THE ROLE OF ISLAMIC MICROFINANCE INSTRUMENTS IN POVERTY REDUCTION

Abstract

This article examines the role of Islamic microfinance instruments in 
reducing poverty. Since conventional microfinance is largely based on interest (ribа), it 
may, in some cases, contradict Sharia principles in Muslim societies. Therefore, Islamic 
microfinance – providing financial services in accordance with Sharia – has gained 
attention as a sustainable alternative for poverty alleviation. The study primarily focuses 
on trade-based and partnership contracts, including murаbahah, istiṣnаʿ, mushаrakah, 
mudаrabah, and tawarruq, and analyzes their application within microcredit models. 
Evidence from Bangladesh, Nigeria, and Pakistan suggests that Islamic microfinance 
mechanisms contribute positively to poverty reduction by increasing household income, 
supporting entrepreneurial activity, and strengthening financial inclusion. The article 
also highlights practical challenges faced by Islamic microfinance, such as regulatory 
limitations, insufficient financial literacy, and operational constraints. In the context 
of Uzbekistan, the effective implementation of Islamic microfinance requires pilot 
programs, enhanced financial education, improved legal and regulatory frameworks, 
and the introduction of innovative Sharia-compliant financial instruments.