Innovative Islamic Social Finance for Housing Microfinance

For a long time, microfinance was considered an appropriate tool to accomplish social and financial goals simultaneously. Over time microfinance has become more commercialized, transforming into a financially efficient industry, allowing more customers to have access to more sophisticated banking products (e.g. small housing loans). Despite interest from the commercial sector, the industry has yet to find a workable market-based solution to fund (housing) microfinance and to improve access to finance. Microfinance in member countries of the Organization of Islamic Cooperation (OIC) face three challenges: (i) affordable funding, (ii) financial exclusion due to religion and limited access of consumers to financial services, and (iii) constraints in the area of risk and management capabilities. Growing populations and rising urbanization have impeded the access of low income groups to housing finance. Housing costs in relation to incomes and the lack of formal title have forced people to live in informal settlements. The objective of this paper is to describe and assess the introduction of an innovative way to leverage Islamic social finance instruments combined with a market-based mechanism, e.g. ṣukūk, (Islamic bond), that aims to enhance access to finance at a lower and more affordable cost. Microfinance institutions have tapped capital markets by securitizing their housing microfinance portfolios however, due to the high risk of underlying portfolio conventional mechanisms of credit enhancements fail. The paper proposes a unique way to overcome credit enhancement issues in absence of outright credit guarantees through the use of Islam's redistributive social finance instruments such as waqf (trust) and qard hasan), qarḍ ḥasan (benevolent loan). The result is a viable option to develop a market-based financing solution to address core problems of financial inclusion and non-bankable segments in OIC countries