| Summary: | This paper is aimed at explaining the application of musharakah mutanaqisah into a newly context of Islamic
microfinance. The term Islamic microfinance is similar to that of conventional but it is varied in terms of Shariah
principles used and the prohibition of interest in business operations. Further, microfinance institutions have
been established in many developing countries to solve the problem of poverty. In muslim countries, Islamic
microfinance can be a powerful tool to fight poverty if these institutions are managed in the right way. Islamic
finance scholars have argued that the provision of equity based financing by Islamic financial institutions will
facilitate toward achieving the Islamic socio-economic objectives which include social justice, economic growth,
efficiency and stability. This paper illustrates that musharakah mutanaqisah, an equity based financing
instrument, is better than debt-based financing because of its flexibility and end result in the ownership of assets
on the part of the customer. The paper also highlights musharakah mutanaqisah as an innovative mode of
financing and should be a preferred instrument of financing by Islamic microfinance institutions. Our study
provides further evidence regarding the applicability of musharakah mutanaqisah into the context of
microfinance, thus closing the research gaps. Limitation and potential future work are outlined to assist future
researches in the area.
Keywords: Islamic microfinance, Profit-loss sharing, Musharakah mutanaqisah, Microfinance, Poverty
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