Towards a Sustainable Islamic Microfinance Model in Pakistan

By Salman Ahmed Shaikh

Abstract

According to SDPI estimates, poverty rate in Pakistan has increased sharply, especially in rural areas. Some 58.7 million Pakistanis are classified as poor while Microfinance beneficiaries are only 2.8 million people. The progress and penetration of Islamic Microfinance is even more insignificant in relation to the enormous underdevelopment challenges faced by Pakistan. In this paper, we document the progress of Islamic Microfinance in Pakistan and build the case of its importance for Pakistan and for the Islamic finance industry. We also document the various business models and institutional structures used in practice for offering Islamic Microfinance products and services. We also document the regulatory environment under which Islamic Microfinance products can be offered in Pakistan. We explain the two basic models of Islamic Microfinance using a mathematical representation. The paper highlights the reasons why Islamic Microfinance in particular and Microfinance in general is not growing as rapidly as it should have given the level of underdevelopment and poverty in the country. Lastly, we propose how standardized screening and complimentary operations of NGOs and commercial IMFIs together with fiscal and monetary support can make Islamic Microfinance sustainable and commercially viable.