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HUM
30,1 The challenge in poverty
alleviation: role of Islamic
microfinance and social capital
76
Abul Hassan
Centre of Research Excellence for Islamic Banking and Finance,
King Fahad University of Petroleum and Minerals, Dhahran, Saudi Arabia

Abstract
Purpose – The purpose of this paper is to examine the growth of Islamic microfinance (bila
sudi-qardh) scheme in Andaman Islands and to see how Islamic microfinance sector and social capital
contribute to face the challenge in poverty alleviation.
Design/methodology/approach – The researcher developed a questionnaire and conducted
non-random survey with the samples of Islamic microfinance group members to examine the Islamic
microfinance and cash awqaf effect for the development of the local common resources (LCRs) in
general; and financial, physical capital as well as social and human capital effects of the group
members in particular.
Findings – This study found that collective action through Islamic microfinance groups actually
helps to increase environmental awareness, economic betterment of the members and fruitful
management of LCRs through Islamic microfinance.
Research limitations/implications – The paper’s findings are limited to the Islamic microfinance
groups’ management in Andaman Islands in India.
Originality/value – The paper explores social, financial and physical capital effects such as
environmental awareness, economic upliftment of the Islamic microfinance groups’ members and
potential for LCR management through united action of the groups.
Keywords Microfinance, Poverty, Awqaf, Common resources, Economic-upliftment, Social-capital
Paper type Research paper

1. Introduction
The importance of economic or financial capital, human capital and natural capital for
development and for finding an exit path of poverty is a popular issue in the present
time. Most development policies in the developing countries have focused on
generating assets and providing access to these forms of capital to the poor. In the
semi-arid and arid tracts of India, the population on average is among the poorest,
with low natural resource endowments, few viable assets and low levels of access to
finance specially in the rural area. Social capital plays a crucial role in facilitating
adoption, and overcoming constraints of lack of financial, human and natural capital.
On the other hand, collective action provides the means to adopt and benefit from
agricultural innovations, generate economic and human capital, and make the
development process sustainable. A large number of Islamic microfinance loan
recipients who make at least part of their living by exploiting their local common pool
Humanomics resources (LCRs) strengthen the social capital.
Vol. 30 No. 1, 2014
pp. 76-90 The Islamic microfinance program place considerable reliance on client networks
q Emerald Group Publishing Limited and voluntary input for loan disbursal and recovery. The empirical evidence indicates
0828-8666
DOI 10.1108/H-10-2013-0068 that Islamic microfinance programs which built social capital can indeed make
a significant contribution to poverty alleviation. But very little has been written about Challenge
Islamic microfinance effects on these resources. As preliminary to comprehensive in poverty
discussion, this study examines the experience of Islamic microfinance program for
economic betterment of the poor people in Andaman and Nicobar Islands in India. alleviation
The primary objective of this study is to develop the links between Islamic
microfinance and social capital which involve collective action of group members into
income generating activities through utilizing local common resources (LCRs): 77
irrigation, water resources, grazing land and forests. In the present paper, we explore
how three common characteristics of Islamic microfinance programs affect the
sustainable use of LCRs which are characterized by high exclusion costs and high
sub-tractability. First, Islamic microfinance extends loan to the very poor to promote
micro-enterprise and other income generating activities, which may increase production
and consumption and in turn change the demand for LCRs and the technology for their
use. Second, Islamic microfinance programs often focus on people living below the
poverty line, who are the primary users of LCRs. Finally, Islamic microfinance often
conducts Islamic study circle, group meetings and group-lending techniques,
potentially building human capital and strengthening the Islamic social capital of the
community. This social capital, in turn, can lower the costs of collective action in
managing LCRs.
The remainder of the paper is structured as follows. Section 2 discusses about
Islamic microfinance programs in the social intermediation process and Section 3
focuses on Islamic social capital as network of linkage and development. Section 4
focuses on Islamic microfinance effects on local common pool resources such as
irrigation systems, other water resources, fishing pools, grazing lands and forests.
Section 5 examines the impact of Islamic microfinance and social capital’s role in
environment and lastly Section 6 draws the conclusion.

2. Islamic microfinance in social intermediation process

Since inceptation, Islamic microfinance sector has a diversified growth and multiple
impact. It is seen as an important phenomenon in the process of development,
especially in the context of globalisation and liberalisation whereby subsidy and grant
based programmes/schemes are losing their importance. Islamic microfinance sector is
seen as the best option based on saving mobilisation of the poor people and its linkage
with income generating activities. The goal of Islamic microfinance is to target the
poorest who worked in the informal sector of the economy. The marginal farmer,
labours who sell locally grown foodstuffs; make brooms, tailoring in their little
shops, etc. are coming under the jurisdiction of informal sector. Historically, these
workers in the informal sector have been excluded from formal banking due to several
possible factors. First they lack of the literacy and necessary connections to get loans.
Second, such tiny loans is seen as financially unsustainable due to the high transaction
costs that the bank has to face. In order to meet those costs, many conventional
bankers believed that interest rates would have to be high. Third, workers in the
informal sector were perceived as having credit risks because they do not possess
physical collateral.
In a holistic perspective, Islamic microfinance is a process of social intermediation
and building social capital. Process of social intermediation is an investment that is
made for development of both human resources and institutional capital to make
HUM marginalized groups to be self-reliant in preparing them to engage in formal financial
30,1 intermediation. According to Elaine and Barton (1998), social intermediation is
a financial intermediation with a capacity building component, aimed at those sectors
of society that lack access to savings and borrowing facilities. It can be understood by
transformation of beneficiaries into clients or customers and creation of local
institutions that bridge the gap between the formal financial institutions and
78 marginalized groups.
The information asymmetric between borrower and lender plague most credit
markets and arise from the lenders inability to know the true credit worthiness of the
borrower. In addition, problems of moral hazard arise, whereby lenders assume riskier
behaviour once they give loan to the borrowers. These particular traditional problems
in rural credit delivery can be categorised as low potential profitability and imperfect
information. Despite these problems, microfinance promotion institutions (MPIs) in
India found that workers in the informal sector were indeed credit worthy.
With the inspiration of MPIs, the Islamic Welfare Society (IWS) in South Andaman
expanded the base of informal Islamic investment out of their “Bila Sudi Qardh”
Scheme. It extended interest free loan by utilising simple procedures that did not
require literacy and could therefore include the poorest. The investment programmes
among others, include provision of loan for investment in crop production, fish
cultivation, irrigation, agriculture and irrigation equipment, non-farm activities,
vans and rural transport, materials for housing, etc. This investment is either based on
profit and loss sharing (PLS) like Musharaka, Mudarabah, or fix commission based
instrument Murabaha and Bai-salam based on the principles of Islamic Shari’ah.
To encourage payback, payments were frequent and small, and borrowers formed peer
groups that gave support and excreted repayment pressure. An individual select an
Islamic microfinance group which promotes group homogeneity in terms of
landholding, income and promotes repayments.
Although borrowers do not have physical capital to act as collateral, but they have
social collateral. By utilising the existing social capital – the network of trust and
brotherhood based on Islamic ethical values, the Islamic microfinance group
techniques helped to ensure repayment of the interest free loan with agreed percentage
of sharing profits. Members of the group may be required to borrow in groups, select
their own group members, act as mutual guarantors (in case of business failure,
financial grant-equivalent to the amount of loan is sanctioned out of the zakah
fund/cash awqaf of the IWS). These group incentives and dynamics are reinforced
through regular Islamic study circle and group meetings. It reduced the costs of the
information asymmetry which is common to most lending situations by aligning
borrowers’ incentives and using their knowledge and maintaining Islamic values,
monitor repayment and exert peer pressure. This concept, the idea that social collateral
has been substituted for physical collateral in the provision of interest free loans is
a novel idea in the world of Islamic banking and it has been replicated in the informal
Islamic microfinance programme.
IWS, South Andaman started the Islamic microfinance programme in 1984, partly
promoted by the increasing interest in Islamic microfinance by MPIs. But in 1996,
there have been a number of reviews for adopting an appropriate microfinance model
by IWS which was emphasised in the form of a mutualist Islamic model. The present
Islamic microfinance model which is adopted by the IWS is a very popular programme
among the poor people of Andaman district. In 1996 it had 1,000 members and Challenge
membership reached at 2,570 in the year 2010 of whom 95 percent are Muslims. in poverty
Each group has five to ten members. Loan decisions to Islamic microfinance groups are
taken by IWS staff but internal decisions are taken by the group members. By 2010, alleviation
it extended loan to 237 groups of men and women (who are around 40 percent).
Apart from the monthly compulsory thrift, Islamic microfinance groups operate the
following funds/schemes under the control of the manager (Islamic finance) of the IWS. 79
(1) Trouble fund
A portion of the saving is often reserved in a fund which members may access for
serious health problems and natural calamity, etc. This fund provides interest free loan
(Qardh Hasan).

(2) Cash awqaf certificate (fund)

The Waqif (donor or a person who donate money) donates money as awqaf by
purchasing cash waqf certificate. The certificate can be bought in the name of family
member, even if he/she is already dead. The Waqif expects return of the managed fund
to be assigned for certain purpose, e.g. public facility development, rehabilitation of the
poor people, etc. The Manager (Islamic finance) of IWS administers this fund and
invests the collected fund in various investment portfolios. He manages portfolio of
investment:
.
by investing the fund in sharing business with established businessman;
.
by establishing new businesses with sister organizations; or
.
financing small and medium scale enterprises (SMEs).

The objectives of the cash awqaf certificate are:

.
to collect social savings through cash awqaf certificate (cash awqaf certification
can be done in the name of other beloved family member to strengthen family
integration among rich families);
.
to help in transforming the collected social savings to social capital;
.
to increase social investment;
.
to create awareness among the rich people in respect to their responsibility for
social development within their environment; and
. to stimulate integration between social security and social welfare.

In addition to the above-mentioned objectives of the cash awqaf practice, profit of the
managed awqaf fund can be allocated for:
.
poor family rehabilitation;
.
enhancing poor people’s welfare;
.
educational and cultural development;
. supplying free books;
.
funding relevant research and development;
.
improving educational programs such as scholarship, grant for schools and
Madrasa;
HUM .
preserving and developing cultural values;
30,1 .
health and sanitation for poor people;
.
establishing health centre;
.
providing cheap medicines with appropriate quality; and
.
building facilities for religious activity.
80
Islamic microfinance which extends small loans for income generating activities to
the poor in predominantly Muslim society, has become one of the most popular
development tools to appear in the last few years. Islamic microfinance loan recipients
make at least part of their living by exploring their LCRs such as irrigation, fishing
pools, gazing lands and forests. This program uses existing social capital, particularly
in their group-lending techniques, but arguably also create Islamic social capital
through Islamic study circles, meetings and other services. It may be considered as a
part of the shuratic (consultative) process and ummatic (community) desire working
for the all round development of an Islamic society (Choudhury, 2002).

3. Social capital as network of linkage and development

The concept of “social capital” is useful when interpreted as the network between sets
of agents located in different sectors of the economy. Networking creates the ground
rules for the transparent functioning of development interventions as well as
developing trust and co-ordinating action. It also promotes innovative interactions
between agents and helps to solve problems such as free-riding and bottleneck of
networking which typically prevent communities from conserving and harnessing
their natural capital (Hassan, 2006). Brehm and Rahn (1997, p. 14) define social capital
as: “the web of cooperative relationships between citizens that facilitates resolution of
collective action”. Kloosterman et al. (1999) describe the combination of social and
professional networks primarily for economic benefit as “mixed embeddedness” and
attribute this interaction predominantly to communities. They argue that embedded
networks of individuals are not limited to one group but incorporate resources
available throughout the wider community. The central proposition of social capital
theory is that networks of relationships constitute a valuable resource for the conduct
of social affairs, providing their members with “collectively” – owned capital and a
“credential” which entitles them to credit, in the various senses of the word
(Bourdieu, 1986; Putnam, 1993). Much of this capital is embedded within networks
of mutual acquaintance. The significant social capital in the form of social status or
reputation can be derived from membership of specific networks, particularly those in
which such membership is relatively restricted (Burt, 1992).
Islam places a greater emphasis on duties than on rights. The wisdom behind this
is that if duties (relating to justice and trusteeship) are fulfilled by everyone, then
self-interest is automatically held within bounds and the rights of all are
undoubtedly safeguarded. Since the society is the primary institution in Islam
(and not the state), the emphasis is on the human being rather than on state power.
The real wealth of societies consists of their people and an over-concentration on the
creation of material wealth can obscure the ultimate objective of enriching human
lives. Humans are thus the ends as well as the means. Unless humans are motivated
to pursue their self-interest within the constraints of economic well-being, neither the
“invisible hand” of the market nor the “visible hand” of central planning can success Challenge
in achieving socio-economic goals (Chapra, 1992). in poverty
Al-Quran says:
alleviation
O mankind! We created you from a male and a female and made you into nations and tribes
that you may know each other. Verily, the most honoured of you before God is the most
righteous of you; surely God is knowing, aware (Al-Quran 49:13).
81
A natural effect of the concept of universal brotherhood is mutual co-operation and
help. Prophet Muhammad (peace be upon him) advised Muslims to be moderate in all
their affairs and described Islam as the “middle way”. Therefore, a balance in human
endeavour is necessary to ensure social well-being and continued development of
human potential (Ahmad, 1982). Al-Quran says “Be kind to those on earth and he who
is in heaven will be kind to you” (9:11). Here God emphasises on justice. The concept of
brotherhood and equal treatment of all individuals within society and before the
Islamic law is not meaningful unless it is accompanied by a form of economic justice.
Everyone gets his/her dues for his/her contribution to society as to the social product
and that there is no exploitation of one individual by another one. Islamic ethics urge
Muslims to “withhold not things justly due to others (p. 4)” (Chapra, 1970). Implying
that every individual must get what is due to him, but at the same time should not
deprive others of their fair share. This warning against injustice and exploitation is
designed to protect the rights of all individuals in the society regardless of whether
they are consumers, producers, or distributors and to promote general welfare.
In view of the above, Islamic social capital may be defined as networking that helps
to create the linkages which in turn motivate people to follow up the Islamic
conventions and norms governing the development process. The goal of Islamic social
capital is to create universal brotherhood community and social economic justice.
Therefore, the concept of “social capital” has added a new dimension to the dialogue
on development from an Islamic perspective. While institutions have long been
considered as significant in development theory, viewing the density of formal and
informal institutions for development as “social capital” formalises the link with labour
and capital as inputs into development. The social capital system in Islamic
perspective show that material prosperity, based on a strong foundation of spiritual
values, constitutes an essential part of the Islamic social philosophy. Islam as a religion
is dedicated to universal brotherhood, social and economic justice, equitable
distribution of income, and to individual freedom within the context of social
welfare. This dedication is spiritually oriented and is finely interwoven within the
entire fabric of its social and economic standards.
Poor people have few assets. But in their social relationships and networks,
the poor people can cooperate, share the resources and risks, and act collectively.
The importance of understanding formal and informal institutions and their contribution
to the construction of social capital is necessary to perceive how people mobilize and
acquire a wide range of assets and gain access to decision making processes,
technologies, resources and markets, and benefit from them. The least explored outcome
of Islamic finance is the production of social capital arising from group-based Islamic
microfinance programs. The Islamic social capital is the institutions, the relationships,
the attitudes based on Islamic ethical values that govern interactions among people
and contribute to economic and social development. Therefore, social capital in Islamic
HUM perspective can be conceived of as networks of horizontal and vertical linkages.
30,1 Horizontal linkages are generally those positive social networks that contribute to the
overall productivity of a community, such as volunteer associations. It is fairly well
understood how Islamic microfinance programs use the existing networks of horizontal
associations to lower some information and other transaction costs. It may also be
pointed out that the importance of hierarchical relationships, including relationships
82 among borrowers and Islamic microfinance group that become personal through regular
meetings which create Islamic traditional patron-client relationships and the need to
demonstrate allegiance, and the relationships.

4. Islamic microfinance effects on local common pool resources

The effect of Islamic microfinance on LCRs begins with two unique characteristics;
extending Islamic microfinance to the poor people and engaging group members into
collective actions through group-lending methods. Table I indicates how each of
these program components changes an existing constraint that the borrowers live
under, and hence can lead to a change in their productive or consumption behavior.
Islamic microfinance affects environmental and common pool resources through
changes in the levels, diversity, or regularity of borrowers’ income, changes in the role
of poor people, and changes in the cost of collective action. Changes in these constraints
lead to behavioral changes that have implications for LCRs.
Changes in the physical, human and social assets that arise from Islamic microfinance
activities will affect a community’s production, consumption, and in management
opportunities and decisions around LCRs. Whether the net effects are negative or positive

Islamic microfinance Changes in

characteristics constraints

Changes in Examples of
behaviour utilisation of LCRs

Capital extension " Income/ownership " Management Sustainable techniques, less

(physical capital) " Income diversity " Demand for chemical use
environmental Less water and land
equality pollution, improved
" Resource use sanitation
Proper disposal of waste on
common land, water ways
Islamic group lending Income regularity Demand for social More social capital and
(social and human capital) among the poor insurance mutual help, more
people Utilisation of agriculture, income
Production balance resource generating activities
Cost of collective " Resource use and Awqaf grazing land use,
action cooperation less resource degradation
Knowledge " Management of and depletion
LCRs More investment in
common land and water
Table I. resources
Relationship of Islamic Improved monitoring and
microfinance to LCRs self-help rules enforcement
clearly depends on agro-climatic zones, the particular LCRs, design of the Islamic Challenge
microfinance program, and other local and non-local institutions. The net physical capital in poverty
effect of increased production and consumption opportunities – including increased
demands on LCRs and increased waste and byproducts compromising the quality of the alleviation
LCRs – may be negative. We suggest, however, that the human and social capital effects
of Islamic microfinance may mitigate these damages.
We often ignore the environmental impacts of micro-enterprises because of their 83
small in size. There is limited evidence that, per unit of output, the environmental
consequences of small enterprises can be more pronounced than those of larger
enterprises because of technical inefficiencies in production and waste treatment, and
the difficulty of regulating this sector (Kent, 1991). The Islamic microfinance effect on
LCRs of two unique characteristics of the programs are discussed below.

(1) Financing to the poor: financial and physical capital effects

Extending financing to the poor has environmental resource consequences through
both financial and physical capital investment undertaken and the potential changes
in borrowers’ income. Islamic microfinance program allows micro-entrepreneurs to
invest in small-scale capital such as sewing machines, looms, bi-cycles, livestock, tools,
and other supplies. The micro-enterprise activity increases mudarib’s (entrepreneur)
income and ownership. Not only it may result in an increase in resource use and waste
production, but also an increase in demand for environmental quality which has
beneficial effects on natural resource management.
(i) Increased income and ownership. Some evidences say that Islamic microfinance
raises the income and creates assets of at least some participants. As income increases,
we expect the quantity, composition and timing of economic activity of the poor to
change. Changes in activities afforded by increased income have effects on the
environment that may change over time, and be positive or negative. For rural, largely
natural resource-based subsistence economies, growth involves either the
extensification of agriculture, intensification of agriculture, and non-farm activity.
In South Andaman, India, access to member-based Islamic microfinance
encouraged agricultural intensification by increasing lowland rice yields and upland
soil fertility with the help of state agriculture department. Increased access to capital,
however, also increases upland farming opportunities, though on net an increase of
3 percent of households involved with Islamic microfinance groups decreased upland
use by 0.90 percent. Agricultural intensification, while reducing pressure on forests
and grasslands, is often achieved by increased chemical fertilizer use, purchased
through borrowing from group which may have its own environmental consequences
including soil and water contamination and increased demands on irrigation and other
water systems.
Rural farm- and non-farm micro-enterprises may increase the demand for resources
supplied by LCRs, such as water, timber for fuelwood, or land for grazing. The negative
impacts include generating toxic and waste whereby their severity depends on scale, the
absorptive capacity of the environment, and the infrastructure and services to deal with
it. Processes and products may contaminate LCRs, especially water and forest systems.
Examples of environmentally harmful farm-based micro-enterprises include
chemical-intensive agriculture and aquaculture because of inappropriate use
and disposal on public lands and waters of the hazardous chemicals.
HUM Non-farm activities financed by Islamic microfinance that may put particular pressure
30,1 on LCRs include metalworking and electroplating, tanning, craft enterprises, brick
production, foundries for food processing, wood processing, chemical production,
small-scale transportation and road-stand restaurants.
More positively, rising incomes tend to be correlated with a greater demand for
environmental quality through improved household infrastructure including
84 sanitation and cooking facilities, greater access to safe drinking water, increases and
changes in fuel use (Reardon and Vosti, 1995). The impact of changes in fuel
use depends on the fuel and fuel burning technology used. Switching from biomass to
electricity, for example, may reduce the destruction of forest sinks and CO2 emissions.
On the production side, increased income may also promote resource management
through increasing property rights, access to more environmentally friendly
technology, and maintaining future value of the resources. Increased land and other
resource ownership can create incentives to practice better long-run resource
management. It can also allow the flexibility to smooth consumption and expenditures
to achieve better returns or improved practices. Lower discount rates may increase
borrowers’ willingness to use organic fertilizers and pesticides and to practice
integrated pest management that can reduce both the demand on LCRs and the toxins
that threaten the quality of those resources.
(ii) Income diversification. Income diversification can be an important result
of Islamic microfinance, particularly for the rural poor who are dependent on
agriculture and are subject to weather fluctuations and crop cycles. Income can be
diversified through savings or other financial services offered by the member-based
IWS, additional farm activities such as new crops, and new or expanded non-farm
activities.

(2) Islamic group lending: social and human capital effects

As a group, Islamic microfinance overwhelmingly focuses on extending loan to the
poor. The environmental consequences of increased income or property rights for
poor people may be more pronounced than for other category of people. This is because
the poor begin with more limited rights but often have a major natural resource
management role. In most developing countries, people below the poverty line are
responsible for gathering fuel-wood and non-timber forest products and sell low wages
labour. This type of works contributes to a unique and intimate relationship with
environmental resources and a knowledge and sophisticated appreciation about local
ecosystems. This includes understanding the varied functions of different forest
resources, the multiple uses of crops, soil features, water flow, and health care for small
livestock.
The poor people also suffer most of the time from deforestation and desertification,
and have a particular incentive to maintain or improve their environment and LCRs.
The Islamic microfinance institutions (IMFIs) that require regular group meetings can
strengthen these initiatives and offer the opportunity to share their own knowledge
and best practices. The IMFIs which offer financial, business, technical, reproductive
and other training may add to the human capital of the borrowers and the community.
The value added may be particularly high for poor people. It is logical to assume that
the relevance of training in entrepreneurial skills will have enduring value only if
entrepreneurial opportunities exist for credit recipients (Fukuyama, 1995).
 Stiglitz (1990) and Besley and Coate (1995) explained that how microfinance Challenge
programs use the existing networks of horizontal associations to lower some in poverty
information and other transaction cost. van Bastelaer (1999) emphasized about the
importance of hierarchical relationships, including relationships among borrowers and alleviation
lenders that become personal through regular meetings that create traditional
patron-client relationships. It demonstrates allegiance and the relationships between
microfinance institutions and governments. Question may be raised that how IMFIs 85
create new social capital. The Islamic microfinance programs use existing social
capital, particularly in their group-lending techniques, but practically it also creates
social capital through meetings and other services.
Collective action actually provides the means to adopt and benefit from agricultural
innovations, generate economic and human capital, and make the development process
sustainable. As we observed in South Andaman that Islamic microfinance has the
potential to enable collective action and through collective action actually provides the
means to adopt and benefit from agricultural innovations, generate economic and
human capital, and make the development process sustainable. Therefore, Islamic
microfinance is more sustainable community-based informal institution under the
umbrella of IWS. Therefore, due to the nature of its investment activities, Islamic
microfinance enhances incentives for cooperation by increasing the anticipated
payoffs. As it is often the case, if the poor people are the primary users of the LCRs,
Islamic microfinance activities may provide a conduit for changing the operational
rules of the LCRs among the users and the Islamic ethical value system surrounding
their usage.
Ostrom et al. (1994) stated that communication among participants greatly increases
the chances of successful collective action. This has been shown in a series of
experiments that used right institutional framework to communicate among the
stakeholders. He also gave evidence that “the members used the opportunity
successfully; to calculate coordinated yield-improving strategies, to devise verbal
agreements to implement these strategies, and to deal with non-conforming players”
(p. 167). van Bastelaer (1999) argued that social capital is created when MPI like the
Grameen Bank and its replicators require all members to repeat the same behaviour
every week, such as reciting the list of decisions that accompany group membership.
This routinization creates a corporate culture, or cultural habit. Such cultural habits,
in combination with strengthened allegiances among borrowers and their families,
reduce incentives to behave in ways detrimental to the common good.

5. Islamic microfinance and social capital: environmental impacts

In order to track both household-level Islamic microfinance activities and ecological
and LCR measure in the area of operation of the IWS in the South Andaman, India,
we mailed survey question among 200 members of Islamic microfinance groups.
Only 71 members responded including IWS executives who are involved in the
implementations of Islamic microfinance program. Of the respondents, 75 percent
(54) classified themselves Islamic microfinance group members 10 percent (seven) of
the IWS employees who are implementing program and 10 percent (seven) are
executive committee members of IWS. The average of female borrowers across all
programs was 40 percent. 45 Islamic microfinance groups extended lending facility to
more than 77 percent women borrowers. Among other questions, respondents were
HUM asked whether they used group or individual loans and the environmental impact
30,1 (if any) of the Islamic microfinance activities in their area. The data provide
perceptions of both the effects of Islamic microfinance on the environment and the
importance of IWS for social cohesion.
The respondents were asked, “are there any sustainable natural resource or
environmental related conditions of lending associated with your program?” Out of
86 71 respondents, 42 percent (30) of the respondents said yes, while 36 percent (26) said
there were none. The interpretation of “requirements” varied. Some Islamic
microfinance groups reported strict conditions, for example, that:
[. . .] agricultural loans are conditional upon the abstinence from use of chemicals, conditional
upon the strict maintenance of resources, i.e. no deforestation is allowed (for) as a condition of
a loan (and there are) conditions pertaining to the disposal of waste.
Some lending conditions included “building a pit latrine” or “planting a tree”. Other
members reported that loan applications directly asked about “environmental impacts”
and that applicants had to prove that their project or loan would not have detrimental
effects: “joint project finance (group lending) for food processing are based on the
condition that the location of the machine and the design of the structure minimize
waste and do not damage surrounding soil”, and “participants are required to have in
place soil conservation practices and to plant appropriate trees and erosion control
barriers. Participants must be knowledgeable about use of manure and compost”.
“Most of the borrowers have to present activity for loan to group (the) group rejects
activities those are not favorable to local social or environmental practices”.
Other Islamic microfinance groups did not focus on the project per se, but required
certain behaviors from borrowers:
Members must have a solar stove for use at least once a week; The 12th Rabiul Awal
(Prophet Muhammad birth day- Eid-e- Miladunnabi), Idul Fitr and World Environment Days
were celebrated with the planting of a tree seedling in the compound or in the family farm.
Still others reported priority lending for organic agriculture, kitchen gardening and
forestation projects to protect the environment, but they did not mention conditions on
other lending: “Activity that applies natural plant and non-chemical pesticide will be
given first priority”. Finally, some Islamic microfinance group members mentioned
educational efforts such as “environmental awareness campaigns to which clients are
exposed” and:
[. . .] we try to educate women not to harm natural resources such as using wood to cook their
food in high mountain areas. Instead we show them how to use solar ovens and stoves.
Given the baseline level of knowledge among the Islamic microfinance group
population about long-term environmental implications of their actions, even an
informal education effort may lead to substantial behavioral changes. This supposition
needs to be measured through observation and environmental monitoring.
The respondents were also asked whether they believed there was a discernible
impact on the environment or natural resource use from the loan of Islamic microfinance
group, grant from cash awqaf or zakah fund. The responses are summarized in Table II.
Of the total respondents, 52 percent (37) said yes and 44 percent (32) said there
was none. Of the 71 Islamic microfinance groups, 61 percent (44) said that they felt that
there was an environmental impact and 36 percent (26) felt that there was none.
 Challenge
Loan from Islamic Grant from zakah or
microfinance group cash awqaf in poverty
Questionnaires Yes (%) Yes (%) alleviation
Positive for environment
Less deforestation 69 27
Increase organic farming 48 45 87
Increase crop rotation 40 68
Use of integrated pest management 35 58
Less water use 15 26
Negative for environment
Increase of utilization of fuel 19 11
Increase of deforestation 11 8
Less crop rotation 10 12 Table II.
More chemical fertilizer use 22 18 Islamic microfinance
More chemical pesticide use 18 18 group responses: impact
Increase of irrigation 39 22 on environmental
Increase of water use 42 31 resources

Of those Islamic microfinance group members that reported some sort of discernible
impact, the type of impact reported was both negative and positive. Not surprisingly,
there was a greater percentage of Islamic microfinance group sample population
responding “yes” to environmental impacts involving farming techniques – in
particular those that can generally be construed as positive. There was less difference
around perceptions of water, irrigation and deforestation effects. The grant from zakah
fund or cash awqaf also played positive environmental aspect in respect of increase
crop rotation and implementation of integrated pest management and increase in
organic farming.
Of the top four impacts “more water use” suggests a primarily negative environmental
impact, while the other three are generally positive: less deforestation, increased organic
farming methods, and increased crop rotation. More water use may reflect increased
economic activity that may dominate any positive changes in managing common water
resources. Less deforestation and access to loan correlates with reduced agricultural
extensification, possibly from enabling borrowers to diversify into non-farm activities and
intensify their current agricultural activity by purchasing fertilizer or other inputs.
As with water, we cannot discern from these data what changes Islamic microfinance
programs may have elicited in LCR management. Increased organic farming and crop
rotation is consistent with the proposition that increased income and ownership of the
group members. While the net environmental effects of micro-enterprise activity may still
be negative but some positive overall results of other areas suggest that, in some respects,
Islamic microfinance programs may contribute to sustainable LCR use.
The Islamic microfinance group members were also asked, “what are the most
important impacts of the loan or grant from zakah/cash awqaf fund and other financial
services your institution provides?” Out of the following list, they were asked to rank
all of the impacts that they felt applied to their organization (with 1 being most
important, 2 being the second most important, and, etc.):
.
develop financial skills;
.
create jobs;
HUM .
improve incomes;
30,1 .
improve the environment;
.
create business skills; and
.
improve social cohesion.

Out of the response received from the questions, 54 percent (37 respondent) listed social
88 cohesion as one of the most important impacts they felt their financial services/zakah,
cash awqaf fund provided. Of these respondents, 41 percent felt it was the first or
second most important impact of their program.
Though these results are limited, anecdotes that support Islamic microfinance’s role
in building Islamic social capital and the importance of that social capital in managing
the commons abound in the field. Collective action can increase the provision of public
goods such as irrigation, drinking water facility, and sanitation, etc. It is also vital for
improving the management of LCRs, such as grazing lands, groundwater basins,
fisheries, and forests. Besides, the Islamic microfinance group members report a
correlation between Islamic microfinance activity in a village and the cleanliness of
public spaces.
In order to use LCR through the joint action of the poor people (social capital), the
group-based Islamic microfinance programs can play tremendous role in the poverty
alleviation. The empirical evidence says that IWS, South Andaman has demonstrated
that Islamic microfinance group members who are economically poor have involved
jointly in different type of economic activities for the cause of their economic benefit. The
IWS drew upon the growing body of knowledge about management of common
property resources to develop institutional mechanisms to facilitate acquisition and
development of blocks of barren land by small groups of poor households. They
already-demonstrated ability of small groups composed of kin and close neighbours to
co-owns milk cow suggest that similar small face-to-face groups might also be able to
successfully manage tracts of land held as common property with the financial help from
group-based IMFIs.
It may be pointed out that the general parameters of the networking within which
the developmental intervention has been conducted by the IWS, South Andaman are
replicated in the other part of Andaman district. A transparent process set up as a
consequence of a “reaching out” between agents in different sectors comprised the
basic starting point. This is the social capital that is put in place by the members of the
Islamic microfinance groups who acted as catalysts.

6. Conclusion
The importance of economic or financial capital, human capital and natural capital for
development and for finding an exit path out of poverty has been discussed in the study.
Most development policies in the developing countries have focused on generating
assets and providing access to these forms of capital to the poor. The social capital plays
a key role in enabling households to take advantage of human capital resources that
become available in the form of new cultivation practices and knowledge regarding
technologies. It is argued that social capital plays a crucial role in facilitating adoption,
and overcoming constraints of lack of financial, human and natural capital.
In this study, we argue that the IWS of South Andaman (a Muslim NGO in India)
have played a challenging role in poverty alleviation program by linking
Islamic microfinance programs with income generating activities. There are important Challenge
connections between Islamic microfinance programs and environmental resources – in in poverty
particular, local common pool resources. We offered a conceptual scheme that
hypothesizes some of these connections, which argued for the importance of evaluating alleviation
these impacts. It is observed that some of these connections are from the physical and
human capital created by Islamic microfinance group activities. But there are also
opportunities for creating Islamic social capital to lower the costs of collective action 89
and hence the costs of managing LCRs.
Our empirical result suggests that some Islamic microfinance groups have
intentionally linked their financial services (group loan, grant from the cash awqaf or
zakah fund) to environmental resource goals. Some groups may be having inadvertent
effects upon the environment. Nonetheless there remains much to be understood about
the connection between Islamic microfinance, social capital, environment, and
managing LCR. In particular, the centrality of Islamic social capital to the success of
Islamic microfinance suggests a powerful means by which group base approach may
improve common joint agricultural activity management. The system of group
borrowing through mutual guarantees is based on strong Islamic cooperative behavior
and mutually reinforcing positive incentives in poverty alleviation. There is some
evidence of its effectiveness for the two primary objectives of Islamic microfinance
programs: income and production enhancement which are the ingredient of the
economic upliftment of the poor people. Furthermore, if Islamic microfinance program is
directed toward management of LCRs, it may be equally effective. Challenges in
addressing poverty alleviation through Islamic microfinance program is an issue that
needs more research including more analysis of such questions as “should social capital
be included to address poverty alleviation? Or is poverty alleviation the exclusive
responsibility of the government?” There are pro and cons on this issue, and it is
potentially a good topic for further research.

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Further reading
Al-Quran (n.d.), Madina Al Munawar: King Fahad Quran Complex (English translation by A.Y. Ali).

Corresponding author
Abul Hassan can be contacted at: abulhassan03@gmail.com

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