ISLAMIC MICRO FINANCE BOUND TO CHANGE RURAL LIFESTYLE

AMANULLAH BASHAR
Sep 17 - 23, 2007

Pakistan is among the few countries in the world, which has a separate legal and regulatory framework for Microfinance Banks. The framework allows microfinance and commercial banks to extend range of microfinance services to poor and low income people through various arrangements.

With the growing popularity of Islamic Banking in the country, it was deemed necessary to provide options for provision of Islamic microfinance services by microfinance and commercial banks as well as allowing full fledged Islamic microfinance banks in the country.

Actually, the concept of micro-finance did not produce the desired results in Pakistan so far mainly because of much higher interest rates being charge by the conventional micro-finance companies.

The average interest rates with the exception of National Bank of Pakistan, ranges from 18-22 percent which in a way kills the concept of helping out a large segment of population living below the poverty line.

The recent initiative taken by the central bank to allow expansion of the Islamic Micro-Finance by allowing all the commercial banks (convention) to open special counters, branches, full fledged banks of Islamic Micro Finance is sure to facilitate people at the bottom line of the society from urban to remotest parts of the country. In fact, while talking about rural population in general or farmer's community in particular, the moneyed class of Zamindars and Waderas were enjoying the banking facilities because of their easy access to the banking system. Having strong political connections, the big land lords were not so worried even about the repayments of the agriculture loan that was the primary reasons for reluctance of banks to operate in rural areas. While the small farmers either had to access to banking system or they were reluctant to go for bank advances because of higher financial charges.

Under the Islamic Micro-Finance, the element of interest or mark up does not exist; the borrowers become the partners of the banks in profit and loss. It is expected that the initiative of the state bank by allowing all banks to carry on Islamic micro finance business would produce results as the concept is designed to induce a sense of entrepreneurship at the grass root level.

Consequently, State Bank of Pakistan has formulated guidelines for provision of Islamic microfinance products and services by financial institutions which are attached as annexure to this circular. These guidelines are aimed at broadening the coverage of microfinance products and services to low income segments of the society in a Shariah compliant manner. These guidelines stipulate four types of institutional arrangements for offering Islamic microfinance viz:

1. Establishing Full Fledged Islamic Microfinance Banks (IMFBs)

2. Islamic Microfinance Services by Full-fledged Islamic Banks

3. Islamic Microfinance Services by Conventional Banks

4. Islamic Microfinance Services by Conventional Microfinance Banks (MFBs).

It must be taken into account that the criteria mentioned in these guidelines shall be in addition to the requirements already issued by SBP under respective category of financial institutions. These regulations and guidelines, by any means, are not replacing the regulations and guidelines already issued by SBP from time to time in this area.

Commercial and microfinance banks interested in building Islamic microfinance portfolio should review the different institutional/organizational arrangements and select, one or the combination of more than one mode, based on their organization structure, capacity and overall objectives.

The conventional banks having Islamic Banking Branches interested in sponsoring an Islamic microfinance subsidiary may apply to SBP for issuance of a license to establish the Islamic microfinance bank under MFIs Ordinance 2001. The bank shall be required to submit the information and documents required under SMED Circular 10 of 2006 as well as s requirements for Islamic Microfinance banks mentioned above. However, the subsidiary may use the services of Shariah Advisor of their parent bank. Other requirement of establishing Islamic MFB shall be same as discussed under aforementioned heading "Establishing full-fledged Islamic microfinance bank".

Provision for offering Islamic Microfinance by Financial Institutions: Islamic microfinance services and products can be offered by various types of financial institutions, in different forms. Each type of financial institution has been separately discussed under the following headings in these guidelines:

1. Full-fledged Islamic Microfinance Banks (IMFBs)
2. Islamic Microfinance Services by Full-fledged Islamic Banks
3. Islamic Microfinance Services by Conventional Banks
4. Islamic Microfinance Services by Conventional Microfinance Banks (MFBs)

These guidelines are not intended to replace the regulations and guidelines already issued by SBP from time to time. It must be recognized that the under-mentioned criteria shall be in addition to the parameters already defined by SBP for each category of financial institutions.

OPTION 1. ESTABLISHING FULL FLEDGED ISLAMIC MICROFINANCE BANKS (IMFB):

LICENSING REQUIREMENTS:

Sponsors desirous of establishing full fledged Islamic microfinance banks shall be required to obtain a licence from State Bank of Pakistan under the Microfinance Institutions (MFI) Ordinance, 2001. This ordinance allows establishment of four categories of microfinance banks in the country viz:

1. Nation wide Microfinance Banks;
2. Province wide Microfinance Banks;
3. Region wise Microfinance Banks; and
4. District wide Microfinance Banks.

MICROFINANCE COUNTERS AT EXISTING BRANCHES

The Islamic microfinance products and services can be offered at both Islamic Banking and conventional branches. All the Islamic microfinance products and services shall be duly vetted by Shariah Advisor of the bank. There should be separate counter in the branch offering Islamic microfinance products and it should be prominently displayed in the premises that Islamic microfinance products are being offered in the branch. However, if the Islamic microfinance products are to be offered in conventional branches, all the documents including ledgers, registers, pay-in-slips, cheques, receipts, passbooks, etc. used for Islamic microfinance shall be appropriately marked, so as to easily distinguish them from the documents pertaining to conventional banking. Moreover, proper systems and control shall be in place to ensure that the fund transfer takes place on the same day to/from the nearest Islamic microfinance branch or if there is no Islamic microfinance branch in the nearest Islamic Banking Branch. The authorized branch(es) shall not, in any manner whatsoever, receive/pay interest on such services. The authorized branch(es) may charge a reasonable fee/commission on sale of such deposit/financing schemes under a policy to be approved by the management. Proper training in Islamic microfinance should also be provided to the staff of authorized conventional branches dealing with such products. Before launching the scheme, the information required in SMED Circular No. 10 of 2006 shall be submitted to Islamic Banking Department and SME and Microfinance Department alongwith its vetting from the Shariah Advisor.

The conventional banks having Islamic Banking Branches interested in sponsoring an Islamic microfinance subsidiary may apply to SBP for issuance of a license to establish the Islamic microfinance bank under MFIs Ordinance 2001. The bank shall be required to submit the information and documents required under SMED Circular 10 of 2006 as well as s requirements for Islamic Microfinance banks mentioned above. However, the subsidiary may use the services of Shariah Advisor of their parent bank. Other requirement of establishing Islamic MFB shall be same as discussed under aforementioned heading "Establishing full-fledged Islamic microfinance bank".