Islamic Microfinancing by the Banking Sector of Pakistan: Problems and Solutions

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

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“…In the above study, the challenges and prospects of micro-takaful were discussed by reviewing the existing literature. Ayaz et al, 2019 conducted the most recent study to investigate the underlying reasons behind the low penetration of Islamic microfinance products, where they discussed the perspective of the banking sector's practitioners through semi-structured interviews. The same methodology is followed in the current study to find out the takaful operators' perspective regarding the growth of micro-takaful products in Pakistan.…”

“…Takaful operators, in spite of increased growth in family takaful (USD 1.35 billion in 2010) and general takaful products (USD 48 million), still have the ignored area called micro-takaful (Nu, et al, 2015). In Pakistan, very few micro-takaful products are offered through 60% of the population of the country lives below the poverty line (Ayaz et al, 2019).…”

“…However, peculiar problems from the perspective of the Pakistani takaful operators have not been investigated so far, to the best of the researchers' knowledge. Practitioners' insight is necessary to explore the underlying reasons behind the limited penetration and further enhancement of the industry (Ayaz et al, 2019).…”

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“…The lack of initial capital and targets owned causes not all people to transact at the Bank. This is one of the problems that the government must solve by promoting IMFIs as microfinance institutions that can be accessed by all levels of society in Pakistan (Ayaz et al, 2019). Meanwhile, in China, The anecdote which states that the use of interest is usury causes the Muslim community to try to avoid transactions using conventional banks.…”