Research Analyst
Sep 10 - 16, 2012

Presently, Pakistan's Islamic Microfinance is getting appreciation by the whole world particularly for alleviation of poverty and Muslim and non-Muslim countries are utilizing it. Although, Microfinance Institutions in Arab countries are also providing microfinance to Muslims which is in accordance with Islamic standards in order to get poor out of obscurity of poverty. Amongst these Arab Countries, Yemen is at the top of the list with other countries like Iraq, Syria, Jordan and Egypt. Islamic microfinance is the perfect opportunity for Islamic financial institutions (IFIs) to promote the humanitarian principles of Islam, and make a profit while doing so.

Islamic Banking is one of the fastest growing sectors of the financial industry. Microfinance, a division of finance ideologically compatible with Islamic finance, capable of Shariah-compliance and possessing a sizeable potential market, is a perfect fit for inclusion in IFIs' new products and services.

Microfinance is comprised of microcredit practices i.e., extension of very small loans, known as micro loans, to those who do not have access to traditional financial services due to lack of collateral, employment and credit history.

Around the world, conventional microfinance has failed and its examples can be clearly seen in India and Latin America. Due to the failure of conventional financial system, many countries in the world are adapting Islamic microfinance system for poverty alleviation through which not only poverty will be eradicated but also a sustained economy shall come into being in these countries.

One reason behind expansion of poverty is interest based mechanism in Muslim countries. People do not use financial and banking system due to interest, as it is strictly prohibited in Islam. They highlighted the need assessment of Islamic microfinance in Muslim countries by saying that 44 per cent of conventional microfinance clients live in Muslim countries and United Nations has added half of the countries of Islamic Development Bank in the list of least developed countries, which shows that Islamic microfinance can be used to eradicate poverty from Muslim-majority countries.

Pakistan has been acknowledged as a leader of Islamic microfinance industry and currently in Pakistan over 25 institutions are providing microfinance services. Through Islamic microfinance by using the financial products based on Shariah principles, the government can get the people out from poverty. Furthermore, the Islamic banking Industry (IBI) started its tenth year with expansion of 19 branches in first quarter with its asset base reaching to Rs. 644 billion constituting 7.7 per cent share of the overall banking industry in Pakistan. IBI has shown a marginal decline in its market share in terms of assets, however, in terms of deposits the share (8.4 per cent) has remained the same as of the last quarter; by end of the first quarter deposits of Islamic banking industry were Rs 530 billion. A concerning development is the rising non-performing financing (NPFs) that increased by 8.89 per cent during the quarter in contrast to only 1.00 per cent in the last quarter. However despite the surge in NPFs, the industry's earnings remained strong as depicted by ROA and ROE which is higher than that of overall banking industry.


Since the dawn of this 21st century, Islamic finance has undergone the most dramatic transformation to its landscape. In the current global economic environment of extraordinary challenges and uncertainties, Islamic finance is becoming very much a part of the global financial system, with OIC countries being the main suppliers of Islamic financial services. The last decade in the history of Islamic finance is remarkable for its many significant milestones and for the rapid growth that has been sustained. An important development during the last decade has been the growing significance of the international dimension of Islamic finance and its increased role in the international financial system. Continuing in the same vein, the Islamic finance industry has already witnessed a number of significant developments at the beginning of this decade. The significant international developments in the industry during 2011 were: The launch of IIBR was a significant leap towards achieving a fully Islamic capital market and decoupling Islamic finance industry from the conventional system. Since the establishment of the first Islamic commercial bank in 1975, the Islamic finance industry has been searching for an indigenous benchmark that can be used to value a wide spectrum of Islamic financial products ranging from short-term liquidity instruments to long-term investment instruments, such as Sukuk. IIBR is expected to fill an important gap by providing the Islamic financial institutions with a reliable alternative to conventional benchmarks such as the London Interbank Offered Rate (LIBOR). Although the IIBR is currently calculated from expected Murabaha returns for Shariah-compliant interbank funding denominated in US dollars, its instrument-neutral nature, as resolved by the IIBR Islamic benchmark committee, will no doubt pave the way for further expansion of its rate contribution base into other Islamic finance instruments, such as Mudaraba, Musharaka, Sukuk and Wakala, as these instruments are becoming increasingly widespread.

On the other hand, Oman, with its decision in May 2011 to permit new start-ups by Islamic banks in the country, aimed to tap into the regional demand for Shariah compliant financial services currently being met in other countries in the region, thereby curtailing the current outflow of Islamic investments from the country. In Qatar, the boundary imposed on the conventional banks is expected to provide opportunities for fully Islamic banks and encourage new conversions to Islamic banking.