Australian Journal of Basic and Applied Sciences, 7(4): 535-542, 2013

ISSN 1991-8178

Applicability of Islamic Micro-Investment Model in Kano State, Nigeria: Empirical

Evidence
1
AliyuDahiru Muhammad (PhD), 2Muhammad ArifZakaullah (PhD)
1
Department of Economics, International Islamic University Malaysia
2
International Islamic University Malaysia

Abstract: Islamic microfinance is a new emerging niche area due to the prevailing bottlenecks in the
theory and practice of conventional microfinance. The problems become more pronounced in Muslim
countries and communities as the religion of Islam prohibits taking and giving interest on loan. Based
on that, considerable number of Muslims expressed their concern and triesto avoid violation of the
teachings of Islam in their business and economic undertakings;hence, the emergence of Islamic
microfinance to tackle the challenges. However, the alternative microfinance was found to be
converging with the conventional microfinance. Therefore the current study investigated and
developed an Islamic micro-investment model that is less susceptible to the current problems of
microfinance. The model has dual advantages of fulfilling the economic needs of the micro-investors
at the same time satisfying the religious requirements in complying with sharia principles of finance.
The research uses qualitative techniques, specifically experts` interviews to examine the applicability
of the proposed model.

Key words: Islamic Microfinance, Micro-Investment Model, Poverty, Nigeria

INTRODUCTION

This research proposes the use of Ijara, Mudaraba and Musharaka contracts integrated together into a single
model called Islamic Micro-Investment Model. The model is proposed as another option to the existing micro-
financing scheme in the country. Several studies have shown that most of the government funded development
finance projects suffered due to the fact that the people consider the proceeds as government’s largesse and they
are not willing to repay back the loans. This factor together with other corrupt practices brought malfunction to
the numerous efforts embarked upon to reduce poverty in the country.
The proposed model intends to be a kind of collaborative venture between parties involved. The model has
three stages of implementation. These steps are flexible. Their flexibility makes mobility from one step to
another possible. In the first stage, a very poor who may lacks skills and capital participates. The waqf fund
could be used to provide skills to the poor. The contract is called Waqf –Ijara contract. The second stage is the
Mudaraba contract upon graduations from the first stage and the third stage is Musharakah contract. Each of
these contracts has been treated separately as individual entities and later integrated into a single entity. The
bonding of participants together in a cooperative manner may induce mutual benefits of parties involvedand that
will help to realise the optimum benefits of the model. The platform for implementing the proposed model could
be formal, semi-formal or NGOs MFIs that operate on the Islamic principles.
The paper is spread into 6 sections. Section 2 presents theconceptual framework of Islamic Micro-
Investment Model. Section 3 consists of the methodology used in the study. Section 4 presents the results and
discussions and finally section 5 concludes the paper.

Conceptual Framework:
This section presents the conceptual framework of the IMIM. This comprises of the needs and prospects of
the IMIM, Islamic microfinance versus Islamic Micro-Investment Model; as well as the operational structure of
the model.

The needs and Prospects of Islamic Micro-Investment Model:

Diverse approach is needed in any effort to fight poverty. A single solution fits all might not be viable. This
reality necessitates different options for poverty alleviation programme across nations and times.
The three decades of microfinance development of various types yield little success so far in terms of
impact and solving poverty problems (Shetty, 2008). Various impact studies have shown that microfinance
impact studies are prone to naïve estimates (Kono and Takahashi, 2010) or there exist mission drifts in the
objectives of microfinance by charging excessive interest rate (Karnani, 2007, Karim et al, 2008,Adewale, 2006,
Gow, 2010). Still others observe that the microfinance is not in line with the culture and belief of Muslims in
many countries including Bangladesh where the modern microfinance originates (Demirtuc-Kunt, 2008,

Corresponding Author: AliyuDahiru Muhammad (PhD), Department of Economics, International Islamic University
Malaysia
E-mail: alitahir797@yahoo.com
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Adewale and Daud, 2010, Muhammad and Hasan, 2009). According to IFSD Forum (2007), in order to address
financial exclusiveness of the poor, cultural and religious sensitivities of Muslim societies must be given due
attention. That will incorporate large support of poor population in the formal financial systems in Muslim
countries and communities.
This development leads to emergence of few Islamic microfinance institutions in some Muslim countries
and communities(Karnani, 2007, Karim et al, 2008,). However, the alternative microfinance suffers from the
existing framework of high cost of administration, expensive products (El-Karanshawy, 2007) which may not
enable it to achieve developmental objective or maslaha in the society (El-Minsawi, 2006).
Ahmed (2007) discusses the sustainability of operational issues of a waqf based MFI. The author links
Islamic economic objectives and Islamic financial objectives and advocates for Islamic financial sector to
include social dimensions in their operations along with commercial objectives. This will be in form of
financing the poor to increase their wealth and income through various applicable Islamic financial contracts
such as qardhasan, meeting basic needs and financing micro-entrepreneurs. He also argues that Islamic finance
has been dominated by Islamic banks that choose to go to larger firms just like its conventional counterpart.
Despite rigorous discussion on the waqf based microfinance, the author has not developed a practical model that
could be implemented.
Central to the challenge of fighting poverty is creating wealth through development of microenterprises
(Obaidullah, 2008, p.4). Islamic approach to poverty alleviation is more comprehensive and more rigorous than
either minimalist or maximalist approach. Although the maximalists have tried to incorporate non-financial
aspects of supporting the poor to exit from poverty but fail to pass an ethical test of Shari’a compliance in
business and financial activities for the Muslims poor (Mohammed, 2010).
As regards to the prospect of the model in Nigeria, the model will fit the target community for the following
reasons. Firstly, the teeming Muslims population in Nigeria and being the most populous Muslims country in
Africa and fourth largest among OIC member countries isthe leading factor to realize the model`s objectives.
This potential creates an opportunity for introducing and implementing micro-investment that tally with Muslim
belief system. This potential could also place the country as a hope of Islamic financial product in Sub Saharan
Africa. Secondly, exclusion of substantial number of people that require financing may likely create opportunity
for Islamic Micro-investment as an alternative source that fully comply with faith and culture of the
Muslims.Thirdly, high resistance to interest among the Muslims faithful would pave way to the massive
acceptance of Islamic micro-investment model.
Research findings by Frishman (1986) on small scale industries in Kano (1973 & 1980) which is the most
Muslims dominated state in Nigeria show high degree of resistance to interest among the small business
entrepreneurs. Therefore the demand of Islamic microfinance is high also due to the discountenance of some
Muslims to conventional microfinance in Nigeria in protection of their faith.
The importance of distributive justice cannot be underestimated. Qur’an chapter 7 verse 10 stated
categorically the importance of justice and benevolence in transactions. Thus, the believers are encouraged to
embrace financial activities that promote the duo. This injunction can be observed in partnership that shares
risks and return such as Mudaraba, Musharaka etc. Unlike debt financing contracts, partnership contract
involves both the commitment of both financier and agent in the outcome delivery thereby enhancing efficiency
and productivity.
Similarly, the injunction in the Qur’an chapter 59 verse 7 prohibits wealth concentration among few
members of the society. The verse promotes obedience to Allah in all matters including financial transactions.
The verse demonstrates that wealth and resources ultimately belongs to Allah and human serves as a custodian.
The verse buttresses that wealth and resources must not be concentrated in few hands thus, it must be circulated
through businesses and other lawful transactions.

Islamic Microfinance versus Islamic Micro-Investment Model:

Islamic Micro-Investment Model (IMIM) can be defined as a business venture in line with the Shari`ah
requirement of finance, intended to cater for the socio-economic needs of the poor in the society.Islamic
microfinance is basically a microfinance that employs Islamic financial principles in providing financial services
to the poor. It has been developed due to the apprehension of some Muslims in different countries and
communities due the belief that conventional microfinance violates Islamic principles of finance. In other
words, Islamic microfinance is developed just like the way Islamic banking has developed to overcome the
obstacles inherent in the conventional microfinance. Therefore it serves as an alternative to the conventional
microfinance.
However, the practice of Islamic microfinance again raises an alarm on the mismatch between the Islamic
economics and finance objectives with that of the institutions offering Islamic microfinance. Based on this
background, the research felt the need to develop a model that will ensure business success with socio-economic
objectives of the Muslims community. The IMIM can be applied by any Islamic microfinance institution that
has the dual objectives of attaining profitability and promoting socio-economic welfare of the society. The

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IMIM imbibes the spirit and form of Islamic finance. Some scholars argue that the implicit in the laws of
Islamic finance (i.e. the spirit of the laws) is an ethical guideline to ensure that some or all of its funds for
investment are used to redistribute wealth in the society at profitable level such as through microfinance
(Farook, 2007, p.31-32). This can be achieved by applying a scheme that has the dual objectives of the members
of the society as stated earlier.
Similarly, the name of the model “Islamic Micro-Investment Model” gives different positive impressions
and creates avenues for applying the marginalized and under-applied Islamic financial contracts particularly
genuine partnership despite its potential benefits. Abdul Rahim (2010) for instance, advocates that profit and
loss sharing scheme has the potential to reduce inequitable distribution of wealth and income as well as ensure
optimal allocation of resources compared to the interest based arrangement.
The IMIM proposed will overcome some of the major challenges of Islamic Microfinance such as cost of
capital, human resource need and above all poverty alleviation by targeting different segments of the society.
This can be achieved by mobilising the latent resources specifically waqf of different types including cash waqf.
Thus, the model could be described as what Haneef (2011) coined as ‘ethically superior’ by incorporating waqf
in it since waqf is voluntary unlike zakat which is obligatory.
In a nutshell, theoretically, Islamic microfinance should serve the same purpose with Islamic Micro-
Investment Model while practically adopting IMIM gives more economic and social benefit than the current
dominated debt and murabaha-centric in Islamic microfinance.

Structure of Islamic Micro-Investment Model (IMIM):

Figure 1below shows the schematic presentation of the model called Islamic Micro-Investment Model
(IMIM). The presentation order indicates input, process and output.

Fig. 1: Islamic Micro-Investment Model (IMIM)

Source: Authors:

Figure 1 depicts the 3-stage model developed from the combinations of different contracts. These contracts,
Waqf-Ijara Contract (WIC), Mudaraba Contract (MDC) and Musharaka Contract (MSC) serve as building
blocks of the model. In the first stage the micro-investor would be given training from the waqf fund and capital
would be provided in form of Ijara. If the micro-investor possesses the skills to start with mudaraba contract
he/she would be considered so also musharaka. This depends on the assessment by the Islamic microfinance
institution. The output of the model implementation is expected to significantly impact on the income of the
poor; provide faith satisfaction to investors, operators and clients. Additionally, employment, skills development
and enhancement as well as inclusiveness are expected to be realized.

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Dataand Methodology:
Data from this research is collected through structured interview from 7 respondents and were analysed
thematically. Data analysis in qualitative research is defined as the process of systematically searching and
arranging the interview transcripts, observations notes, or other non-textual materials that the researcher
accumulates to increase the understanding of the phenomenon (Sekaran and Bougie, 2010). The process of
analyzing qualitative data predominantly involves coding or categorizing the data. Basically, it involves making
sense of huge amounts of data by reducing the volume of raw information, assigning them into categories,
followed by identifying significant patterns, and finally drawing meaning from data and subsequently building a
logical chain of evidence (Sekaran and Bougie, 2010).
According to Miles and Huberman (1994) there are generally three steps in qualitative data analysis: data
reduction, data display and the drawing conclusions. Phenomenal data reduction, according to Ueda &Sakugawa
(2009, p.57) was the method used to reveal the essential meaning of the statements. In the words of these
authors “phenomenon means participants individual “experience” and essence means “the participant’s genuine
meaning” of the experience.”
Following the previous researchers, this research addresses one central research question. That is, what is
the suitability and applicability of Islamic micro-investment model? The question is then divided into sub-
questions and the responses generated were considered as themes of the research findings with respect to each of
the questions. The research uses phenomenological method of inquiry to establish comprehensive understanding
of the phenomenon under inquiry. The method helped us to derive general meanings from specific experiences
of the interviewed persons (Moustakas, 1994). The respondents were asked the questions on the subject matter
and their individual responses were coded and analyzed simultaneously to generate themes and sub-themes
relevant to the issues raised. Therefore, the study findings were derived from the statements made by the
experts.
The data used in this study is primary data gathered through survey.The research adopted semi-structured
interview. Themes emerge from the research respondents interviewed. The themes were generated based on
responses and viewpoints aimed at providing holistic view of the proposed model. The themes comprise of
modern innovation toalleviate poverty; ethical consideration of Islamic microfinance; Musharaka, mudaraba,
ijarahetc; suitability and sustainability of the proposed model; prospect for growth; community, government and
NGO as platforms as well as the need for awareness.

Population and Sampling Techniques:

Seven experts were interviewed in the research between January, 2011-March 2011. These experts
comprised of three government officials from Sharia Implementation, Zakat and Waqf and pilgrimage Boards
respectively. One expert come from Central Bank of Nigeria (CBN) and the remaining three were private
consultant, academician and a fiqhscholar respectively. All the interviewed were recorded and transcribed for
analysis. On average, each session lasted 30-45 minutes.
The researcher uses purposive sampling technique to draw the respondents based on their expertise and
relevance to the research focus. Initially, some earlier contacts were made to solicit for their willingness to
participate in the research. Upon their approval, appropriate time and venue were determined by the interviewee
and the researcher followed up for the interview sessions.

Study Area:
The study focuses on Kano State Nigeria. The state is the second commercial Centre and termed ‘Centre of
Commerce’ in the country. The state comprises various ethnic groups that engage in different economic
activities in the state. Recent data reveals that the state has the highest number of informal sector services with
1, 590 669 person (NBS, 2010). Kano state Government classifies these small businesses into 16 specialised
markets pursuing different specialization of economic activities such as carpentry, food, groceries, vegetables,
meat, handcrafts and appliances markets.

RESULT AND DISCUSSIONS

The result of the survey reveals some important findings that bring about many other pertinent issues for
theoretical and practical consideration. It also gives light on other important issues to be addressed in future
researches. In this section we discuss some of the findings based on themes generated. The first theme that
emerges is Microfinance as an innovative mechanism of fighting poverty. Majority of the respondent (more than
50 percent) believe that microfinance is needed and is a right intervention strategy for fighting poverty. The
response above and the poverty level indicated in demographic profile of the respondents depicts the need for
Islamic micro-investment model intervention as a reliable invention strategy that is proposed based on the
belief and culture of the respondents. Similarly, the model’s mechanism is to incorporate skills of the poor that
will be harnessed and supported appropriately in order to alleviate the menace of poverty. Presently, the size of

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supply fails to commensurate with the demand, thus this may have implication on the microfinance suppliers
such as private, government and NGOs since at the moment the size of microfinance demand met is very low.
According to Anyanwu (2004) it is below 1 percent of the total credit needed in the economy.
Although the respondents have supported microfinance innovations, but it seems there is a fear of failure
due to previous experiences of microfinance programmes in particular and poverty eradication strategies
embarked by the successive political and military administrations in the past. The issue rose by the respondent
regarding the failure particularly government based microfinance include mismanagement, ignorance of the
people and interest charge on loans. The Islamic micro-investment model was developed with unique feature
that makes it distinct from other previous efforts in such a way that it tries to minimize greatly the shortcomings
with such efforts embarked upon.
The developed model has clearly addressed the ethical issue associated with existing conventional
microfinance which is the second themes generated. The ethical issue is what makes IMIM different from other
efforts. The model has taken care of the belief and culture of the people which is one of the most contentious
issues among the Muslim’s community. The consistency of the ethical aspect with belief and culture influence
the outcome of intention which serves as strong indicator for acceptability of the model among the community
members. The compliance of the Islamic micro-investment model with Islamic financial principles has made it
to dissociate itself with anything that involves interest, uncertainty, gambling, speculation etc. These prohibited
elements lock economic resources from being productively utilized. On the other hand, the model promotes
ventures, trade and partnership, mutual cooperation and development of micro-enterprises. Azid, Asutay and
Burki (2007) advocate that integrating the ethical cum economic dimensions will enhance the efficiency level of
the economy and increase social welfare services. In a nutshell, Islamic micro-investment model will get
acceptance in predominant Muslim communities as a means of fighting poverty as a result of its compliance
with Islamic financial principles.
The third theme is the applicability of the basic Islamic financial contracts such as ijarah, Musharaka and
mudaraba. The IMIM model was found impressive by the respondents as it satisfies the cultural belief system
due its composition of these Islamic contracts. According to the popular view, the fundamental Islamic financial
contracts such as Musharakah, Mudarabah, Ijarahetc are found applicable depending on the sector or party
involved. For instance, in agriculture, the contract could be called Muzara`a where the capital provider and the
farmer agree to share the proceeds based on pre-agreed ratio. Saad (2011) found that these Islamic financial
contracts are applicable to finance different economic activities in Malaysia.
Despites this provision, some studies caution the use of some of these contracts in microfinance given its
small nature of capital. Ahmed (2007) opined that contracts like murabaha and ijraha are more appropriate
where information asymmetric exist. Ledgerwood (1999) advocates that stringent conditions in the microfinance
are due to unobserved nature of the effort of the agent, and these conditions could have been softened or
removed if it is become observable. For the practitioners, one can argue for context based and case by case
applications of contracts.
The fourth theme addresses the structure of the model. The structure of the model has satisfied the experts’
views. The model based the experience of the respondent considers ways of channeling the resources
appropriately. It is in line with that the model suggest mode of screening the thereby exploring the relevant
potential and skills of the client before intervention is made. This assessment constitutes another important stage
which has not been captured in all previous efforts and it is aimed at reaching congruence between individual
skills and the business environment. Chapra (1992) maintains there must be a filtering mechanism in the system
of Islamic economics and finance to complement the market system (Chapra, 2011, p. 29). This should also be
done with caution to avoid deriving out right clients. According to Usmani (1999, p. 78) Islamic financial
institutions are not just commercial institutions but they are also duty bound to promote the system since they
are built on a certain philosophy. Therefore applying partnerships arrangement atleast on a selective basis before
it evolve and clear out any form of dishonesty. According to him, this will set precedents in the market and
induce other IFIs to follow the suit.
The fifth theme that emerges is sustainability of microfinance via waqf. It is very clear that the source of
capital for whatever microfinance sometimes presents a problem in achieving objective of an initiative. Islamic
micro-investment model has incorporated waqf to subsidize the microfinance particularly in form of training.
IMIM will serve a counter initiative to conventional microfinance that considers the cost of capital irrespective
of the sources of funds whether from commercial financial institutions or from deposits of the participants;
interest rate must still be paid. According to the practice, poor are seen as more risky because they do not have
credit record and the required collateral in case of default, thus, their interest rate tends to be higher
(Ledgerwood, 1999). The situation becomes more complicated when the administrative cost are taken into
considerations. Introducing waqf in the Islamic micro-investment will reduce substantially the cost of capital on
the supply side and increase the human capital development through training on the demand side.
The sixth theme deals with prospects for growth and IMIM model was developed to bring prospects to the
businesses of the micro entrepreneurs as it takes into consideration the potentials micro entrepreneurs. The

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model stresses the skills and potentials irrespective of gender. The model has wider scope that carries along
family, individuals and group. The wider scope integrates other segment of population such as widows. Results
of experiments show that women are generally good partners as far as micro-financing is concerned as there
were found to be trustworthy in case of Zakat &Hubsi house in Kano State. The Zakat house has given out a
small amount of 5000 ($33) Naira to women as a capital for business and after a while the woman beneficiary
has the amount multiplied in manifolds through their investment and savings.
The seventh themes deals with platform through the model could be implemented. With regard to the
platform, divergent views have been provided. Some of the respondents were of the view that Islamic
Institutions/NGOs should be used, others support the idea of leaving it open to any institution willing and able
to operate microfinance. In that way, the outreach of the poor could be enhanced by having many potential
institutions willing and able to implement it including government and private based microfinance institutions.
The platform of implementing IMIM, although is very important but, the key aspect is to provide avenue
where there will be full compliance of the model’s provisions. This finding is consistent with the
recommendations of the International Conference on Financing for Development (ICFD, 2002) which stated
that “development banks, commercial banks and other financial institutions whether independently or in
cooperation, can be effective instrument for facilitating access to finance, including equity financing, for such
enterprises”.
In the eighth themethe consensus that emerged among the respondents is the awareness problem that may
likely serve as one of the major challenges that could face the proposed model. It is discovered that several good
initiatives and programmes got set back due to inadequate awareness among the people. In fact, it is a common a
belief that southern part of Nigeria tends to benefit more than the northern part as far as initiatives are
concerned, simply due to the issue of awareness which has to do with formal education, training, enlightenment,
public campaign and role of media. These media have been more readily available in the south than its
counterpart north.
The task of making the model more public should be a priority during implementation in order to bring
more beneficiaries. Massive awareness campaign in places of gatherings such as mosques, public talks, seminars
and workshop could be helpful in this direction. The element of awareness will constitute different dimensions
of the model such as socio-economic advantages, religious implications and marketing aspects among others.
This section provides the precise summary of major findings obtained from the qualitative aspects of the
study.

Table 1: Summary of the Major Research Findings

Themes Title of the theme Number of Respondents Percentage
supported Support
1 Modern innovation to alleviate poverty 4 57
2 Ethical consideration of Islamic Microfinance 6 86
3 Musharakah/Mudharabah, Ijaraahetc 4 80
4 Suitability of the Proposed Model 6 100
5 Sustainability and suitability via Waqf 4 100
6 Prospect for Growth 5 100
7 Community/Government platform/NGOs 3 50
8 Awareness need 4 67

The proposed IMIM Model was developed based on Theory of Reasoned Action (TRA) and expert
interview, the result of which indicates acceptability and applicability of the model. Therefore, the model
imbibes the spirit/ethical and material aspects of Islamic finance for micro and small entrepreneurs. The
outcome of the model would be significant in poverty reduction, faith satisfaction, employment generation,
inclusiveness of different categories of people and capital growth for the micro-investors in particular and the
society at large.
The application of the model could be more effective when massive awareness campaign is embarked upon
through media in order create public knowledge and motivate participations as the public has already indicated
intention to use the Model. Government and other major relevant stakeholders should play the role of creating
the awareness for the common goal of fighting poverty.
Islamic Development Bank (IDB), Consultative Group to Assist Poor (CGAP), ethical investors and other
similar agencies that fight poverty could invest in applying the model to make it a success. Supporting and
promoting the IMIM among the populace and other stake holders is critical especially at the initial stage.
Similarly, Awqaf foundations both nationally and internationally should champion the course of the
implementation of the model. This will help them also to achieve their objectives in the society.
With regard to the users of the IMIM, it is of practical importance to assess the clients based on certain
criteria to ensure they are genuine users and not opportunists as in the case of previous government based
programs. The issue of trust and transparency of the clients will enhance overall performance of the model thus;
any intervention to influence the attitude of the potential clients will be relevant. Such interventions could be in

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form of moral and spiritual training, education about consequences of any action, legal measures as in the case
of clear fraud by the clients or any party involved.

Conclusions:
The study investigated the challenges of conventional microfinance in Nigeria and developed an integrated
Islamic Micro-investment Model (IMIM) that has the unique feature of fighting poverty and concurrently
overcoming the main obstacles of the conventional microfinance in Nigeria. The new IMIM model uses the
fundamental contracts of ijara, mudaraba and musharaka with the support of waqf to reduce the cost of capital.
The model has the potential of not only fighting poverty, but providing employment opportunities, mobilizing
resources, ensuring inclusiveness, achieving public interest (maslaha) as well as promotes social harmony in the
society.
Nigeria is a country whereby a sizable number of poor below poverty line engage in microenterprises. This
IMIM developed in this study is an opportunity for Islamic micro-investors and other stakeholders to utilize and
reap benefit for the investment and for the overall society. Employment is likely to increase, poverty will
decrease, capital will be accumulated through saving by the micro-entrepreneurs, and above all there will be
faith satisfaction in the process. Neither the investor nor the micro-entrepreneur violates Islamic prohibitions of
dealing with interest, and with this credit, the business is likely to be blessed by Allah (S.W.T).
Findings from qualitative data indicate that Islamic Micro-investment Model is applicable in Kano State,
Nigeria and has tremendous benefits for the micro-investors in particular and the society at large. It should be
noted that, piloting the IMIM will assist in perfecting the model.
However, it is a challenge for future research to look into the concept of ‘amana’ (trust) in Islamic
economics and finance whether it could improve the performance of the agent, thus making some strict trust
based contracts easy to apply.

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