USAID recently signed a loan guarantee agreement with Bank Mulamalat, Indonesia’s oldest Islamic bank, enabling low-income women in that country to apply for microfinance loans. This $1.15 million agreement is USAID’s first-ever finance guarantee program with an Islamic financial institution worldwide.
The loan guarantee agreement builds on President Obama’s speech in Cairo, in which he called for deeper engagement with the Muslim world. It is also a prime example of the type of how USAID partners with established in-country institutions to leverage existing resources and knowledge.
The loans are available to applicants of any religious affiliation, but the fact that they are compatible with Islamic principles will help reach the low-income women who have been hardest to reach with traditional microfinance programs. Microloans will allow these women to start or expand businesses, helping to increase their incomes and improve living conditions for themselves and their families.
In Islamic banking the bank follows Sharia (Islamic guidelines) for approving financing for applicants with a goal to achieve social and economic justice. For example, the charging of interest is prohibited by the religion’s Holy Book Koran. So rather than charging profit-motivated interest as a typical bank would, Bank Muamalat’s microloans will be a funding type known as mudaraba, in which the micro-entrepreneurs and the bank share both the profit and risk.
