Salman Ahmed Shaikh
There are 5 full-fledged Islamic banks operating in Pakistan and more than 15 conventional banks with Islamic banking branches. The growth in Islamic finance industry has been consistently high ever since the establishment of Meezan Bank in 2002. The share of the industry in the banking system has risen to over 12 percent from just 0.5 percent in 2002.
Despite all this growth, none of the Islamic banks, either full-fledged or those with Islamic banking branches have ventured into Islamic micro finance in Pakistan.
This is not due to the fact that the target market is not sufficient to venture into micro finance business. Approximately, 40 percent of the labor force is employed in agriculture and this sector can be the main target market for micro finance. Poverty rate in Pakistan according to some estimates has risen to 43 percent. Pakistan has huge supply of young labor aged between 15 and 40 and it has sixth largest labor force in the world.
Informal credit markets already exist and recovery rates are higher i.e. 95 percent offering a great opportunity for sustainable growth. Density of population is high and therefore, transaction costs for most process are lower. Since interest rate charged in informal credit markets is usurious (as high as 50 percent or even more), the affordability of the products is also not a problem since formal institutions would target a much lesser required rate of return.
Part of the reason behind negligence of micro finance by Islamic Financial Institutions (IFIs) is to do with their management. The principal investors behind such institutions have limited inclination and vision for having an Islamic economic framework. Islamic banking and finance for them is a new niche market to enter and diversify.
In Pakistan, conventional banks with Islamic banking branches are twice more in number than the full fledged Islamic banks. With dual operations, egalitarian initiatives can’t be expected from them. Also, Islamic banks can not be expected to come to the rescue due to lack of both vision and will. It is signified by the fact that despite having huge liquidity at their disposal, Islamic banks have extremely low advance to deposit ratio (as low as 34%) and due to which, their spreads are higher than conventional banks.
Institutions like Akhuwat with uncomplicated procedures and humble setup had disbursed billions of rupees worth of loans without interest with 99% recovery rate. Likewise, the need of the hour for Islamic banks is to venture into micro finance and lead this sector.