Enhancing the Enforceability of Islamic Microfinance Contracts in OIC countries
The role of Microfinance in alleviating poverty and enhancing social development is increasing. However, Microfinance Institutions (MFIs) suffer from two important problems which undermine their growth. The first one is inherent to their exposure to information asymmetry (adverse selection and moral hazard). The second one is related to the higher cost of debt enforcement especially in the developing countries where they are generally operating. The problem of costly monitoring is also faced by Islamic Microfinance Institutions (IMFIs) and becomes more important in the case of Profit and Loss Sharing contracts. This paper provides a literature survey about the best practices of the MFIs in term of monitoring, discusses their relevance to the IMFIs, and explores the development of specific regulatory and institutional mechanisms to enhance the performance of different schemes of Islamic micro lending programs. It comes up with a number of policy recommendations (for policy makers and managers of the microfinance institutions) detailing the directions of enhancing the regulatory and institutional environment for the sustainable growth of the Islamic microfinance industry in the OIC countries.
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