- A legal framework for Islamic microfinance should be developed, and implemented in true letter and spirit
Interview with Muhammad Farhan ul Haq Usmani — EVP & Head, Shariah Audit Department, Meezan Bank
Muhammad Farhan ul Haq Usmani holds a Baccalaureate in Business Administration and Commerce, Master’s and M. Phil. in Economics from the University of Karachi, Pakistan. He is also a Certified Islamic Banker from the Centre for Islamic Economics (CIE). His areas of research include Islamic Capital Markets, Shariah Compliant Funds & Asset Management, Islamic Banking Products & Services and Shariah Audit & Compliance.
Mr. Usmani joined Meezan Bank Limited in the year 2005 where his main areas of responsibility include Product Development & Implementation, Islamic Banking Policymaking & Implementation, Islamic finance training, Shariah Controls, Shariah Compliance & Audit, and Islamic Financial & Shariah Advisory.
He is a frequent national & international speaker and visiting faculty member at various leading institutions like NIBAF (National Institute of Banking & Finance), Institute of Business Administration (IBA), CIBES (COMMECS), Institute of Bankers Pakistan (IBP), CIE and others. He is also a founder member of the Karachi Stock Exchange’s Index Committee of KMI 30 Index, Pakistan’s First ever Shariah Compliant Index and KMI All Shares Index besides being a member of the SECP’s Committee for the promotion of Islamic Finance in NBFIs.
Mr. Usmani is also a member of the University of Karachi’s Corporate Advisory Board and Member University of Karachi’s ORIC’s Steering Committee, Member of the Academic committee of Centre for Islamic Economics (CIE), Member, Advisory Board – (CIBES) COMMECS and Member, Consultative Board – LUMS (CEIF).
PAGE: How would you comment on microfinance in Pakistan?
Muhammad Farhan ul Haq Usmani: As far as microfinance is concerned, it is a very important sector for the development and growth of the cottage industry and small enterprises and businesses. Specifically, for developing countries in developing economies you need finances since in these economies, usually, the businesses are high leveraged businesses. In such economies in order to upscale or even at a small level, to reach economies of scale and reduce the cost of business, these businesses require financing. From that perspective too and with Pakistan being an agrarian economy, we require value addition in our production, and being the 5th largest population in the world, in order to efficiently use our resources, adding value to our production, the role of microfinance is very important. Unfortunately, in Pakistan, microfinance is never implemented in the way it is required to flourish the small and cottage industry in Pakistan. Microfinance in Pakistan is the need of the hour at the same time very significant for the economic growth of Pakistan.
PAGE: What is your perspective on microfinance facilities for the cottage industry?
Muhammad Farhan ul Haq Usmani: My perspective about microfinance facilities for the cottage industry is that as mentioned earlier, the cottage industry is the backbone of the growth of the economy of any country. Even for the industrialized economy, a lot of allied products are produced through the cottage industry and hence microfinance is very important for the cottage industry as well. The cottage industry generally requires working capital financing and usually capex financing is not very common and if required, the volume is not very high. In short, the cottage industry is mostly dependent on the working capital facilities required. Mostly in seasonal businesses, cottage industries are usually in dire need of working capital financing.
PAGE: Could you tell us about default in the realm of microfinance?
Muhammad Farhan ul Haq Usmani: As far as default in microfinance is concerned, relatively its impact is not very high as compared to a large corporate. Having said this, if the credit evaluation, control and risk management framework in microfinance institutions are not in place then the risk could become high risk, which adversely impacts and may raise a question mark on the going concern of such institutions. One of the most important considerations is to create awareness of microfinance facilities for SMEs ad cottage industries that what facilities and probable solutions are available to them through microfinance.
On the other hand, they should be motivated by telling the benefits of maintaining a good credit history by making timely payments of obligations and what are the drawbacks and problems of having overdue in their outstanding facilities.
In addition, in case, if a microfinance institution or a cottage industry goes for deliberate and wilful default, a legal framework should be in place to support in realizing the overdue funds and the claims of microfinance institutions towards the borrower should be implemented in a timely manner.
We see that the judicial system takes a lot of time to settle a case which is an opportunity loss for the microfinance institution. Therefore, in order to mitigate the default risk, microfinance institution charges a high cost and hence at times microfinance institutions do not remain competitive with the cottage industry and individuals in terms of pricing.
PAGE: Your views on financing for Small and Medium Enterprises in Pakistan:
Muhammad Farhan ul Haq Usmani: In Pakistan, as is the case with the cottage industry, small and medium enterprises face similar challenges to upscale their business. In this regard, one thing which must be considered for development of the microfinance is belief.
State Bank of Pakistan and DFID – United Kingdom had conducted a joint study i.e. KAP Study (knowledge, aptitude and practices), in Pakistan’s banking sector, which revealed that people do not go for banking and financial products and services because it is based on Riba (interest) which is against their believe. So, the point is if such financial services are provided according to their believe through the Sharia-compliant modes and under the supervision of the Shariah Board or Shariah Advisors, we can provide these small industries access to finance besides enhancing financial inclusion in our economy, through the promotion of Islamic finance.
Awareness should be created and it should be implemented through public-private partnerships. If it is solely implemented through the private sector, it will lack authenticity and trust, especially among the general public. Similarly, the public sector would also not be able to reach out alone without partnering with the private sector.
The legal framework for Islamic microfinance should be developed and implemented in true letter and spirit. Further ease or convenience for availing finance facilities for microfinance customers is required through the use of technology and AI. There should be a few relaxations in terms of easy documentation like in banking account opening, a new type of account is introduced called “Aasaan” bank account which can be opened only with a valid CNIC. The introduction of these types of initiatives will surely enhance the finance outreach of the small and cottage industrial sector, besides enhancing financial inclusion in our economy.