INTEREST FREE MICROFINANCE AND IMPACT ON POVERTY ALLEVIATION

Abstract

This comprehensive study delves into the efficacy of interest-free microfinance in mitigating poverty, contrasting it with conventional microfinance models that often employ high-interest rates. The article begins by tracing the origins of microfinance to a small, impactful initiative by Professor Mohammad Yunus in Bangladesh, evolving into a global phenomenon. Despite the initial success, traditional microfinance has faced criticism for exacerbating poverty through high interest rates and aggressive recovery practices, leading to severe social repercussions. In response, interest-free microfinance has emerged as a sustainable alternative, particularly in Islamic regions and developing countries, providing collateral-free, interest-free loans that encourage self-reliance and economic stability. The paper examines various models of interest-free microfinance, including the Grameen Bank Model, Village Bank Model, Credit Union, and Self-Help Groups, with a special focus on the Akhuwat model in Pakistan. Empirical evidence from multiple studies highlights the superior performance of interest-free microfinance in poverty alleviation compared to interest-based models. This research underscores the potential of interest-free microfinance to create significant social and economic impact, advocating for its broader adoption to combat poverty effectively.