ISLAMIC financial institutions (IFIs) should extend small loans or micro-financing to the poor and give them an opportunity to become successful entrepreneurs, said a banking expert.
Monash University Malaysia chair for accounting and finance Professor Bala Shanmugam said there is a need for an innovative financing product to help the poor.
"The current scenario is that most small scale entrepreneurs struggle to find the capital for start up, mainly because they do not have the sort of assets that banks insist upon," he said.
Most turn to money lenders, pawn brokers and even loan sharks, who charge them exorbitant interest rates.
Islamic lenders can provide small loans and at the same time promote the saving habits among low-income individuals under Murabaha or Qardh Hassan principles.
While Murabaha (cost-plus financing) can be used to buy goods and re-sell them to small-scale entrepreneurs, Qardh Hassan is a benevolent loan, where the debtor is required to repay only the amount borrowed.
Although it represents true Islamic banking, it is seldom practised due to the lack of commercial benefits, explained Bala.
"The Government can play a vital role in protecting the interest of banks by guaranteeing the funds advanced by IFIs by offering a grant to banks or through other organisations such as the Credit Guarantee Corporation to monitor the disbursement and usage of funds."
Monash University together with the Institute of Bank-bank Malaysia (IBBM) will host the fifth International Islamic Finance Conference 2007 for two days in Kuala Lumpur starting on September 3.
Former prime minister Tun Dr Mahathir Mohamad, as adviser to the OIC, has been invited to present the keynote address.
Bala said so far 10 countries have indicated their participation.
Dr Yahia Abdul Rahman from the American Finance House LARIBA in California, considered the first to introduce Islamic finance in the US, is among the presenters during the conference