Microfinance is just one tool in the war against poverty. For microfinance to be successful at poverty reduction, it must be used in conjunction with education, health, and other social interventions. Microfinance becomes a multiplier force in such a scenario. Not only does it reduce poverty, but it also creates an even playing field by bringing the marginalized population into the banking net. The reality is that this customer base pays an exorbitant price for the services that the banked population uses.
The microfinance industry has been successful in opening mobile accounts but has yet to make efforts to keep these accounts active. The microfinance industry has had healthy growth in Pakistan but now needs to grow exponentially if it is to become a major player in addressing financial exclusion and poverty. Apart from microfinance, agriculture and small business are critical sectors in Pakistan’s economy that play a significant role in job creation and poverty reduction.
Pakistan has a growing and vibrant microfinance industry. While it has existed over the past 20 years, the real growth has come in the past 15 years. Unlike Bangladesh and India, Pakistan has been able to use the branchless banking route to harness deposits. Pakistan has been ranked by the Economist Intelligence Unit as having one of the top three regulatory mechanisms in the world. The Securities and Exchange Commission of Pakistan (SECP) has also created regulations for the unregulated segment of the industry, further enhancing it. Besides, the industry must embrace the technological revolution taking place in Pakistan. It must harness the benefits of branchless banking. It must use the smartphone and data that exists in the smartphone, to provide solutions to those at the bottom of the pyramid.
Islamic Microfinance has great potential to provide support to the poor by providing financial services at their doorstep. The asset-based nature of Islamic modes of financing safeguards customers against misuse of financing and thus over-indebtedness. The regulatory environment for developing Islamic microfinance in Pakistan is quite conducive as detailed guidelines for the Islamic Microfinance industry including detailed licensing criteria are already available. Going forward, support is being provided by SBP to the Islamic microfinance industry for capacity building, coordination & collaboration among various stakeholders, focused research, and pilot projects to develop this sector.
While Islamic microfinance’s reach has increased considerably over the past few years, the provision of Shariah-compliant products is still in its early stage, in Pakistan and globally. At the same time, the overall demand for Islamic microfinance products seems to be overgrowing, and Pakistan is set to be one of the most promising markets.
Based on the current state of Islamic microfinance in Pakistan, there is huge potential for these providers to expand outreach in this niche market. This can be achieved by focusing on diversification in the range of products offered (going beyond credit products) as well as expanding geographic outreach, which is currently heavily concentrated in the province of Punjab.
Islamic microfinance offers an alternative paradigm for millions of poor people who are currently not served by conventional microfinance. In order to provide access to sustainable services on a scale, it is imperative for the industry to adopt innovative and sound practices and prove that these models work. To this end, the industry requires deeper market research and a comprehensive initiative to build the capacity of players at the micro and macro levels, in order to help in developing and implementing appropriate business models.
The need of the hour is that all stakeholders of the Islamic finance industry seek to engage with the broader microfinance and Islamic finance communities to find new ways to foster development and support this sector in the future. Given that the group of 2.5 billion unbanked includes a vast number of Muslims, expanding the availability of affordable and sustainable Shariah-compliant services can prove to be transformative for microfinance.