For the last few years, Islamic financial institutions have been making inroads into the banking industry of Pakistan. Therefore, it was but natural for the State Bank to devise a proper regulatory mechanism for these institutions so that they become an integral part of the banking sector of the country.
The latest move in this direction is formulation of guidelines for provision of Islamic microfinance products and services by financial institutions. In a circular issued on 10th September, the State Bank said that Pakistan was among the few countries in the world having a separate regulatory and legal framework for microfinance banks which allowed these institutions to extend a range of microfinance services to poor and low-income people.
With the growing popularity of Islamic banks in the country, it was deemed necessary to provide options for provision of Islamic microfinance services by microfinance and commercial banks in the country. The new guidelines for provision of Islamic microfinance products and services are aimed at broadening the coverage of such products to low income segments of society in a Shariah compliant manner, and stipulate four types of institutional arrangements for offering Islamic microfinance.
These include establishment of full-fledged Islamic microfinance banks (IMFBs), Islamic microfinance services by full-fledged Islamic banks, Islamic microfinance services by conventional banks and Islamic microfinance services by conventional microfinance banks.
The criteria laid down in these guidelines will be in addition to the requirements already spelled out by the SBP under respective categories of financial institutions and would not replace other regulations and guidelines issued by the State Bank from time to time in this area.
Commercial and microfinance banks, interested in building Islamic microfinance portfolio, could select one or the combination of more than one mode, based on their organisational structure, capacity and overall objectives.
The above guidelines issued by the State Bank are obviously in response to the growing popularity of financial institutions engaged in offering Shariah-compliant products and services and the desire of the authorities to encourage microfinance business in order to increase self-employment and reduce poverty in the country.
Seen against this background, the fresh guidelines were necessary to promote Islamic microfinance institutions in an orderly fashion so as to achieve certain socio-economic objectives and bring them under the regulatory umbrella of the State Bank. The increasing interest of the State Bank in the establishment and functioning of Islamic financial institutions will certainly give confidence to the clients of these institutions in their solvency and fairness in dealings.
However, it may be added that Islamic microfinance institutions have to be much more vigilant than the conventional banks in extending loans and other facilities to the borrowers and their credit appraisal needs to be immaculate. Whereas conventional commercial banks offer loans at a predetermined rate which is easy to calculate beforehand, Islamic financial institutions have to share both profits and losses which could make their operations risky and unprofitable.
The existing Islamic financial institutions, it may be mentioned, are either much less profitable than the conventional banks or incurring losses on their operations which makes their existence suspect on a long-term basis. This, in a way, is a poor reflection on our moral standards and, with the passage of time, could discourage the growth of the Islamic financial institutions and put depositors' money at risk.
Also, Islamic financial institutions would be generally short of resources because of low deposit base and their inability to access institutional funds at a reasonable rate. Therefore, while these institutions have to give greater attention to their deposit mobilisation efforts, their investible resources could be augmented by providing them credit lines from conventional banks which, in turn, could get finances from the State Bank through their normal channels at the prevailing T. Bills' rate.
Such a facility could encourage them to provide loans to their clients at reasonable rates which would help improve their recovery rate further. Their high lending rates as at present could otherwise induce their clients to look for other options.
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