Eid Saeed! This week Muslims around the world have been celebrating Eid ul-Fitr, the holiday that marks the end of Ramadan, the holy month of fasting. And low-income women in Indonesia, the world’s largest Muslim-majority country, have another reason to celebrate.
As a result of a new USAID loan guarantee signed on August 23, they can now apply for microfinance loans through Bank Muamalat, the country’s oldest Islamic bank. This $1.15 million agreement is USAID’s first-ever finance guarantee program with a Islamic financial institution worldwide.
What is Islamic banking? It means that the bank uses 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 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 microentrepreneurs and the bank share both the profit and risk.
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.
The finance guarantee agreement builds on President Obama’s speech in Cairo , which 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.