The effect of Islamic micro finance on poverty alleviation: Study based on Eastern Province in Sri Lanka

Abstract

Microfinance is recognized as a developmental tool to fight poverty. Islam defines poverty as a state whereby an individual fails to fulfill any of the five basic human requirements of life: Religion, Physical self, Intellect or Knowledge, Offspring and Wealth. Recent studies have shown positive impacts of the microfinance on the income and health of the clients. However, Muslims face the challenges in accepting the conventional microfinance whereby it does not tailor with Islamic commercial law. While the Muslims are restricted the involving in interest based finance, the necessity of Islamic microfinance as an alternative system has been developed for the purpose of extension of the industry to alleviate the poverty. The objective of this study is to examine the relationship of Islamic microfinance on poverty alleviation in Eastern province of Sri Lanka. The study uses five dimensions to examine the impact of microfinance on poverty alleviation. The five dimensions are basic needs, education, health, income and empowerment. The study assumes that if these five variables have positively impacted poverty alleviation, then the poverty is alleviated by Islamic microfinance received. This study utilizes the primary data collected from 273 customers using questionnaires. The data were analyzed using descriptive, correlation, regression analysis and hypothesis testing by SPSS 20.0 software. In addition, the regression model shows that there is positive impact between poverty alleviation and the dimensions of Islamic microfinance (basic needs,education, health, income and empowerment). The finding of this study shows that there is significant relationship between Islamic microfinance and poverty alleviation. This study concludes that Islamic microfinance program statistically helps poor people to uplift their live in Shariah compliant manner. The study recommends that the Islamic microfinance services to be disseminated and started based on Islamic non-profit organization such as Mosques Zakath or Sadqah foundations, welfare associations, Islamic NGOs and other social service institutions.