Value-Driven Innovation in Islamic Microfinance: Reconciling Ethics, Sustainability, and Institutional Change

Abstract

Islamic microfinance has emerged as a transformative alternative to conventional financial systems, especially in Muslim-majority regions seeking to enhance socio-economic inclusion and poverty alleviation. Rooted in sharīʿah principles and ethical finance, Islamic microfinance institutions (IMFIs) aim not merely at economic efficiency, but also moral value creation. Yet, their performance has often been questioned for lagging innovation and limited sustainability when compared with conventional peers. This study explores how value-driven innovation can reposition Islamic microfinance as both ethically sound and institutionally adaptive. By aligning its practices with core Islamic ethical imperatives—such as ‘adālah (justice), maṣlaḥah (public interest), and environmental stewardship—Islamic microfinance can transcend mere financial intermediation. Employing qualitative content analysis and field-based case studies from Indonesia, this paper identifies dynamic institutional configurations that support ethical innovation. Findings indicate that when IMFIs integrate sustainability frameworks and ethical imperatives into their operational models, they experience enhanced legitimacy, community trust, and resilience. These outcomes are particularly evident in institutions adopting participatory governance, ethical investment screening, and qard al-ḥasan-based products. The fusion of traditional Islamic values with modern innovation paradigms illustrates a unique institutional transformation process. This research advances theoretical and practical conversations around institutional change in faith-based finance. By reconciling ethics with innovation and sustainability, Islamic microfinance can become a model for inclusive, resilient financial development.