The Basic Answer
Microfinance is neither Zakat nor sadaqah in either its modern conceptual formation or its growing (oppressive) practical form. It is a thoroughly capitalist, money-making loan scheme that preys upon the poor and socially weak, even though a Muslim economist is credited with reviving microfinance in the global banking system.
You should be clear about this difference between capitalism’s version of microfinance loans and the personal goodly loan (qard hasan) in Islam, meant to help someone who is destitute or in need farm, or start a business, or house, or support his or her family.
What is the difference between Islam’s personal goodly loan to help the poor and modern-day microfinance?
Ultimately, the major difference between modern microfinance and Islam’s personal goodly loan is the curse of the divine on microfinance as a vehicle for financial interest (riba) and Allah’s blessing on the goodly loan as a means of sadaqah, or voluntary charity. (Loans are sadaqah, not Zakat.)
Allah blights banking’s microfinance loans as unlawful (haram) instruments that saddle the poor and vulnerable with interest-based debt, while He sends His blessings down upon the wealth and the persons of those who give goodly loans to help people in need — especially to help them become financially sustaining by enabling their independent earning.
Allah obliterates all blessing from interest and increases generously the reward for sadaqah-charity, for Allah loves no relentlessly unbelieving sinner” (Surat Al-Baqarah, 2:276).
Riba, interest-taking (and acceptance of it) is among the most serious crimes in Islam. The great Mamluk-era hadith scholar Al-Dhahabi (673-748 H / 1274-1348 CE) ranked it 12th of the 70 Major Sins (Al-Kaba’ir). Allah warns Muslims in the Quran that interest-taking, riba, is a cause for the declaration of divine and prophetic hostilities against one:
O you who believe! Be ever God-fearing and forsake all that remains due to you from interest, if, indeed, you are believers.
Yet if you do not do so, then be forewarned of war from Allah and His Messenger. But if you repent, for you is the capital of your wealth. You shall neither do wrong nor be wronged” (Surat Al-Baqarah, 2:278-79).
(See What Is Riba and Why Is It Forbidden in Islam?)
Is riba-interest Islam’s only problem with the modern-day banking practice of microfinance?
No. Like all interest-based financial models, microfinance seeks to institutionalize debt among the poor and vulnerable (and it is vastly focused on women supporting families).
But not only does it bridle them with a mandatory commitment to accepting interest (riba), it makes them pledge themselves to other financial conditions that Islam makes unlawful (haram):
It makes the individual recipient of a micro-loan financially liable and punishable for the financial obligations and social practices of a random group of other microfinance interest-loan recipients that it bundles each recipient with.
It requires collective investment and repayment with a loan-recipient’s bundled group.
It mandates a commitment to ever-greater “investments,” meaning taking continued, larger riba-loans.
It requires an individual loan-recipient to monitor and physically go and “restore discipline” in adherence to these conditions on the other individuals one’s loan is collectively bundled with. This also violates Allah’s strong ban on breeching another’s privacy and spying.
It requires mandatory participation in the social activities of one’s collective loan group.
It conditions its loan on the oath of the vulnerable recipient disavowing, for oneself and one’s family, avenues of financial and human enrichment that Allah has made lawful (halal) to that recipient and his or her family.
A woman must forgo her divine-right of dowry (mahr) (which the Bangladeshi original Grameen Bank modern microfinance model calls “the curse of dowry” in its 16 Decisions (a contract to which every recipient must agree to become loan-eligible).
It requires a pledge to have small families against the divine right, and prophetic encouragement, of parents to have children, as they choose.
In other words, microfinance as conceived and practiced in our times makes the halal into haram (the lawful becomes prohibited) and vice-versa.
(See What Types of Riba Are There?)
Does Islam support a microfinance model based on sadaqah?
Yes, and very emphatically, with the promise of a great reward and forgiveness for its givers from Allah on the Last Day.
Islam’s microfinance practices are based on the ‘goodly loan’ (qard hasan) — a loan that carries no interest or unfair terms of duress for the needful and exposed who lack the financial standing or wealth to establish themselves, either in acceptable housing, farming, education, business, or any combination of these.
Allah and His Prophet, on him be peace, very much encourage the giving of small, personal loans to the destitute and vulnerable — again, especially to help them become self-supporting financially.
The “decisions” regarding loans that Islam requires of us fall mutually on givers and recipients.
Recipients of loans in Islam must have two intentions:
To pay back in full any loans taken and within the agreed upon time. The Prophet, on him be peace said:
The best of you are the most excellent among you in repayment” (Muslim).
To use all loan wealth only in Islamically lawful ways for Islamically lawful ends — especially to financially establish oneself and family in a sustainable livelihood through business, education, agriculture, or housing.
Loan givers in Islam also bear requirements:
To lend only from wholesome wealth and provision lawfully obtained.
a. The Prophet, on him be peace said:
"O people! Indeed, Allah is wholesome. He accepts nothing but something wholesome. And, indeed, Allah commanded His believers with that which He commanded His messengers. He said: ‘O messengers! Eat of all that is wholesome and do righteous deeds. Indeed, I am all-knowing of all that you do.’ And He said: ‘O you who believe! Eat of the wholesome foods which We have provided you’” (Muslim).
b. Allah said:
"O you who believe! Spend charitably from the wholesome things you have earned and from all We have brought forth for you from the earth. Thus do not target what is vile to spend from it in charity, though you yourselves would not take it, without closing your eyes to accept it. And know that Allah is self-sufficient, all-praised (Surat Al-Baqarah, 2:267).
To harbor Islam’s ethic of loan forbearance and forgiveness.
The Prophet, on him be peace said:
"Indeed, there is an angel at a gate of the gates of the Garden saying: ‘Whoever offers a goodly loan today shall be rewarded tomorrow!’ And there is an angel at another saying: “O Allah! Give the charitable replenishment and give the grasping ruin!” (Ibn Hibban)
Can you summarize modern microfinance versus Islam’s personal goodly loans?
All personal goodly loans are sadaqah, even if the lender is paid back, provided they are made with good intention, charge no interest, provide no other worldly benefit from the recipient to the lender, and the lender gives them for the sake of Allah to the needful expecting payment but understanding that Islam urges him to a strong ethic of forbearance and even forgiveness if circumstances warrant it. Such goodly loans Allah highly rewards lenders for, both in life and in the Hereafter.
The Prophet, on him be peace, said:
A man entered the Garden and saw written upon its gate: ‘Sadaqah Counted at Ten Times Its Like! A Goodly Loan at Eighteen!’” (Al-Tabarani)
He said also:
Whoever loves for Allah to shade him in His shade, let him help one in hardship, or let him forgo his loan to him” (Ibn Majah).
In concept, microfinance is a capitalist-based financial enterprise that gives small loans to the poor, unemployed, and socially vulnerable who want to engage in earning-based activities. It is predicated, however, not on sustainable recipient financial gain but on increasing lender-profit through interest-based financial group-services that the poor do not have the wealth to qualify for alone under traditional bank-lending conditions.
In practice, microfinance has been established (or reestablished) in the modern period by banks, or individuals or groups who form banks, to issue small loans to the impoverished to do business, and they are mostly for-profit ventures, viewing the destitute as a growing, lucrative market. Such microfinance generally bridles the poor in a life-long debt cycle and requires of them exacting moral and social changes that burden the loan-recipient for the sake of indemnifying lenders against loss and guaranteeing that lenders make money.
