will be delivered to the MMEs immediately, while payment for the raw material will be
postponed to a later date. Similarly, if MMEs employ Islamic instruments for sale of their finished goods
then banks would buy finished goods from the MME and sell them in the market which will relieve
producers from marketing problems and will allow flexibility in production scheduling.

According to Research paper by Badr- El-Din A. Ibrahim (March 2003) the conventional bank usually gets
back the amount it has lent along with the interest payments. It does not matter whether the
entrepreneur made a profit or incurred a loss. Thus the Islamic financing modes are better suited for
meeting the needs of MMEs. In most cases financing is granted without an obligation on the part of the
partner to pay back whether he or she gains or loses. As Islamic investment arrangements put great
emphasis on the transaction itself, rather than the creditworthiness of the partner, no strict security
should be demanded. . If the operation ends in a loss the partner does not bear this loss alone. If he or
she is unable to settle his or her bills, a grace period is given without any additional fees. Most of Islamic
instruments are suited to fulfill the needs of MME and to lead them towards growth and development
e.g. Musharaka caters for both production and management, thus leading to increase incomes for
income groups who do not own capital. It is a suitable mode of financing for both working and fixed
capital.

Interest Free Micro Credit Program (IMCP) - Designed for Urban Areas of Pakistan

May 2002, Rehman, F.Islamic finance for urban Pakistan

This article explores how the microfinance institutions (MFIs) in Pakistan play an effective role in poverty
alleviation through Interest-free Micro Credit Program (IMCP).

The author highlights salient points of IMCP as:

It is based on partnerships in business for a specific time period, with the maximum being three years.

It works on the principle of sharing profit and loss.

After providing finance to a partner (borrower), the organization also provides social and business
development services.

The borrower gets the highest share in profit.

The borrowing partner gets back the ownership of the business after completion of partnership
duration.

The author discusses models that are used for financing under IMCP. These include:

Profit and loss sharing schemes:

Mudharaba (partnership)

Musharaka (Equity Partnership).

Non-profit and non-loss sharing schemes:

Murabaha (Trade finance).

Finally the author explains that IMCP can finance:

Manufacturing enterprises such as shoe making, bakery, bag manufacturing etc.

Trades and services like vegetable/fruits shop, milk/yogurt shop etc.

Though Islamic instruments are highly beneficial to MMEs but in order to increase their use by
MMEs some steps needs to be taken. While discussing Mudarabah-based investment and
financing Abdul Gafoor suggests that the execution of Islamic system require the development of
new knowledge from all the stakeholders. It needs contribution from each member, but at the
same time it provides incentives both to members of the society and the society itself. The
Mudarabah contract can be used at individual level and corporate level too. However, Mudarabah
is preferab. http://www.islamicbanking.nl/article2.htmlly right to MMEs.