Although the number of Islamic microfinance initiatives remains limited, less than 1% of total global microfinance outreach, there is for a number of reasons increasing interest in developing microfinance programmes based on Islamic financing principles. Firstly, it is apparent that a significant proportion of Muslims refrain from using interest based microfinance services for fear of breaching their religious beliefs. Indeed, it is likely that even less religiously observant Muslims who currently use interest based microfinance may prefer Shari’ah -compliant microfinance if available. Secondly, some, particularly Muslim faith based, microfinance providers are striving to abide by the wishes of their donors, many of whom want to ensure that their funds are only utilised in a halal or permitted manner. Finally, many programme staff are motivated by their faith to develop Shari’ah-compliant microfinance alternatives.

However, there remains little research conducted on the impact of Islamic microfinance programmes. This paper examines one such programme that is being implemented in Kosovo under the auspices of Islamic Relief and explores a number of questions: Does an association with faith make Islamic microfinance programmes more or less effective? Can faith-based microfinance providers reduce problems of moral hazard and adverse selection, and as a result encourage higher repayment? Are programme staff more motivated? This investigation explores these and other issues by interviewing both borrowers and programme staff. This paper also describes the Islamic financing principles that govern the structure and operations of Shari’ah-compliant microfinance programmes as well as the principal financing methodologies employed.

While from the outset it was obvious that the performance of any microfinance programme is largely determined by organisational traits and the context in which it is implemented, the research highlighted a number of areas in which faith impacts upon the behaviour of programme staff and borrowers in Kosovo. While the resultant behaviour appears to contribute to the success of the programme, the extent of this influence is difficult to determine amid a number of other influencing factors. Indeed, in overall terms, factors such as the macroeconomic environment, the capacity of staff, and programme structure, policies and procedures are likely to be far more influential. Nevertheless, it is apparent from the research findings that faith does have some influence on the way borrowers perceive and behave and it also has a motivational impact on programme staff.