Innovations in Islamic Microfinance: Lessons from Muslim Aid's Sri Lankan Experiment

Islamic Microfinance Working Paper Series No. 01-09

16 Pages Posted: 16 Nov 2009 Last revised: 25 Oct 2014

Date Written: November 1, 2008


This paper seeks to highlight the need for creativity and innovation in poverty alleviation efforts using Shariah compliant mechanisms. Contemporary mechanisms in use by mainstream Islamic banks and financial institutions may indeed be grossly inappropriate in the context of local economies and for financing micro livelihood projects. Arguably, poverty alleviation efforts cannot be viewed similar to commercial transactions where an Islamic MFI seeks to provide a mix of services that include handholding and other forms of support to its client (which is often a loose group/ association of poor people). While some of its operations may involve for-profit transactions governed by sustainability concerns, the overall objective is benevolent and strictly not-for-profit.

The present paper seeks to document a case study of Shariah-compliant microfinance undertaken by Muslim Aid in Sri Lanka to highlight the need to move beyond the "popular" Islamic banking instruments and to search for appropriate solutions. This study on financing paddy cultivation for impoverished and displaced farmers is demonstrative of one such innovative solution, that is also Shariah compliant, involving use of value-based salam and mudharabah.

Suggested Citation

Obaidullah, Mohammed and Mohamed-Saleem, Amjad, Innovations in Islamic Microfinance: Lessons from Muslim Aid's Sri Lankan Experiment (November 1, 2008). Islamic Microfinance Working Paper Series No. 01-09, Available at SSRN: or

Mohammed Obaidullah (Contact Author)

Islamic Development Bank ( email )

P. Box. 5925
Private Sector
Jeddah, 21432
Saudi Arabia

Amjad Mohamed-Saleem

University of Exeter ( email )

Northcote House
The Queen's Drive
Exeter, Devon EX4 4QJ
United Kingdom

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