By Salman Ahmed Shaikh
Abstract
Interest is prohibited in all monotheist religions; however, it features as an essential element in practiced capitalism. Interest based financial system has created two major havocs in last two decades i.e. in East Asia in 90s and in the Great Recession since 2007. With interest at zero bound in U.S since 2008 and with unemployment at 11% level, scarcity of capital cannot solely explain this. However, interest based Microfinance has had mixed results. Interest based lending at Micro level is usually carried out at very high interest rates, more so when the lending takes place informally without institutional intermediation. Institutional intermediation serves a good purpose, but it can also be designed using equity modes of financing. This can relieve the financee and increase diversity of entrepreneurial activities as in debt based microfinance, not much diversity can happen with compulsory servicing of debt. The related questions as to how the institutional arrangement would work to carry out this system, how documentation problems be resolved, how trust level can be created, how effective monitoring can be undertaken and how the intermediaries generate finance themselves and mobilize funds are answered in this paper.
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