By Vehbi Zeqiri

The decisions taken by central banks to grant loan moratorium for clients affected by the recent lockdown have posed a huge liquidity gap for Islamic microfinance institutions. The prolonged and delayed repayments have significantly hurt the further disbursement of the new loans.

A significant percentage of the already poor clients of the Islamic microfinance institutions including family members who have lost their jobs or closed their businesses are unable to repay back their loans. These loan defaults have hurt not only the clients but also Islamic microfinance institutions tremendously. The loss of jobs or closing of businesses will have long lasting economic consequences, thus compassionate and caring approach particularly from the Islamic microfinance institutions would be highly desirable.

Despite the mainly three months loan moratorium ordered by the central banks, clients are still struggling to continue paying back their loans. Some of the Islamic microfinance institutions have reported a significant increase of the non-performing loans (portfolio at risk>30) which might be very concerning. On top of that, Islamic microfinance institutions that operated with a low number of employees including those working from home, had a negative impact on the overall performance of the Islamic microfinance institutions.

The concepts and processes of the risk management have changed slightly due to the current situation and have resulted in the experts thinking about new ways of identifying and measuring risks from the perspective of clients and Islamic microfinance institutions Future loan appraisals and preapprovals will also need to undergo a review process.

From another side Islamic microfinance industry is seen as an important player to ease the financial burden of the lowest layers of the society. As such, huge expectations placed on the shoulders of Islamic microfinance institutions from the wider public.

From the practical perspective of leading the Islamic microfinance institutions, there are two major challenges in meeting the expectations of the wider public:

  • Bringing back to normal the loan delays caused by the recent lockdowns, and
  • Disbursing new loans to those in need

How can a distressed Islamic microfinance institution help others and what about the current huge financial demand?

The dilemma of necessary recovery activities from loan moratoriums and delays vs. activities that require the full engagement of the Islamic microfinance institutions on further financial support to those in need has brought all Islamic microfinance institutions to a crossroads.

The way forward

In the search for creative and Shariah compliant solutions by Islamic microfinance practitioners, the following are some thoughts on how Islamic microfinance institutions can move forward: 

  1. Admitting and learning to live with the current pandemic situations as an initial step forward might bring creativity and solutions to this worldwide challenge, otherwise the uncertainty about the length of the pandemic might hold back progress in this regard.
  2.  Islamic microfinance institutions’ unique features are probably the best partner for any government emergency funds dedicated to soften the current economic crisis.
  3. Social and institutional donor agencies are the best funding partners for Islamic microfinance institutions to carry on their mission.  
  4. Islamic microfinance programs might shift from a commercial approach to a charity approach especially during these uncertain times. The donor agencies can play a crucial role in supporting Islamic microfinance institutions in covering their operational costs to secure them from falling backwards
  5. Digitalization of the services when possible, and investing in financial and regulation technology can help Islamic microfinance institutions reduce the operational costs which will ease the already-hurt operations from the increased percentage in delays
  6. Close cooperation between charity organizations and Islamic microfinance institutions is essential to have a long lasting impact on the lives of those who have been negatively affected
  7. Islamic social finance modes such as Zakat, Waqf, and Sadaqah that are rooted in benevolence and aiming for sustainability are promising tools and possible solution for Islamic microfinance institutions
  8. The huge Islamic finance industry as part of its corporate social responsibility can support Islamic microfinance institutions tremendously.  

The popular saying that real leadership can be seen on crisis seems to be true. Islamic microfinance institutions cannot wait until the pandemic crisis is over. It will be too late and more costly to recover and bring back to ‘normal’ the affected lives of the clients and other prospective clients. Immediate actions are crucial and highly appreciated. Islamic microfinance institutions are not active for themselves – they are there to support those who are less fortunate

A firm behaviour and the decisions to act immediately will result in possible partnerships with governmental and non-governmental bodies that will secure the outreach and depth of the financial support to the needy. To achieve this the sustainability and the profit of Islamic microfinance institutions should be set aside for the time being. During the crisis, solidarity and brotherhood concepts should be the primary intentions, which in turn will secure the credibility and further progress of Islamic microfinance institutions

Islamic microfinance institutions have to work with clients and find the best way forward without adversely affecting them or their families in terms of financial means. Further financial support to clients can be a solution with a due diligence review of the current conditions by the loan analysts in close cooperation with the client. Irresponsible financing should be avoided by Islamic microfinance institutions.            

The internal affairs and operations of Islamic microfinance institutions should be treated with sincere care in order to keep the employees fully motivated during these uncertain times. For a certain period, Islamic microfinance institutions should act as a ‘candle’, lighting up others while burning itself down. Further technological investment in fintech and reteach, including the digitalization of some services, might ease and bring down operational costs.

To all Islamic microfinance institutions’ representatives out there, the world is waiting for you!   

Vehbi Zeqiri is the CEO of START, an Islamic microfinance institution based in Kosovo. He can be contacted at

Courtesy By :Islamic Finance News