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Abstract
This study highlights the obstacles which limit the penetration of the banking sector in the field of Islamic microfinance in Pakistan, keeping in view the practitioners’ perspective as to how these obstacles can be overcome. In Pakistan, where approximately sixty percent (60%) of the population is living below the international poverty line, Islamic microfinance has the potential to play a vital role in alleviating poverty. Unfortunately, the banking sector of Pakistan is reluctant to contribute in Islamic microfinance due to some limitations from the bankers’ perspective. Qualitative approach has been followed in this study in which semi-structured interviews were conducted with twenty-six participants from all over Pakistan, including five from Islamic, seven from conventional, thirteen from microfinance and one from an Islamic microfinance bank. Interviews were conducted with the board of directors, Sharīʿah board members, senior management, and microfinance heads. According to the experts, the mindset of bankers, lack of collateral, weak role of the State Bank of Pakistan (SBP) and the government of Pakistan in setting targets, limited availability of sector targeted products, lack of customer awareness, lack of initial capital, time consumption and documentation problems are among the issues faced by the banking sector. These experts emphasized the crucial role of the SBP and government support to promote Islamic microfinancing through banks. State Bank of Pakistan (SBP) as regulator and other commercial banks, Islamic microfinance banks and their boards of directors, Sharīʿah board members, senior management, and microfinance heads can implement the outcomes of this study.
Highlights
Microfinance is defined as “the collection of banking practices built around providing small loans and accepting tiny savings deposits.”1 Microfinancing is considered an important tool used to reduce poverty but it works on the basis of riba, which is against Sharīah rules and regulations
In Pakistan, 60% of the total population lives below the international poverty line but there is no proper financial system for poverty alleviation
The purpose of the current study was to find out ways to make it possible for banks to penetrate the Pakistani financial market by offering more microfinance products
Summary
Microfinance is defined as “the collection of banking practices built around providing small loans (typically without collateral) and accepting tiny savings deposits.” Microfinancing is considered an important tool used to reduce poverty but it works on the basis of riba, which is against Sharīah rules and regulations. It is the key to providing financial access to millions of poor Muslims who are reluctant to buy conventional microfinance products that do not comply with the Islamic law.. Islamic microfinance has captured a minimal share of the financial market of Pakistan as compared to conventional microfinance as well as mainstream Islamic finance. Scholars have been writing about the significance of Islamic microfinance and have forwarded some models; still, the penetration of Islamic microfinance is low in financial markets all over the world including Pakistan. This study will attempt to take into consideration the banking practitioners’ perspective about the issues faced by the banks in Pakistan, which restrict them from rendering Islamic microfinance services to their customers. Solutions have been sought from the above mentioned perspective in order to overcome the issues and to facilitate the greater penetration of Islamic microfinance by banks in the market
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