Reconstructing Governance in Islamic Microfinance: A Normative-Institutional Study of Bayt al-Māl wa al-Tamwīl

Abstract

Islamic microfinance has evolved as a critical component in enhancing financial inclusion among marginalized Muslim populations, especially in developing economies. Rooted in sharī‘ah-compliant principles, the concept of Bayt al-Māl wa al-Tamwīl (BMT) has historically served both redistributive and productive functions in the Islamic economic system. However, modern applications of Islamic microfinance, including BMT, face considerable governance challenges that hinder their effectiveness in contemporary financial environments. This study emerges from the urgent need to reconstruct governance mechanisms that are both normatively grounded and institutionally functional within Islamic microfinance settings. This paper aims to explore the normative foundations and institutional applications of governance in BMT. By integrating classical Islamic governance literature—such as al-Māwardī’s and al-Ghazālī’s works—with modern institutional economic theory, this study seeks to formulate a hybrid governance model for BMT. The research applies a normative-institutional methodology, combining textual analysis of Islamic classical sources with a review of contemporary institutional theory and its implications for microfinance governance. Findings reveal that a governance framework informed by maqāṣid al-sharī‘ah, ḥisbah, and institutional coherence can significantly enhance the legitimacy, efficiency, and ethical integrity of BMT institutions. The study also uncovers gaps in current regulatory models, which often overlook the epistemological and operational integration of Islamic governance values. This research contributes theoretically by bridging the normative heritage of Islamic economic thought with contemporary institutional design, and practically by offering a reconstructed governance framework to strengthen Islamic microfinance institutions’ performance and credibility.