Microfinance, which is the term used to describe banking or financial services given to poor or low-income clients, aims at poverty alleviation. It is also a viable business. Micro-entrepreneurs borrow at market rates and have a repayment track record which beats that of the borrowers of most commercial banks (97% on average).
The industry is currently expanding its reach by offering shariah compliant investment products to communities that are reluctant to deal with conventional financial instruments. Microfinance relies on small, repeatable short-term financing instruments and group responsibility. These features find a natural home in the framework of Islamic finance where the concern for social equity is reflected in the principle of "no exploitation" and support for the needy. Furthermore, Islamic insurance or mutual guarantee products are very much in the spirit of mutual responsibility. Accordingly, microfinance organisations can use Islamic financing products to offer loans as well as other financial services to promote financial inclusion.
Luxembourg law provides a highly attractive framework for microfinance investment vehicles (MIVs) which may be structured as UCIs, SICARs, SIFs or securitisation vehicles. These same vehicles may be used to build microfinance funds that comply with shariah principles.
The microfinance business is well embedded in the Luxembourg financial centre and enjoys the support of the Government. Luxembourg is the leading European domicile for regulated microfinance investment vehicles and meets the requirements to become a hub for shariah compliant microfinance investment financing.