Islamic Credit Union: An Inclusive Financial Institution to Meet the Needs of the Community

Abstract

Islam is a practical way of life for humanity with its own systems in every aspect of life whether cultural, social, political or economic. In the economic sphere, Muslim societies around the globe have inherited mostly interest-based feudal, capitalist or socialist economic systems. As there is no working model, Muslim economists and scholars have made considerable efforts to develop their own Shari'ah-compliant economic model and financial institutions. Since 1960's, the Islamic finance industry has grown exponentially to surpass the USD 2.1 tln mark end 2014. The Islamic banking and Sukuk sectors dominate the Islamic finance industry (approximately 80% and 15% respectively) while Islamic microfinance has less than 1% market share. Islamic financial institutions are often criticized for operating or mimicking the capitalist mode for offering nothing more than a modified conventional loan. It is also questioned whether Islamic financial institutions have indeed contributed to achieve the objectives of Islamic economics alongside a healthy and growth-oriented economy where the necessities of life and spiritual peace are available to society at large. The purpose of this paper is to propose an inclusive financial institution model (Islamic Credit Union), based on cooperative and Islamic financial principles, which is a community-based institution. Such a model has so far received only sporadic attention in the market. The paper also presents the status of Islamic Credit Unions worldwide and discusses the legal and operational framework and opportunities of the Islamic Credit Union model.