Achieving sustainable economic development through Islamic microfinance and the potential of a proposed two- tier mudarabah waqf business model

Abstract

Islamic microfinance provides an alternative model for a significant number of underprivileged people who are not served by conventional microfinance. In order to give access to sustainable services with a greater extent, the Islamic microfinance is in paramount need of the adoption of innovative business models and sound practices into the industry. To this end, the research seeks to propose a two-tier mudarabah model based on cash waqf as an alternative to Islamic microfinance institutions. The objectives of the study are twofold: (1) help develop and implement an appropriate business model; and (2) help make a reform in the present institutional framework for Islamic microfinance and waqf institutions. To test the feasibility and possible implication of the proposed model, this test employed cointegration, vector error correction model (VECM) and the system generalized method of moments (GMM) technique. A total number of 90 conventional and Islamic microfinance institutions are taken as a sample of the empirical study. The study finds that cash waqf-based microfinance institutions can play an important role in financial inclusion and developing socio-economic conditions of the poor and underprivileged people in society.