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exclude themselves. Factors that result in financial exclusion of the poor include low income,
high risk, price, and information asymmetry (Ahmed 204). However, Muslims may voluntarily
exclude themselves from formal financial services, since Islam prohibits participation in
interest-based mechanisms.
Over the last four decades, microfinance has evolved as a unique financial institution that
focuses on pro-poor financial inclusion and has grown in popularity. The concept of Islamic
microfinance is a rather novel one, compared to conventional microfinance. To comply with
Shariah laws, Islamic microfinance generally provides the poor with real assets instead of cash.
Additionally, they can also utilize several types of financing and contractual arrangements,
such as Qard-al-Hassan (interest free loans), Musharakah, Mudarabah, and other contracts.
Microtakaful is a second way of increasing financial inclusion. Conventional insurance services
are not Shariah compliant due to the inherent high level of uncertainty. Takaful is a mutual
guarantee that functions by bringing together a group of people who contribute to a fund
managed by a takaful operator (TO). There are three takaful models: mudarabah, wikala, and
waqf. Mudarabah consists of a partnership relationship in which the participants contribute to
a fund and the TO invests the funds.
Appendix: Case Studies of Islamic Financial Instruments
Over the last three decades, Islamic mutual funds have evolved as a growing alternative asset
class that provides diversification opportunities to investors who look for Shariah compliant
investment alternatives. Such growth of Islamic mutual funds has been fostered by the
innovations in the financial product offerings of the Islamic financial services industry. The
evolution of a wide range of sukuks and increasing demand for Shariah compliant products
have enhanced the depth and breadth of the Islamic capital market.
Following the global financial crisis of 2007, Islamic bonds, i.e. the sukuk industry, have hardly
been affected. While sukuk issuance reached its all-time highest growth at the end of 2007,
following the financial crisis and credit crunch in the global market, sukuk issuance has
declined sharply. From 1997 to 2009, a staggering number of sukuks have defaulted, which
has jolted investor confidence in sukuk. In addition, incongruent legal systems and the lack of
specific prudential guidelines from regulators have also played a part in falling investor
confidence.
Both success and default stories surrounding sukuk issuances are presented in this chapter
alongside a summary of the key empirical findings in the existing literature. The prevailing
legal systems in Muslim countries are generally based on western legal systems, mostly
English common law or the French legal system. However, shariah law is not given formal
recognition in the legal systems in these countries; additionally, bankruptcy provisions and
investor rights and protections are not well defined in these jurisdictions, which has made
dissolving sukuk defaults more challenging.
Islamic banks have remained rather unscathed during the financial crisis, because of their lack
of participation in the derivatives markets. However, the slowing economic growth in Muslim