- Pakistan’s Islamic microfinance industry reached Rs 27.1 billion in assets, aiding economic growth and poverty alleviation
- Murabaha, Mudarabah, Musharakah, and Qard Hasan offer ethical financing, promoting financial stability in underserved communities
In the developing world international industry experts examined that lacking of access to financial services is considered as one of the major constraints on inclusive economic growth. It is the main constraint on the growth of micro, small and medium businesses – often the single source of income for poor households, which hampered employment opportunities, economic growth and shared prosperity.
It is said that Islamic microfinance shows the confluence of two rapidly growing industries: microfinance and Islamic finance. It has the potential to not only respond to unmet demand but also to combine the Islamic social rule of caring for the less fortunate with microfinance’s power to offer financial access to the poor.
Studies recorded that Islamic microfinance is still in its infancy, and business models are just emerging. One of the major objectives of Islam is to support the needy, and Islamic microfinance works to complete this objective.
As per the report issued by State Bank of Pakistan (SBP), the branch network of Islamic microfinance business (banking) in Pakistan consisted of 110 branches by end September, 2024. The assets size of the Islamic microfinance industry was registered at Rs 27.1 billion by end September, 2024 representing increase of Rs 2.4 billion i.e. 9.71 per cent as against to previous quarter. Likewise, deposits of Islamic microfinance banking institutions reached at Rs 17.3 billion by end September, 2024 showing increase of Rs 1.9 billion i.e. 12.33 per cent, whereas investments increased to Rs 6.1 billion from Rs 4.4 billion showing increase of 38.5 per cent.
No doubt, Islamic microfinancing has become an increasingly significant tool in Pakistan’s efforts to alleviate poverty and promote economic. Given the country’s socio-economic issues, Islamic microfinance institutions (IMFIs) offers an alternative to traditional banking services, helping underserved populations, mainly the poor and marginalized, access financial resources without compromising Islamic principles. Furthermore, Islamic microfinance is based on Shariah principles, ensuring that the financing is free from interest (riba) and follows ethical guidelines. Instead of charging interest, Islamic microfinance institutions (IMFIs) offer financing through Murabaha (cost-plus financing), Mudarabah (profit-sharing), Musharakah (joint venture) and Qard Hasan (benevolent loan). These modes of financing assist ensure that the poor do not fall into a cycle of debt driven by interest payments. In rural areas where the formal banking system is limited, small loans are extended to entrepreneurs, particularly women, enabling them to start or expand small businesses like agriculture, tailoring, or handicrafts.
Farmers and small traders can access financing for purchasing equipment, seeds, or livestock, directly enhancing their livelihoods and incomes. Moreover, Islamic microfinance institutions often target women, who traditionally have limited access to financial services.
By offering women with financing, they can engage in income-generating activities and contribute to family welfare. It also helps to improve the living standards of many poor households. Unluckily various poor individuals in Pakistan, especially in rural areas, may not fully understand the concept of Islamic microfinance or may be hesitant to approach these institutions because of cultural or religious reasons.
Although progress has been made, the reach of Islamic microfinance remains limited compared to traditional microfinance models, chiefly in remote or underserved regions. It is also said that sustaining the financial sustainability of microfinance institutions while ensuring that borrowers can repay loans remains a key challenge, especially when borrowers face external shocks like poor harvests or economic downturns. The Pakistani government has recognized the importance of microfinance in poverty reduction, and in 2025 it is hoped that, various initiatives are underway to support this sector.
Investments
In Pakistan during July to September 2024, Investments (net) of Islamic banking institutions (IBIs) grew by Rs 314 billion (7.0 per cent) and reached at Rs 4,803 billion by quarter close compared to previous quarter. The breakdown of investments (net) portfolio shows that Islamic Banks (IBs) investment grew by Rs 157 billion and stood at Rs 3,155 billion. Similarly, investment (net) portfolio of Islamic Banking Branches (IBBs) grew by Rs 157 billion to a total of Rs 1,648 billion by the end of September, 2024. In terms of share, IBs and IBBs investments (net) as percentage of total investments (net) reached at 65.7 per cent and 34.3 per cent respectively.
Deposits
The bifurcation of deposits among IBs and IBBs shows that the deposits of IBs increased by Rs 244 billion and reached to Rs 5,059 billion by end September, 2024 in our country. Similarly, IBB’s deposits declined by Rs 12 billion to reach at Rs 2,537 billion by the end of quarter. The share of IBs and IBBs in the overall deposits of IBI was recorded at 67 per cent and 33 per cent respectively, by September 2024.
Liquidity
During July to September 2024, Liquid Assets to Total Assets Ratio grew to 51.5 per cent in Pakistan, whereas Liquid Assets to Total Deposits Ratio grew to 67.0 per cent. While, Financing to Deposits (net) Ratio declined to 42.8 per cent by end September, 2024.
Capital
Capital ratios of IBI were observed to be increasing during July to September 2024. Capital to Total Assets Ratio grew to 8.5 per cent, whereas (Capital – Net NPAs) to Total Assets Ratio enhanced to 8.8 per cent which was previously recorded at 7.7 per cent.
Profitability
Profit before tax of IBI was recorded at Rs 381 billion at the quarter end September 2024. Meanwhile, earnings ratios i.e. ROA’ and ROE (before tax) were 5.4 per cent and 69.7 per cent, respectively. During July to September 2024, ‘operating expense to gross income’ of IBI was recorded at 34.1 per cent.