- It can remove social and economic discrimination from the society, and

While the conventional microfinance industry has been globally growing at 13 percent per annum since early 1990s, only very limited information is available on micro finance institutions (MFI’s) operating under QH. A relatively small number of interest-free loans are operating in Pakistan (www.akhuwat.org.pk) and there are some small-scale micro-/rural banks in Indonesia. However, no organized institutions are known to be operating on the basis of QH except in Iran where QH has been utilized effectively to provide finance for the needy and where these institutions are widespread throughout the country.

Also QH funds have been operating in Iran since the Islamic Revolution they have enjoyed phenomenal growth and a successful track record. QH funds in Iran, by and large, provide small consumer and producer loans and, in some cases, engage in profit-sharing activities with small producers and firms, thus supplementing the fund’s capital. These funds are usually associated with local mosques or other religious organizations and sometimes with guilds or professional associations. The capital is contributed by the more well-to-do who are at liberty to withdraw their funds at any time. These funds operate with reasonably low administrative costs since most are managed on a voluntary basis by the people within the group.

A recent survey on QH based finance that has been operating with the objective of helping low-income group through short-run credit in Iran shows that there exited 1,229 _Qard-al-Hassan_ Funds (Kazem 2007). Total loans amounted to $169 mln, and deposits totaled to $227 mln with 60% of the total loans had been paid back (please see table 1 for a comprehensive survey on literature).

Conventional micro finance (MF) and Qard-al-Hassan Microfinance (QHMF) have both similarities and differences. MF charges interest, an abomination from an Islamic perspective, and MF schemes resort to collective punishments for defaulting, yet under QHMF, usually donors/subscribers introduce the borrowers and cosign for their loan, yet no collective punishment is usually imposed in case of default. On the other hand both instruments target the same income groups and they have both effectively contribute to avoiding informational problems by relying on peer monitoring, as well as good knowledge of the borrower reputation. In addition, neither requires collateral as a prerequisite for a loan.

QH can also be considered an excellent venue for supporting SME’s and penetrating to lower income levels that are deprived of financial resources that is not properly tapped in Islamic countries. It provides a reliable source of funding to economic development and targets minimizing the lending risk as it build on pooling and social collateral. In addition, it commends payback and therefore benefits from the potential recirculation of funds in poor and extremely low tiers of the economy. While the social cost of QH funds lies mainly in the opportunity cost of using these funds in alternative projects, the social benefits of availing funding to MFI’s at zero cost acts a good catalyst for growth and provide an extremely high social benefits through creating jobs and generating incomes to the poor, deprived and unprivileged.

23