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 micro-financing 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