Islamic finance can be defined as finance that conforms to Islamic law (Sharia) derived from the Qur’an and other sources. It has considerably expanded over the last two decades, with Islamic financial assets increasing from $150 billion in the mid-90s to $1880 billion at the end of 2015 (Islamic Financial Services, 2016). Islamic finance is particularly prominent in Southeast Asia, South Asia, and in Middle Eastern countries. According to Obaidullah and Khan (2008, p.6) in a report for the Islamic Development Bank, “microfinance and Islamic finance have much in common . . .. Both focus on developmental and social goals. Both advocate financial inclusion . . .. Both involve participation by the poor.” It therefore appears natural that Islamic microfinance has emerged to supply microfinance tools which are Shariacompliant. Our objective in this chapter is to describe and to discuss Islamic microfinance. We aim at explaining how Islamic microfinance works nowadays in the world. To this end, we explain what characterizes Islamic finance and present the differences between Islamic microfinance and conventional microfinance. Literature on Islamic microfinance is still very limited, which limits the current knowledge we have on the effects of Islamic microfinance.
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