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Ibrahim Khan 31 May, 21 8 min read

What are Microloans, are they Halal and can they be used to Combat Poverty?

Microloans have been heralded by many as a key tool to combat poverty. Mohammed Yunus, a Bangladeshi Muslim entrepreneur was even awarded a Nobel Peace Prize for pioneering the use of microloans to help the poor. In this article, we will look at what exactly they are as well as providing the Islamic perspective.

What are microloans?

In a nutshell, microloans are small loans for impoverished borrowers. These borrowers are usually excluded from conventional loans due to a lack of collateral (i.e. guarantee) or credit history.

For example, consider a poor person earning less than £2 a day in a developing nation. They would most likely not have a bank account. If they wanted to borrow money, their options would be limited to friends, family or even the local loan shark.

Microloans exist to solve this problem. You don’t need any collateral or a bank account to be eligible. The amount borrowed could even be as low as £10.

Microloans are a branch of microfinance which is a suite of financial services targeting the poor. This includes other services such as savings, insurance, and payment facilities. The focus of this article is on microloans.

Why the fuss?

It’s easy to understand why the idea is so popular. Improving access to finance can be a game changer. Giving poor people a loan can allow for additional investment into their small business. This can then help them become more self-sufficient.

It can also protect people from loan sharks, who charge exorbitant rates trapping people in a cycle of debt. The UN loved this idea and declared 2005 as the ‘Year of Microcredit’.

However some critics argue that microloans have largely failed in their initial objective of getting people out of poverty. A key factor behind this is many borrowers using loaned funds for day-to-day needs instead of strictly using them for business purposes. Interest payments can also make it difficult for borrowers to come out ahead.

That being said, it has still been proven to improve lives [1]. Being able to meet day-to-day needs is a crucial key first step. With this solid base, people can direct more attention to productive pursuits that could enable them to be more self-sufficient.

There is also research showing that microloans have boosted entrepreneurship. All in all, microloans are a net positive.

Is it halal?

This depends on whether interest is being charged. If it is, then no it wouldn’t be halal. As Muslims, we know how unethical interest is and how it usually means a net transfer of wealth from the poor to the rich.

Researchers studying the effects of microloans have also commented on how microloans can also drive borrowers into debt traps [1].

Unfortunately, many of the big mainstream investors do charge interest on their microloans.

Sadly, posterchild Grameen Bank, winner of a Nobel peace prize through founder Mohammed Yunus, also charge interest.

However all hope is not lost. In the next section, we will look at halal alternatives.

Do halal alternatives exist?

We have established that microloans are a good idea in principle.

However we need to make sure they are delivered in a halal manner. You’d be glad to hear that there are a plethora of halal options. This is particularly true in Muslim majority countries. We’ll cover how this can be done and will provide some examples of this being done in practice.

The halal approach

Muslim organisations delivering microfinance typically do so via a Qard Hasan. This is basically an interest-free loan that is mentioned a number of times in the Quran.

“Who is it that will lend to Allah a good loan which Allah will multiply ˹many times over˺ for them, and they will have an honourable reward?” (Qur’an 57:11).

This structure is also more compassionate to borrowers that face difficulties in repayment. Lenders must extend repayment times and can even voluntarily waive repayment of part or all of the loan.


A great example of a Muslim organisation that provides this type of microloan is Islamic Relief. Instead of providing handouts, their aim is to provide a “hand up”. This approach allows small entrepreneurs to become more self-sufficient.

They report that approximately 99% of the loans are repaid [2]. These funds can then be lent out again compounding the benefit of the original capital.

There are many local organisations in Muslim majority countries who offer Qard Hasan microloans. One such example is Pakistani-based Akhuwat.

Instead of focusing solely on giving microloans to businesses, they also fund other services. This includes education, health, marriage, and emergency support.

According to their website, they have distributed over $800m in interest-free loans and have an exceptional repayment rate of 99.9% [3].

A quick word on other approaches

This article is focused solely on loans. Therefore we’ve only covered organisations that provide Qard-Hasan (interest-free loans). However some Muslim organisations are also employing investment tools such as mudaraba and musharaka. This is where they provide capital up-front as a partner in the business venture and take a share of any profits made.

This then allows microfinance companies to move from being purely charitable enterprises to commercial operations. And that is usually important if any project is going to properly scale.

Final words

So there we have it. Helping the least well-off among us to become more self-sufficient is a noble pursuit. However our solutions should be ethical and in line with the shariah.

That’s why it is great to see Muslim organisations taking the lead in offering interest-free loans. However it’s worth remembering that microloans alone cannot win the war against poverty.

In our view this is also an area that is ripe for innovation. One of the biggest challenges is the cost of delivering these small loans.

Visionary Muslim-owned FinTechs leveraging technology or even utilising low cost cryptocurrency could revolutionise the sector.

If you found this article interesting and want us to cover any other aspects of Microfinance, do let us know!


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