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1. 1
Declaration
I hereby declare that; this thesis is my original work and it has been written by me in its
entirety. In accordance, I acknowledged all the sources of information which has been used
in the thesis.
All academic institutions can benefit from the finding and the recommendation of this
thesis.

2. 2
Table of contents
DECLARATION____________________________________________________ I
DEDICATION________________________________________________ VII
ACRONYMS ________________________________________________ VIII
APPROVAL __________________________________________________IX
ACKNOWLEDGEMENT________________________________________XI
ABSTRACT ___________________________________________________XII
CHAPTER ONE
1. Introduction ________________________________________________ 12
1.1 Background ________________________________________________12
1.2 Problem of the Statement______________________________________14
1.3 Objectives of the Study _______________________________________14
1.4 Specific Objectives __________________________________________14
1.5 Research Questions __________________________________________15
1.6 Significant of the Study _______________________________________15
1.7 Scope of the Study ___________________________________________16
1.8 Geographic of the Study ______________________________________ 16
1.9 Limitations of the Study ______________________________________ 16
Chapter Two
2. Literature review _____________________________________________17
2.1 Concept and Definitions _______________________________________17
2.1.1 Definition of Islamic Microfinance ____________________________17
2.1.2 The fundamental of Islamic Finance ___________________________17
2.1.2.1 Modes of financing _____________________________________ 17
2.1.2.2 Source of funds ________________________________________ 17
2.1.2.3 Considering the poorest __________________________________18
2.1.2.4 Amount and deviations of funds ___________________________ 18
2.1.2.5 Target groups __________________________________________18
2.1.2.6 Incentives of Staff ______________________________________ 19
2.2 Islamic Microfinance Concepts _________________________________ 19

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2.2.1 Qard Hassan _____________________________________________19
2.2.2 Wadiah _________________________________________________19
2.2.3 Mudarabah ______________________________________________19
2.2.4 Bai- Istijrar ______________________________________________19
2.2.5 Salaam _________________________________________________ 20
2.2.6 Musharaka ______________________________________________ 20
2.2.7 Murabaha _______________________________________________ 20
2.2.8 Ijara ___________________________________________________ 20
2.2.9 Istisna __________________________________________________ 20
2.2.10 Takaful _________________________________________________ 21
2.3 Riba/Usury ________________________________________________ 21
2.3.1 What is Riba ____________________________________________ 21
2.3.2 The historical background of Riba ___________________________ 21
2.3.3 The Nature of Riba _______________________________________ 22
2.4 Types of Riba _____________________________________________ 21
2.4.1 Riba Al Nasi’ah _________________________________________ 21
2.4.2 Riba Al Fadl ____________________________________________ 23
2.5 The Role of Microfinance in Poverty Reduction __________________ 23
2.6 The new history of Microfinance credit (Grameen Bank) ___________ 24
2.2 Theoretical Review __________________________________________ 25
2.3 Empirical Review ___________________________________________ 26
2.4 Conceptual Frame Work ______________________________________ 33
Chapter Three
3.1 Area Description __________________________________________________34
3.2 Research approaches ________________________________________ 34
3.3 Types and Sources of Data ___________________________________ 34
3.4 Sampling and Sample size determination ________________________ 34

4. 4
3.5 Methods and Data Collection _________________________________ 35
3.5.1 Questionnaire interview ____________________________________36
3.6 Methods of Data Analysis ____________________________________36
Chapter Four
4 Data Analysis and Presentation _______________________________________37
Chapter Five
5. Summary, Conclusion and Recommendation ____________________________46
5.1 Summary of the Findings ___________________________________________46
5.2 Conclusion ______________________________________________________46
5.3 Recommendation _________________________________________________47
6. References 7. Annex _______________________________________________48

5. 5
List of Tables:
Table 1: Sample Techniques
Table 2: Demographic
Table 3: Household size before loan and after loan
Table 4: Overall household income
Table 5: Income increased
Table 6: Income household before the loan and after the loan
Table 7: Shows three things clients like comfortable the IMFIs activities
Table 8: Shows three things clients like comfortable the IMFIs activities

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List of Figures
Figure 1: Level of Education
Figure 2: Types of IGA
Figure 3: Amount of the First loan
Figure 4: Average Monthly Income for All Sources
Figure 5: Overall household income increased or decreased
Figure 6: Household members engaged IGA
Figure 7: Kind of IGA
Figure 8: Shows the property they have before joining IMF
Figure 9: Source of Money Saving
Figure 10: Training about IMFIs

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DEDICATION
I dedicated my research paper to my parent Aisha Ali Hassan to her love and support and
my father passed away during my journey of education on March 27.2019. May Allah grant
him jannah.

8. 8
Acronyms/List of abbreviations
NDP National Development Plan
MFIs Microfinance Institutions
IMFIs Islamic Microfinance Institutions
SDG Sustainable Development Goals
SHG Self Help Group
NGO National Government Organization

9. 9
UNIVERSITY OF HARGEISA
SCHOOL OF POSTGRADUATE STUDIES
ADVISOR APPROVAL SHEET
I hereby certify that I have read and evaluated this proposal entitled “Analysing the impact of
Islamic microfinance institutions for poverty reduction in Hargeisa” and Submitted by:
Student
ABDIKADIR MOHAMED AHMED.
Under supervision:
Dr. Abenet Yohannes (Ph.D.)
And therefore, I recommend that the document fulfill the proposal requirement for the defense.
Dr. Abenet Yohannes 15/12/2020

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Acknowledgement
First and foremost we started the name of Allah who gave me good health
(ALHAMDULILLAH) and allowed me the ability to complete my research paper. I
heartily thankful to my supervisor Dr Abenet Yohannes (Ph.D.) whose encouragement,
guidance and support and supper from the initial to the final level enable me to develop the
understanding of the subject. I would like to thank all members of the Department of Post-
Graduation Studies that supported me throughout my education with patience and
knowledge at the same time as allowing me the room to wake in my way to finish the paper.
I gratefully acknowledge the teachers for the teaching advice and crucial contribution that
made the strong backbone of my life listening, managing, and solving the problem, their
involvement with their originality has triggered and nourished the intellectual maturity that
I will benefit from, for a long time to come.
Furthermore, I wish to thank all my family who devoted their time to encourage me and
tirelessly help me to reach my destination.

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Abstract
Poverty is a condition in which a person's community is depleted or deprived of the basic essentials
and necessities for a minimum starting living less than one dollar and a half per day. Poverty is
understood in many senses, the basic needs of living are Food, Shelter, and water. The poverty
affected Somaliland both rural and urban. People need to get out of poverty through different
access that helps to get their foot on the ground. Islamic microfinance is one of this access to
reduce poverty
The objectives of the research investigating the impact of Islamic microfinance in poverty
alleviation in Hargeisa Somaliland. The research investigates the contribution of social capital
poverty reduction and empowerment of their clients. It also indicates the income change happening
households benefited.
The methodology of the study is systematic random sampling. Questionnaire and interview based
to those who benefited microfinance loans.
The findings of the study indicates increased income households due to access of microfinance.
Microfinance creating employment opportunities. The difficult of accessibility of microfinance
banks. The time of repaying loans is too short 30% of respondents are concerned the time of
repaying loans is not attractive. Percentage of service charging is not welcoming 20% of the
respondents declared the percentage of charging is difficult to the client.
This paper recommended government should have a clear policy and encourage Islamic
Microfinance institutions to expand their operations in urban and rural areas. Microfinance
institutions should be socially or communal based instead of individual based. Microfinance
institutions should consider the percentage of service charging and the time of repayment loans in
order to get more client and expand their services to the new areas.
From the result of research work, it concluded the role of microfinance institutions has been
realized to reduce poverty but still limited. Somaliland microfinance institutions still limited and
not expand their services to the all Somaliland regions. Microfinance is a tool that can reduce
poverty in Somaliland people and getting to increase household income.
Key Words: Islamic Microfinance, Poverty reduction in Somaliland.

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Chapter One
1. Introduction:
The study examines analysing the impact of Islamic microfinance institutions for poverty
reduction in Hargeisa.
It is broadly explaining the relationship between microfinance institutions and the poverty
alleviation in Hargeisa city. This paper deals with the specific reference of the Islamic institutions,
their principles, values and their objectives in order to understand the real impact of financial
institutions through poverty reduction.
1.1 Background of the Study
Poverty is an existential danger to human beings, and it is an occupied human development agenda
of all countries in the world. Poverty has been the main challenge affecting the people of
Somaliland since regained their independent 1991. Somaliland National Plan II (NDP II) indicates
to focus on alleviation of poverty also one of the goals countries to reach Sustainable development
goals to fight poverty and to improve the standard living underprivileged population. However
actual actions faced with poverty are still limited.
Islamic microfinance started around 1976 when Muhammad Yunus started in Bangledesh he
founded Grameen Bank (Bank for the Poor) in 2006 the bank and its founder, Muhammad Yunis
jointly awarded the Nopel Peace Price.
The largest microfinance institutions of Somaliland are Darussalam bank and Dahabshiil bank
(MicroDahab) started 2012 and 2014 respectively.
Islamic microfinance helps many peoples in Somaliland and across the global lifting themselves
out of poverty by providing small loans to those lacking access to the traditional financial services
or funding opportunities. Microfinance institutions (MFIs) have grown popular over the past few
decades because they offer impoverished people access to funds that can be used to develop small
underserved markets ( Kajia Hurlburt 2012)

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Microfinance institutions are important to the economy and considered as one of the most effective
tools for reducing poverty. Microfinance has a significant role to reduce the gap between the formal
institutions and the rural poor.
Microfinance constantly focuses on understanding the needs of the poor and on devising better
ways of delivering services in line with their requirements, developing the most effective and
efficient to deliver finance to the poor (Rakhimov Akma, Ibrakhimov 2016).
The Islamic institutions have greater social welfare responsibility and religious commitments to
achieve the Islamic economic objectives including social justice, equitable distribution of income
and wealth and promoting economic development ( Dusuki 2008).
The overwhelming stress, shock and uncertainty caused poverty is widely affecting poor people
living in Somaliland and no justification for coming generation to secure basic needs.
Fighting poverty is the responsibility of individuals, government and related organizations Islamic
economy principles for eliminating poverty is plenty of evidence in Quran and Sunnah and
practice of Khalifa’s to provide food, social security and as well as access to the finance to every
individual in Islamic economy (Sadegh Bakhtiari 2006).
In recent years, microfinance institutions have emerged as important tools and instruments to
alleviate poverty. Today more than 7000 microfinance institutions operate and provide loans to
more than 30 million poor peoples across the world (Sadegh Bakhtiari 2006).
Mohammad Yunus the founder of the Grameen Bank the largest microfinance in the world
believes 5% of Grameen bank clients exit poverty each year. The success of Islamic microfinance
institutions led to the rapid result of reducing poverty (Seyed Hadi Arabi and Hossein Meisami
2013).
Somaliland largest microfinance institutions Dahabshiil (MicroDahab), Darussalam bank and
Kaaba Microfinance have been able to provide financial services to the poor people in Hargeisa
and other cities of Somaliland these poor people are economically active after providing the access
of credit. Therefore, the researchers has been identified to analyse the real impact of Islamic
microfinance institutions for poverty reduction (Abdirashid 2016).

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Islamic microfinance is different conventional microfinance in that it must adhere to the same
principle of as Islamic finance, which structured to provide product for Muslim customers that are
in compliance with the code of ethics and conduct laid out under the Sharia law. It utilizes a range
of models to avoid elements forbidden to Sharia, namely interest (Riba).
Financial instruments are designed to provide funds in a manner that avoids interest payments
while still taking into consideration the need to cover overhead and the cost of finance if the MFI
is to be sustainable, and shares the risky of the investment between the financier and the recipient
or places (Khajia Burlburt 2012)
1.2 Problem of Statement:
Poverty is the state of economic and social deprivation. It is complex and a denial of the necessity
of life. Limited access to knowledge, resource and basic service. On these Challenges, people
living in Somaliland need permanent access to the same type of financial resources. By the
macroeconomic metrics, Somaliland is among the world’s poorest countries, with 29% people in
urban areas and 38% of these in rural areas classified as living in poverty. (The World Bank
Somaliland Poverty Profile 2015).
The people of Somaliland have no access to the credit and type of financial resource that helps the
household to stand their feet and eradicate poverty.
Somaliland has different banks that have begun to contribute a financial resource to the people.
This study will examine the impact of these institutions to reduce poverty and the changes of the
people who have received a loan from their institutions.
1.3 Objectives of the Study:
The general objective of the study to investigate the impact of Islamic microfinance
institutions in poverty alleviation in Hargeisa Somaliland
1.4 Specific Objectives
● To examine contribution to the social capital, poverty reduction and empowerment of their
clients
● To analyse the impact of the household income of those who benefit the loan.

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1.5 Research Question
1. How Microfinance changes the lives of the beneficiaries through business investment
or individual benefit?
2. Does Islamic microfinance create employment opportunities?
3. Is Microfinance contributes social capital to clients and empower the skills of their
clients?
1.6 Significant of the Study
Poverty has become a serious problem in developing countries. Islamic countries use Islamic
microfinance to reduce poverty and empower poor people to get access to all kinds of credit.
This thesis aims to analyse whether the Islamic instrument could be used to benefit poor people in
Hargeisa city. This study contributes to the better understanding of Islamic microfinance
instructions and they participate to alleviate poverty also to contribute the existing information or
literature in the field of Islamic microfinance.
This study will suggest significant policy statements through its recommendations. The study will
highlight the significance of the models in Islamic financing in Islamic microfinance Sharia’s and
importance of sharia audit. The finding of this study will be useful as a material reference of
academicians and researchers who may wish to carry out further research to contribute their
knowledge to modern Islamic microfinance.
The study will show the clients/beneficiaries who have access to microfinance and the changes
happening in their lives through microfinance.
This thesis will contribute information about microfinance institutions and their impact also
researchers after me will use as a reference to further contribute to the growing impact of
microfinance institutions against poverty.

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1.7 Scope of the Study
This study on analysing the impact of Islamic microfinance institutions was drawn from
the field of Islamic finance institutions by collecting secondary data and primary data from
client members who benefited microfinance institutions.
1.8 Geographical Scope:
The study will focus on Hargeisa city and confined microfinance activities Dahabshiil Bank (Micro
Dahab)
1.9 Limitations of the Study.
The researcher is self-sponsored to progress this study therefore, the limitation of financial
resources is challenged during the data collection process where some Respondents failed to give
required information or difficult to meet several times if they are busy on their work.
The availability of the officials representing microfinance institutions affected my work to collect
during collecting secondary data.
1.10 Organizational Study
The study will be divided into five chapters. The first chapter gives an introduction, background,
problem of the statement, Objectives of the study, Research questions, Significance of the study,
Scope of the study, Geographical of the study, limitation of the study.
Chapter two gives literature review concepts of definitions, theoretical and empirical of the study.
Chapter three provides a research design and the methodology of the research
Chapter four explains data analysis, findings and presentation. Chapter five shows the conclusion,
limitations and the recommendation of the research.

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Chapter Two
2. Literature Review
2.1 Concepts and Definitions.
2.1.1 Definition of Islamic Microfinance
Even though the microfinance is meant to be for the masses, yet its vocabulary can be understood
only by professionals.
Parker defines microfinance as “the provision of small amounts of credit to the poor who usually
fall outside the formal banking sector”. Microfinance is also defined as “the provision of loans,
savings, insurance, and other basic financial services to low-income populations.
Since our interest here is Islamic microfinance, we will try to define it within Islamic framework.
Therefore, Islamic microfinance can be defined as an investment of capital (in cash or in kind),
based on Islamic modes of finance, to the low-income clients, low-income entrepreneurs to help
them start or maintain their businesses.
2.1.2 The Fundamental of Islamic Microfinance
2.1.2.1. Modes of Financing
Conventional MFIs are interest-based while Islamic MFIs are interest free. Islamic MFIs operate
through several Islamic modes of financing such as Ijārah, Murābaha, Istisna, Mudārabah,
Mushārakah, Bai Bithaman Ajil, et
2.1.2.2 Source of Funds
Conventional MFIs usually get the funds from foreign donors. They also finance themselves from
the savings of the clients and external funds (Habib, 2002, p. 12). Islamic MFIs, however, apart
from these sources of funds, can get the funds from religious institutions such as Waqf, Zakat,
Anfal, etc., which are prevalent in most Islamic countries.

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2.1.2.3 Considering the Poorest
Although the microfinance movement is meant to help the poor out of poverty, nevertheless the
poorest segment of the population is left out by conventional MFIs (Choudhury, 2002). However,
this is not (and should not be) the case with Islamic MFIs. Islamic MFIs can integrate the poverty
eradication institutions in an Islamic economic system by using some institutions such as Zakat,
Qard al-Hassan, and other voluntary charities (Sadaqat) to provide the poorest people with
financial services.
2.1.2.3 Amount and Deviation of the funds
It is a practice of conventional MFIs to deduct an amount from the loan before disbursement. This
deduction is for different reasons such as group and emergency funds. However, the interest paid
by a beneficiary is calculated on the total amount. Under these conditions, the effective interest
rate paid by the beneficiary to the MFI increases. Furthermore, there is a risk that the funds, once
transferred to the poor, might be diverted to non-productive uses. Under the Islamic MFIs, there
is no such deduction. Here, usually the gathered fund is directly used to purchase the goods and
these goods are given to the beneficiary. By doing so, the risk that the funds will be used for non-
productive uses is minimized (Habib, 2002).
2.1.2.4 Target Group
While conventional MFIs mostly target women, Islamic MFIs target the family unit. The objective
of targeting women in conventional MFIs is to empower them. It is believed that women use funds
more productively and this increases their incomes (Imboden, 2005). However, in Islam, the family
is the cornerstone of the social system. The family is not a casual or spontaneous organization of
people; it is rather a divinely ordained institution. Family and marriage are regarded as noble and
sacred. As a result, the Islamic MFIs should focus on the family, and not only women.
Consequently, unlike conventional microfinance, in case of Islamic MFIs, both recipient and
spouse are responsible for the loan, since Islamic MFIs are targeting the family.

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2.1.2.5 Incentives of Staff
In the case of conventional MFIs, usually, the main motives of the employees of the MFI are
monetary. This is in stark contrast to the work incentives of employees of Islamic MFIs which,
before all, are religious and only subsequently monetary. In other words, in Islamic MFIs, the staff
view their work as a part of religious duty (i.e. to help those in need).
2.2 Islamic Microfinance Concepts
2.2.1 Qard-Hassan
This concept there is no interest on these loans and the only extra cost that may be charged in
these loans is the amount of money required to cover the administration and the process cost.
2.2.2 Wadiah (Saving and Current Account)
Al- Wadiah literally means the thing left with a person whose real owner for the purpose of safe-
keeping is not. For both saving and current accounts, the depositors grant permission to the Islamic
bank to mobilize the funds but at the same time guarantee their deposits (Wadi’ah yadhamanah)
no return is promised or effected but a gift ( hibah or hadyah) can be given to the depositors.
2.2.3 Modaraba (Labour capital Partnership)
This concept is used both as an asset as well as liability. One of the parts invests it’s money while
the other invests it’s labour. Profit is shared based on agreed proportion, while the loss (if any) is
borne by the Rabul maal except where mudarib is found to be negligent. While, the loss of
mudarib is limited to its/his time and effort.
2.2.4 Bai-Istijrar (Repeat purchases from a single seller)
Bai-Istijrar takes place when the buyer purchases different quantities of a given commodity from
a single seller over a period. The payments may be deferred to a future date and may be based on
normal price or average price prevailing in the Market. This model is ideal for microfinance where
micro- entrepreneurs often buy their raw materials and inputs in small quantities from the same
vendor over extended periods.

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2.2.5 Salaam (Forward Sale)
Salam means a contract is which advanced payment is made for goods to be delivered later. The
seller takes to supply some specific goods to the buyer at a future date in exchange for an advice
price fully paid at the time of contract.
It is an ideal instrument for agricultural production activity and standardized manufacturing where
clients can be financed for both purchase of raw material/inputs and liquidity requirements. MFIs
can also enter a parallel salaam contract with third parties to dispose of the supplies.
2.2.6 Musharaka (Partnership)
This model involves joint contributions with profit and loss sharing between the parties. Profit is
shared based on agreed ratio while loss is shared based on capital contribution ratio. The most
suitable technique of Musharaka for microfinance could be diminishing partnership or Mursharaka
Mutaanaqish
2.2.7 Murabaha (Cost plus Sale)
This is a sale of goods, usually fixed assets at the cost price added with an agreed profit margin.
Profit margin is negotiable, and the payment is made instalments. This type of finance is commonly
used for financing fixed assets such as machinery or equipment.
2.2.8 Ijaara (Islamic lease)
This product is a sharia compliant alternative to leasing, where Islamic banks first buy the goods
to be leased, and then determine a payment schedule over time. The entrepreneurs as a lessee will
be responsible to safeguard the asset, where the lesser will monitor their usage.
2.2.9 Istisna (Manufacturing Contract)
This is commissioned manufacture by mad- to- order in which the manufacturer designs and makes
the product in accordance with the buyer’s wishes. It is an order to manufacture and payment of
price, unlike salaam, it’s flexible, where price may be paid in advance or in instalments or on
delivery of goods.

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2.2.10 Takaful
The word takaful is derived from “kafala” which literally means’ to take care’ and hence
“Takaful”is taking care of each other. Technically, takaful refers to mutual insurance.
Microfinance that considered giving “credit only” is now recognized to include other financial
services to meet the financial needs of the poor households and Micro-entrepreneurs.
2.3 Reba/ Usury
2.3.1 What Is Reba
The word of Riba (interest/ Usury) was used by the arab prior of islam “Increase” in classical
jurisprudence the definition of Riba was” Surplus Value” without counterpart. The definition of
Riba has been noted by Islamic early Islamic jurists such as Ibnu Majah and Ibnu Kathir who lived
the second the period Khalif Omar Binu Khadam.
Islam, Christianity and Judisiam prohibit Riba in the original versions. Later, the clerics of jewish
and and Christina Church abandoned the prohibition of Riba (Interest/ Usury) that led mankind
into economic anarchy of the present era. Islam still upholding the righteous prohibition of Riba
as clearly stated the quran verses.
2.3.2 The Historical Background of Riba
Before the prior Islam was dawn 1400 years ago most philosophers all kinds of religious of the
world had prohibited money lending as a business; Riba, interest and usury.
In A.D 605 there is a history before the dawn of Islam, on a stormy day, a spark of fire caught the
curtains of the Ka’ba (house of Allah in Makkah) resulting in serious damaging to the holly
building. For the repair and the reconstruction of building contributions were asked from the public
living in the locality. It was, therefore, a strong announcement for the HOLY BUILDING, only
pure, clean and honesty earned money should be donated; prostitutes and usurious people were
specifically debarred from contributing anything. It is, therefore, obvious even among the pagans
of Arabia, in the dark days of civilization usury and interest was money earned by unethical means.

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2.3.3 The Nature of Riba
According to the verdicts of quran and the Sunnah the term of Riba literally, means “Increase,
Addition, expansion or growth “it is, however, not every increase or growth which has been
prohibited by Islam. In the Shari ah, riba technically refers to “Premium” that must be paid by the
borrower to the lender along with principal amount as a condition for the loan or for an extension
in its maturity. In this sense riba has the same meaning and import as interest in accordance with
the consensus of all the fuqaha without any exception. (al-Jaziri, n.d, vol. 2, p. 245.
2.4 Types of Riba
2.4.1 Riba al-Nasi’ah
The term Nasi’ah comes from the root Nasa’a which means to postpone, defer, wait and refers to
the time that is allowed to the barrow to repay the loan in the return for the “addition” or the
“premium”. Hence, Riba al nasi’ah is equivalent to the interest charged on loans. It is in the sense
that the term Riba has been used in the quran in verse 2: 275 which stated that “God has allowed
trade and forbidden Riba (interest)
The prohibition of riba al- Nasi’ah essentially implies that the fixing in advance of a positive rate
of return of a loan as reward for waiting is not permitted by the Shari’ah. It makes no difference
whether the rate return is small or big, or a fixed or variable percent of the principal, or an absolute
amount to be paid in advance or on maturity, or a gift or service to be received as a condition for
loan.
The point in question is the predetermined positiveness of the return. It is important to note that,
according to Shari’ah, the waiting involved in the payment of a loan does not by itself justify a
positive reward.
There is hardly any room even for arguing that the prohibition applies only to the consumption
loans and not business loans. This is because the borrowing during the prophet’s time was not for
consumption purposes but rather mainly of financing long distance trade. According, the late
Sheikh Abu Zahrah, one of the most prominent and respected Islam scholars of this century, has
right point out that:

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The whole argument that interest causes hardship only for the one who barrows for consumption
needs is mis founded. It is the obligation of Muslim society to meet the dire consumption needs of
the poor. Barrowed for conspicuous consumption has been discoursed by Islam and most the
barrowing in the classic Muslim society was for business purposes.
According, riba is essentially in conflict with the clear and unequivocal Islamic emphasis on socio-
economic justice. Financiers who do not take the risk are entitled to only the principal and no more.
Those who insist on charging riba regardless of its prohibition are declared by the Qur'an to be at
war with God and his Prophet, peace be and blessing of God on him.
There is, thus, absolutely no difference of opinion among all schools of Muslim jurisprudence that
the riba al- nasi’ah stands for interest and, is haram or prohibited (the journal of Islamic economic
and finance Vol.2, No 1 2006) the nature of prohibition is strict, absolute and ambiguous. However,
the return of principal can be either positive or negative, depending on the final outcome of the
business, which is not known in advance. It is allowed provided it is shared in accordance with the
principles of justice laid down in the Shari’ah.
2.4.2 Riba Al Fadl
While Islam has prohibited interest of loans and allowed trade, it has not allowed everything in
trade. This is because it wishes to not merely eliminate injustice that is intrinsic in the institution
of interest on loans as well as all forms of dishonest and unjust exchange in business transactions,
but also backdoor to riba because according to the unanimously accepted legal maxims of Islam
jurisprudence, anything that serves as means to unlawful is also unlawful.
2.5 The Role of Microfinance in Poverty Reduction
Microfinance institutions are now being careful as one of the vital and effectual tools for poverty
mitigation. The need for financial services allows people to both take advantage of opportunities
and better management of their resources. Microfinance can be an effective tool amongst many
for poverty alleviations. However, it should be used with caution despite recent claims. The
equation between microfinance and poverty alleviation is not straight-forward, because poverty is
a complex phenomenon and many constraints make it poor. We need to understand which type of

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microfinance is appropriate for the poorest to deliver, channel, methodology and product offered
are all inter-linked and in turn affect the prospective and the promise of poverty alleviation.
Access to formal banking services is difficult for the poor. The main problem the poor have to take
when trying to acquire loans from formal financial institutions is the demand for collateral asked
by these institutions. Darussalam and Dahabshiil have its own requirement that poor people living
in Hargeisa city or other part of the country should not afford to fulfil these requirements unless,
he/she gets a collateral demand that the bank satisfied.
In addition, the need for loans entails many bureaucratic procedures, which lead to the extra
transaction cost for the poor. Formal financial institutions are not motivated to lend money to them.
2.6 The New History of Microfinance credit (Grameen Bank)
The new history of microfinance goes back to 1970 when Prof: Mohamed Yunus started the
Grameen bank project in Bangladesh in response to the devastating famine in 1974. His aim was
to provide financial services, mainly loans and advice to the poor. He found that the poor needed
finance livestock-raising, trade and production.
Infect, the poor all over the world are tripped in a kind of exploitation. While they work extremely
hard and create enormous wealth, the middlemen, moneylenders and employers keep the fruits of
their labour, the poor have no access to “institutional credit” because they cannot provide
collateral. The system keeps them firmly trapped in debt, poverty and exploitation. Grameen
always considers and guides the basic following principles.
● The bank would lend only to the poorest of the poor in the rural areas.
● The bank would remain women focused. 94% of its customers are women. These loans
would be without collateral or security.
● The borrower - and not the bank - would decide the business activity the loan will be
utilized for. The bank would help and support the borrower in succeeding.
● Borrowers will pay as little or as much interest as required to keep the bank self-reliant
(that is, not dependent on grants or donations).

25. 25
2.2 Theoretical Review
The genesis of microfinance can be traced to the early 1700s with the Irish loan fund system where
microcredit was provided to the rural poor without any requirement of collateral. This was
followed by the emergence of larger and more formal savings and credit institutions in the 1800s
in Europe, known as People's Banks, Credit Unions, and Savings and Credit Co-operatives. In the
early 1900s, different versions of the European model sprung up in Latin America. In the 1950s,
the European model gradually evolved into the microfinance institutions in operation today. The
terms Microcredit and microfinance first came to be used prominently in the 1970s, according to
Robinson and Otero. In fact, the modern use of the expression microfinancing began in the 1970s
when organizations, such as Grameen Bank of Bangladesh with the microfinance pioneer
Mohammad Yunus, were starting and shaping the modern industry of microfinancing. Prior to
that, from the 1950s through to the 1970s, the provision of financial services by donors or
governments was mainly in the form of subsidised rural credit programmes, which often resulted
in high loan defaults, high losses and an inability to reach poor rural households. As mentioned
earlier the origin of institutionalized or modern Microfinance can be credited to Professor
Muhammad Yunus, head of Rural Economics Program at the University of Chittagong,
Bangladesh who launched an action research project at Jabra (a village adjacent to Chittagong
University) in 1976, to examine the possibility of designing a credit delivery system to provide
banking services targeted at the rural poor. In the words of Muhammad Yunus (1995).
Yunus discovered that most villagers were not able to obtain credit at reasonable rates, so he began
by lending them money from his own pocket, enabling the villagers to buy materials for projects
like weaving bamboo stools and making pots. Ten years hence, he set up the Grameen bank,
drawing on lessons from informal financial institutions to lend exclusively to groups of poor,
especially to women, with saving mobilization as means to promote discipline. He proved that the
poor are not only bankable but also profitable businesses. According to Robinson the 1980s
represented a turning point in the history of microfinance when MFIs such as Grameen Bank and
Bank Raykat Indonesia began to show that they could provide small loans and savings services
profitably on a large scale. They received no continuing subsidies, were commercially funded and
fully sustainable, and could attain wide outreach to clients. Robinson states that microfinance had
now turned into an industry and the 1990s saw accelerated growth in the number of microfinance

26. 26
institutions created and an increased emphasis on reaching scale. In fact, the 1990s is referred to
as “the microfinance decade” by Ditcher. The launch of the Microcredit Summit in 1997 further
reinforced the importance of microfinance in the field of development. The Summit aimed to reach
175 million of the world’s poorest families, especially the women of those families, with credit for
the self-employed and other financial and business services, by the end of 2015 (Microcredit
Summit, 2005). The United Nations declared 2005 as the International Year of Microcredit. Also,
along with the growth in microcredit institutions, focus changed from just the provision of credit
to the poor (microcredit), to the provision of other financial services such as savings and pensions
(microfinance) when it became apparent that the poor had a demand for these other services.
Microfinance was advocated to be one of the key factors in achieving the Millennium
Development Goals in 2005. More recently, it is being touted as an essential tool for the
achievement of the Sustainable Development Goals (SDGs) set by the United Nations General
assembly in September 2015.
Former World Bank President James Wolfensohn said “Microfinance fits squarely into the Bank's
overall strategy. As you know, the Bank's mission is to reduce poverty and improve living
standards by promoting sustainable growth and investment in people through loans, technical
assistance, and policy guidance. Microfinance contributes directly to this objective. The emphasis
on microfinance is reflected in microfinance being a key feature in Poverty Reduction Strategy
Papers (PRSPs). A 2005 IMF review of 56 PRSPs indicates microfinance as a key component in
44 PRSPs. In 2005 the UN Secretary General Kofi Annan said it was a critical anti-poverty tool,
emancipating women and empowering the poor and their communities. Muhammad Yunus’s most
famous claim was that thanks to micro credit the next generation will only find poverty in
museums. It is claimed that the microfinance paradigm helps poor people take advantage of
economic opportunities, expand their income, smoothen their consumption requirement, reduce
vulnerability and empowers them. Realising the importance of microfinance, the World Bank has
also taken major steps in developing the sector. Major landmarks are the formation of CGAP
(Consultative Group to Assist the Poor) in 1995 and establishment of Microfinance Management
Institute (MAFMI) in 2003. The CGAP was formed as a consortium of 33 Public and private
development agencies and acts as a “resource centre for the entire microfinance industry, where it
incubates and supports new ideas, innovative products, cutting-edge technology, novel
mechanisms for delivering financial services, and concrete solutions to the challenges of

27. 27
expanding microfinance. MAFMI was established with support of CGAP and Open Society
Institute for meeting the technical and managerial skills needed for the microfinance sector.
Regional multilateral development banks like Asian Development Bank also support the cause of
commercial microfinance. ADB outlining its policy for microfinance lends support to the logic by
saying “to the poor, access to service is more important than the cost of services' ' and “the key to
sustainable results seems to be the adoption of a financial-system development approach”. The
underlying logic is based on the universally twin arguments i.e., a) subsidized funds are limited
and cannot meet the vast unmet demand, hence private capital must flow to the sector and b) the
ability of the poor to afford market rates. However, various scholars like Morduch have brought
out the flaws of this Win-Win proposition like belief in congruence between commercial
microfinance and poverty outreach. The impact of microfinance has been questioned and many
studies argue that the impact of microfinance is divergent between positive, no impact and even
negative impact. The literature exhibits that the impact of microfinance works differently from one
context to others and the impact is contingent upon the population density, group-cohesion,
enterprise development, and attitudes to debt, financial literacy, financial service providers and
others. In Spite of the controversy surrounding the impact of microfinance, there is no doubt that
microfinance can initiate a cyclical process of growth and development leading to poverty
alleviation. Khandekar’s study shows that microcredit in Bangladesh has led to women
empowerment by enhancing their contribution to the household income and asset accumulation,
which significantly improved the living standard of the family. Abdul Hayes, Ruhul Amin and
Stan Becker analysed the relationship between poor women's participation in microcredit
programmes and their empowerment by comparing both SHG and non-SHG members in rural
Bangladesh. The women empowerment concept was split into three components and measured
separately to arrive at a better understanding of their underlying factors and their relationship to
women's empowerment. The results showed that the SHG members were ahead of non-members
in all the three indices of empowerment. Moreover, the non-members within NGO programme
areas showed a higher level of empowerment on the autonomy and authority indices than do the
non-member within the comparison areas. It was also observed that education, house type, annual
income etc., tend to be positively associated with autonomy and authority indices along with the
positive association of the duration of NGO membership and non-agricultural occupation. The
implications of these findings have been that NGO credit programmes in rural Bangladesh brought

28. 28
rapid economic improvement for women as well as hastened their empowerment. The NGO credit
members were reported to be more confident, assertive, intelligent, self-reliant and conscious of
their rights. A suggestion regarding the complementary role of government along with the NGOs
has also been made - the government must also have a large network of credit programmes for the
rural poor women to increase their economic solvency and enhance their empowerment. Mulunga
in his study relating to Growth of Microfinance Institutions in Namibia found that the availability
of microfinance services had a positive impact on the lives of the poor. According to the Malegam
committee report (144 p), microfinance promotes women entrepreneurship, by providing loans to
the poor women enabling them to engage in productive activities and grow their tiny
establishments, thus giving people the means to fight against poverty. Microfinance can also
contribute towards solving the problem of insufficient housing and urban services as an integral
part of poverty alleviation programmes.
Remenyi observed that the household income of families with access to credit was significantly
higher than for comparable households without access to credit. In Indonesia, a 12.9 per cent
annual average rise in income from borrowers was observed as compared to a 3 per cent rise from
non-borrowers (control group). In Bangladesh, a 29.3 per cent annual average rise in income was
recorded as opposed to a 22 percent annual average rise in income from non-borrowers. Sri-Lanka
indicated a 15.6 rise in income from borrowers and 9 per cent rise from non-borrowers. In the case
of India, 46 per cent annual average rise in income was reported among borrowers with 24 per cent
increase reported from non-borrowers.
Wright says that there is an overwhelming amount of evidence substantiating a positive social and
economic impact in terms of increase in income and reduction in vulnerability. In a study in LDCs,
Vincent concluded that access to credit promotes a sense of entrepreneurship. Initial small loan of
about $100 helped in reintegrating these entrepreneurs into formal networks and it promotes the
structural and sustainable development of the communities. However, only 5% of the microcredit
demand is fulfilled leaving a great potential for this sector to grow. The author is very optimistic
about the role of microfinance and entrepreneurship and stated that “Despite several challenges
ahead, this emerging industry, and the process of sustainable entrepreneurship combine to offer a
potential alleviation solution to the poverty crisis of the 21st century, and into a sustainable future”.
In another empirical study done on 12 MFIs in four countries of West Africa it was found that poor

29. 29
access to credit, poor training, lack of trust and cooperation and aversion to risk was the most
common factor restricting the success of these microenterprises. They also stated that “The
availability of microfinance will inevitably be an important part of the story. But it must be
accessible to those who need it most, and the supporting social capital may need to be nurtured”.
In a similar study at Nicaragua on several micro entrepreneurs through in-depth interviews, Pisani
and Yoskowitz revealed that access to microfinance, enhanced the chances of survival of these
micro-entrepreneurs’ households. It was also found that income for self-employed micro-
entrepreneurs was highly influenced by business sales volume, work experience, number of
employees, and loan size. On the other hand, Adams and Pischke argued that lack of funds was
always perceived as the most important problem for the micro-entrepreneurs rather than product
price, modern input costs, low yield etc. because it is easier for donors and government to give
credit than providing other support. This is the dominant reason behind the launch of so many
microenterprise credits programmes.
They also believe that reliable access to small and short term loan is more important for poor micro
entrepreneurs than large and long term loans and emphasized the role of expanding services to
savings for formal financial institutions by two ways: i) Develop financial institutions which can
deal in small transactions efficiently and ii) Innovation to assist more poor people to become credit
worthy and to have long term relationship with formal financial institutions. In this respect
evolution of microfinance and MFIs has been very useful because they are able to handle small
transactions efficiently as well as they establish a long-term relationship with the borrower.
They focus on small and short-term loans rather than big and long-term loans. In this way it has
the potential to overcome the problems of microenterprise finance programs launched by the
government. Notwithstanding the positive impact, critics argue against the hyped effects of
microfinance and cite modest benefits associated with microcredit, over-indebtedness, and a trend
towards commercialization less focused on serving the poor. Bateman and Chang reject the view
that “reaching the poor” with a tiny microcredit will establish a sustainable economic and social
development trajectory. According to them the edifice of microfinance began to crumble in 2007
and the hubris quickly turned to nemesis. Long-standing supporters of microfinance openly
expressed their concerns at the way the microfinance concept was being destroyed in the hands of
neoliberals and hard-nosed investors. Moreover ‘microfinance meltdowns’ taking place around the

30. 30
globe, as in Bolivia in 1999-2000 followed by a new round of even more destructive ‘microfinance
meltdowns’ in 2008 in Morocco, Nicaragua and Pakistan, marked out by huge client over-
indebtedness, rapidly growing client defaults, massive client withdrawal, and the key MFIs
plunging into loss or forced to close or merge, added impetus to the growing critique of the
microfinance model.
These episodes were then followed in 2009 by the dramatic near-collapse of the hugely over-
blown microfinance sector in Bosnia. As a matter of fact, most advocates of microfinance do not
completely disagree that microfinance alone cannot do the job. For example, Sam Daley-Harris,
Director of the Microcredit Summit Campaign, writes, “Microfinance is not the solution to global
poverty, but neither is health, or education, or economic growth. There is no one single solution to
global poverty. The solution must include a broad array of empowering interventions and
microfinance, when targeted to the very poor and effectively run, is one powerful tool. In the words
of Professor Yunus “Micro-credit is not a miracle cure that can eliminate poverty in one fell swoop.
But it can end poverty for many and reduce its severity for others. Combined with other innovative
programs that unleash people’s potential, micro-credit is an essential tool in our search for a
poverty free world”. As per Vijay Mahajan, a social entrepreneur and chairman of BASIX, India,
“Microcredit is a necessary but not a sufficient condition for micro-enterprise promotion. Other
inputs are required, such as identification of livelihood opportunities, selection and motivation of
the micro-entrepreneurs, business and technical training, establishing of market linkages for inputs
and outputs, common infrastructure and sometimes regulatory approvals.
In the absence of these, micro-credit by itself, works only for a limited familiar set of activities –
small farming, livestock rearing and petty trading, and even those where market linkages are in
place.” Robert Pollin has a similar view and puts forth that: “micro enterprises run by poor people
cannot be broadly successful simply because they have increased opportunities to borrow money.
For large numbers of micro enterprises to be successful, they also need access to decent roads and
affordable means of moving their products to markets.
They need marketing support to reach customers.” Economist Robert Cull (Lead Economist,
Research Department) summarized the findings of six experimental studies of microcredit ranging
from Ethiopia to Morocco to Mexico at the Financial Services for the Poor conference held in
February 2015 at the World Bank, these studies pointed to increases in borrowing, self-

31. 31
employment activities, and some business investments. There were also modest reductions in wage
labour supply, while the impact on consumption was mixed. However, “you don’t see anything
transformational in terms of household incomes, wealth, or poverty levels,” he said. He also
suggested a variety of measures to help meet the challenge of reaching the poor and emphasized
that microfinance is not just microcredit. He highlighted measures such as technological
innovations like mobile banking services, offering agents as nearer points of contact, and a better
understanding of client needs including savings devices, electronic payments, and more flexible
loan repayment schedules. Despite the controversies, the microfinance sector continues to enjoy
double-digit growth.
In fact, global figures testify to significant levels of development, with a portfolio of US$87 billion
and 111 million clients in 2014, and an estimated growth of 10% in outstanding portfolios and
15.8% in borrowers in 2015. Microfinance is a significant lever in the implementation of the 2030
Agenda (the adoption of the 17 Sustainable Development Goals by the UN General Assembly).
By fostering financial inclusion and access to services in the fields of health, food security,
education, energy and housing, the sector confirms its role as a catalyst in global and inclusive
development.
The global microfinance market is expected to grow by 10-15% in 2016. Economic growth in the
main microfinance markets will increase from 3.5% to 4.0% in 2016 and will be twice as high as
in the developed economies. Led by India and Cambodia, which benefit from a more favourable
regulatory environment and strong demand for microfinance services, Asia’s microfinance
markets are experiencing the strongest growth momentum. Asia-Pacific is set to remain the
world’s fastest-growing microfinance market with projected growth of 30 % in 2016.
The actual impact on poverty is still debatable (El- Komi and Croson (2015).

32. 32
2.3 Empirical Review
Vaessen (2001) examined factors that influence receiving poor people in credit showed the
network of information and recommendation of bank staff are the main influences on access credit.
Umoh (2006) investigates the factors that influence microenterprises to participate in microcredit
is the regression analysis used to analyse factors that influence the demand of microcredit. Interest
rates and requirements such as collateral and minimum balance, are factors that decrease the
amount of loans disbursed by microcredit institutions.
According to Ainley ,Mashayekhi, Hicks, Rahman and Ravalia (2007) the development of Islamic
finance institutions in the modern era started with the establishment of an Islamic bank in the
Middle East in the 1960s. The combination of Islamic finance and microfinance was first
elaborated by Rahul and Sapcanin in 1998.
Islamic microfinance has experienced rapid and significant growth over the past four decades. This
is because Muslims comprise 21% of the world’s population with USD 1 trillion of asset
investment. Islamic finance is a promising financial industry and the industry’s assets are forecast
to reach USD 3 trillion in 2020.
Nur Indah Riwajanti (2017) Microfinance institutions have significant economic impact for the
low-level income family 81% of households gained microfinance loans increased their
consumption and created small business in Bangladesh.
Ali and Alam (2018) concluded that microfinance is the most important resource to provide loans
and the other basic financial services to increase the employment rates, productivity and earning
capacity. It will impact the people’s lives through removing poverty.
Tenaw and Islam (2017) mention that microfinance has vital role of in improving and maintaining
livelihood of rural people in Bangladesh and Ethiopia.
Abiola & Salami (2018) mentioned that a lot of literature is present on the positive role of
microfinance in poverty alleviation.

33. 33
A surge of growth in the microfinance institutions has been noticed in the developing countries
the reports that the number of the poorest clients with microcredit has grown from 7.6 million in
1997 to 137.5 million especially in Asian countries in the last two decades (2012).
Ojiegbe, Nwaru and Duruechi (2015) reviewed the role of microfinance bank’s operation on
poverty alleviation in Nigeria.
Irobi (2017) as the provision of financial services such as credit, savings, micro-leasing, micro-
insurance and payments transfers to economically active poor and low-income households to
enable them to engage in income-generating activities or expand/grow their small businesses.
2.4 Conceptual Framework
Independent variable and dependent variable can cause and effect the relationship between Islamic
microfinance institutions and their clients.
The policy, guidelines and regulations of institutions are independent variables they can change
during experiments, but the customer view and satisfaction are dependent variables; it depends
how institutions smoothly updated their policy and regulation to fit their customer satisfaction.
The study use quantitative research based on research questionnaires.
Dahabshiil Bank
(Loans)
Household
Income
Business
Employment
Opportunities

34. 34
Chapter Three
Research Methodology
3.1 Area Description
The paper research focus on investigating Dahabshiil Bank (Micro Dahab), how much contributing
poverty reductions by using Islamic microfinance.
3.2 Research Approaches
The study used a descriptive survey research design and the correlation strategies between
microfinance institutions and their clients.
The research designed to use quantitative techniques reflects the objectives of the study through
systematic data collection that deals with the study. The quantitative data will be used in
standardized questionnaires that are approved by the advisor.
3.3 Types and source of Data
The type of data used in the study is quantitative from Islamic microfinance institutions Dahabshiil
(Micro Dahab) and their clients.
The study will the respondent of the questionnaires should include clients’ benefited Islamic
microfinance and change their life through loans that they get microfinance institutions
3.4 Sampling and Sample Size Determination
The nature of the target population was the number of Dahabshiil bank (Micro Dahab)
Table 1. Below show the respondents of study with the following categories.
The study also focuses on the clients who have taken loans from these institutions and benefited.

35. 35
3.5 Sample Techniques
The study used will follow systematic random sampling and there is an equal change (Probability)
of selecting each unit from within the population when creating the sample. The sample focus on
this year 2020 client benefited Micr Dahab.
Table 1
NO Category Population Sample Size
Year 2018 Dahabshiil Client 1200
Year 2019 Dahabshiil Client 985
Year 2020 Dahabshiil Client 115 20
Total 2300 20
The sample size formula= Number of Population divide by number of needed= 2300/115= 20

36. 36
3.6 Methods and Data collection
3.6.1 Questionnaire interview
This thesis is based on a questionnaire interview. I consider for this type of interviewing
techniques the researcher will get access to individuals with quality knowledge of microfinances
and how it works during operations other are misconceptions elsewhere. In other hand, interviewee
have first choice and make follow up with clarifications. Furthermore, the researcher can tailor
their questions and poses control (Drever 1995)
3.7 Methods of Data Analysis
Data analysis based on the research instruments from the respondents to the questionnaire
interview.
This study used correlation to know the relation between Islamic Microfinance Institutions and
poverty reduction. It will analyse the impact of the households and client taken loan from
Institutions

37. 37
Chapter Four
4. Data Analysis and Presentation
Table 2: This table indicates the demographic of the Respondents
Male 16
Female 4
Widow 2
Married 11
Single 7
Respondent took loan from different microfinance institutions. According to the data 35% are
single while 55% are married the other the other 10% are widows. Married Respondents are always
starting small businesses to cover their needs after they become family. This nature increases the
number of married who are willing to take loans from institutions.

38. 38
Figure 1. Level of Education
This table illustrates 10% of the respondents can read and write 10% are finish basic education.
15% are completed and graduated secondary level. 60% have bachelor’s degree of different field
while 5% are diploma. This date indicates peoples who have higher education are understand
microfinance institutions are see an opportunity to start small business or cover their needs.

39. 39
Figure 2: Types of IGA
The Bichat shows as respondents who have income generate activity familiarize before the loan
taking 5 respondents have experienced and established before income generating activities which
are different types but 15 respondents equivalent 75% of the respondents did not established IGA
before the loan
Table 3: Household size before loan and after the loan
HH Size Before
the Loan
Percentage HH Size after the
Loan
Percentage
2 25% 4 20%
4 15% 5 25%
5 35% 6 30%
6 15% 7 25%
7 10%

40. 40
Figure 3: Amount of the First Loan
Figure 6: Average Monthly Income for All Sources

41. 41
Figure 4: Overall household income increased or decreased
Table 4: The table figures out during the two or three years the overall of the household increased
due to business investment or created another source of income.
Increased 20 100% Decreased 0 0%
Table 5: If increase why your income increased?
Frequency Percentage
Expanding existing
enterprise
15 75%
Start new enterprise 2 10%
Abe to buy input at cheaper
price
1 5%
Get other job 2 10%
Total 20 100%
Figure 5: Are any of your household members engaged in income generating activities?

42. 42
Figure 6: illustrates the kind of income generating activities that clients invest when they receive
the loan from the bank.
55% invest in glossary most women are invested to buy glossary items when they receive the loan
and payback when they sell the items. 20% are invested in beauty salons and make employment
to the young girls.
Table 6: Income Household before the loan and after the loan
Before the loan Frequency After the loan Frequency
200 3 200 1
250 7 250 4
300 6 300 2
400 3 400 3
600 1 600 6
200 1
250 2
300 1

43. 43
This graph presented the income household before the loan and after. It indicates the increase of
household income after they receive a loan.
Figure 7: Shows the property they have before joining IMF
17 Respondents have fixed property before they join IMF while 3 of them have no fixed property
before they take loan.
200
250
300
400
600
0 0 0
200
250
300
400
600
200
250
300
Income Household Before Loan and After Loan
Before Loan After Loan

44. 44
Figure 8: Shows the source of money saving 15% of the respondent source of saving income
comes from income from employment and 85% of respondents comes from business financing for
the loan
Figure 9: 40% of the Respondent got training about Islamic Microfinance while 60% of the
Respondent did not get training.

45. 45
Figure 10: Shows the attractive features of
Table 7: illustrates three things client like about Islamic Microfinance Institutions
Thinks Like Frequency Percentage
Creating Opportunities 2 5%
Crating Employee 8 40%
Creating Income Source 10 55%
Table 8: Shows three things clients not comfortable the IMFIs activities
Thinks Dislike Frequency Percentage
Time of Repaying 6 30%
Difficult to access 10 50%
Percentage of bank charging 4 20%

46. 46
5. Chapter five
Summary, Recommendation and Conclusion
5.1 SUMMARY OF THE FINDINGS
The result of the analysis of the impact Islamic microfinance institutions indicates to reduce on
poverty reveals following findings.
● The income of households increases due to the access of microfinance institutions.
● The microfinance creating employment opportunities
● The accessibility of microfinance institutions is difficult for the people who are willing to
get access.
● The time of repaying is too short 30% of the respondents are concerned the time of repaying
is not attractive to the client.
● Percentage of charging is not welcoming 20% of the respondent declared the percentage
of charging is difficult to the client.
5.2 CONCLUSION
Poverty has been identified as a depleting cankerworm of human society. Its effect is felt in more
developing countries. Somaliland National Plan II (NPD II) indicates to focus on alleviation of
poverty also one of the goals countries to reach Sustainable development goals to fight poverty
and to improve standard living underprivileged population. Microfinance is globally a tool to
escape poverty.
Islamic Microfinance Institutions established in Somaliland will reduce poverty and establish a
room that the poor people of Somaliland can access to the credit. From the result of the research
work, it concluded the role of microfinance institutions has been realized to reduce poverty but
still limited.

47. 47
5.3 RECOMMENDATION
The study makes the following recommendations for consideration for policymakers.
1. Government should make clear policy and encourage Islamic Microfinance Institutions to
expand their operation in urban and rural areas. This will enhance saving mobilizations of
the bank thus creating employment opportunities.
2. Microfinance institutions should be socially or communal based instead of individual
based.
3. Islamic Microfinance should consider the percentage charging and the time of repayment
on how to join more clients to the institutions.
4. Microfinance Institutions should operate all kinds of microfinances and the standard
guideline of the Islamic Microfinance.

48. 48
6. References
Simona Franzona and Asma Ait Allali 2018 “principles of Islamic microfinance”
Thom Hortman Economic growth “Economic growth”
https://www.academia.edu/people/search?utf8=%E2%9C%93&q=islamic+microfinance+institutions
Journal of Islamic and business research Vol. 2. No. 1. September 2013 Issue. Pp. 1 – 12
Elwardi Dhaoui (2015)“The role of Islamic Microfinance in Poverty Alleviation: Lessons from Bangladesh
Experience”
Michaela Hamm (2017) “Islamic Finance Concepts for Savings and Loan Groups in Somaliland”
Barr, Michael S. (2005), “Microfinance and Financial Development”
Irobi, N.C. (2008), Microfinance and Poverty Alleviation: A case study of Obazu Progressive Women
Association Mbieri, Imo State- Nigeria. Uppsala: Department of Economics
Otero, M.(1999); Bringing Development Back into Microfinance
UNDP (201) annual report
Islamic Banking and Finance (2014) Recent Empirical Literature and Directions for Future Research Pejman
Abedifar, Shahid Ebrahim, Philip Molyneux, Amine Tarazi
Kajia Hurlburt (2012) khurlburt@oneearthfuture.org
Journal of Economics and Administration Science (2019)

49. 49
7. Annexes
1. Questionnaire Form
Dear Respondent,
This is the questionnaire that I intended to assess Analysing the impact of Islamic microfinance
institutions for poverty reduction in Hargeisa. The information you provide is only for academic
purposes and should be kept strictly confidential therefore, I kindly request you to give a small
portion of your time to give accurate information.
Part 1: Demographic of the Respondent:
Please use (√) the answer respondent chooses
1. Gender Male Female
2. Age Group 20-45 46-60 60+
3. Marital Status Married Single
4 Level of Education
Secondary Diploma Degree Master
Part 2 determining the status of Microfinance institutions
5 What Type of Microfinance do you run?
Sole proprietorship Partnership Corporation
6 What service does your bank offer?

50. 50
Murabaha Musharakah Modaraba Others
Part 3 Questionnaire determines the degree of Economic growth
7 Does Islamic microfinance institutions encourage people to adapt to new?
Yes No
8 Does your institutions take part economic growth/ social life improvement?
Yes No
If Yes, Please Specify
______________________________________________________________________________
_____________________________________________________________________________________
9: Is your institutions contributes the development of household income through microfinance
Yes No
If yes, please explain
Part 3: Determining Microfinance beneficiary
10: Do you think microfinance economic development of households?
Yes No
If yes__________________________________________________
11: Did you get a microfinance loan?
Yes No
12: If yes, how did you contribute your household income?

51. 51
Normal Good Very good
13: What is the difference between when you get a loan and when you do not get?
_____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
14: Did you establish business when you got a loan from the institution?
Yes No
15: What kind of business did you invest?
________________________________________
Part 4 Business Activity
16: How many times have you been granted microfinance?
One time Two-time Three time More
17: Have you made any savings after taking a microfinance loan?
I could not make any savings I make savings I am in debt
18: What business activity are you engaged in?
Shop Tea Shop Store Others
19: How much was capital before starting business? _ _________________
20: How much is your business capital now? ______________________

52. 52
21: Have your business sales increased when you take a microfinance loan?
Yes No
22: have you received any kind of training about microfinance? If yes, please specify the training type:
_______________
Part 5 Household
After becoming involved of microfinance, how do you perceive the following activities?
Activity
Total Household monthly income
Consumption expenditure
Monthly household saving
Quantity of food
Quality of food
(Consumption of meat, chicken, vegetables, milk etc
Spending of educ
Access to medical service
Accessibility of electric city

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2. Work Plan detail
Activity August September October November December
1. Acceptant of
Research title
2. Reading and
Searching
resource
related to the
topic
3. Starting
Proposal
writing
4. First draft of
proposal
5. Final draft of
Proposal
6. Drafting
questionnaire
7. Collection of
questionnaires
8. Analysing
data
9. Data
interpretation
and findings

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10. Final of
Research
Budget of Proposal
Expenditure of
items
Quantity # of Time Unit price Total cost
Direct Cost
Transport 15 15*$3 $45
Proposal
printing
1 One time 1*$2 $2
Questionnaire
printing
15 One time 15*0.35 $5.25
Final Proposal
Printing
1 One time 1*$5 $5
$57.25