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Using Mudarabah for Micro-Enterprises of Refugees
Abstract
This chapter examines the prospects and challenges of using the Mudharabah (profit-sharing partnership) instrument to extend microfinancing to refugees in microenterprise support programs. According to the literature, many Muslim refugees voluntarily exclude themselves from microfinance programs due to the element of interest that is strictly prohibited in Islam. Mudarabah as a Shari'ah-compliant mode of finance represents one potential instrument that complies with the religious teachings of Muslim refugees and could assist in the financial inclusion of many of them. Despite the inherent risks of Mudarabah such as moral hazard and adverse selection, some successful stories are remarkably encouraging. This chapter is proposing a model for a microenterprise support program based on Mudarabah. The chapter concludes that Mudarabah is a viable mode of finance provided that best practices in implementing Mudarabah as well as microfinance programmes are well adopted and observed.
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