Page 52 - CMA Journal (Mar-Apr 2025)

Islamic Microfinance: A Catalyst for
Focus Section

Small Business Empowerment in Pakistan

Pakistan’s economic landscape is significantly shaped by • Musharakah
the dynamism of its small and medium-sized enterprises (partnership):
(SMEs). With over 3.2 million SMEs operating across the Both parties
country, these businesses contribute nearly 40% to the contribute capital
national GDP and employ approximately 80% of the and share profits
non-agricultural labor force. They span a wide range of and losses
industries, from manufacturing and retail to services and according to
agriculture-related enterprises, playing an indispensable pre-agreed ratios.
role in job creation, innovation, and income generation.
However, despite their substantial contribution to the • Qard Hasan
economy, these businesses frequently encounter (benevolent
formidable challenges, chief among them being loan): A zero- Sarah Safdar, ACMA
restricted access to formal financial services. interest loan Unit Head -RM, Corporate and FI
provided purely for Export- Import Bank of Pakistan
According to the State Bank of Pakistan, less than 5% of welfare purposes,
SMEs have access to formal credit, highlighting a glaring requiring only the principal repayment.
gap in financial inclusion. Traditional financial institutions
often consider small businesses high-risk due to their These instruments are structured to maintain the dignity
limited collateral, informal operational practices, and of the borrower while ensuring that financial assistance is
volatile cash flows. As a result, entrepreneurs are either extended in a fair, transparent, and ethical manner.
left to self-finance their ventures or seek informal
sources, often at exploitative interest rates. In this Why Islamic Microfinance is Suitable
context, Islamic microfinance emerges as a vital for Pakistan
solution—a culturally relevant and ethically aligned
system of finance that addresses both the spiritual 1) Cultural and Religious Compatibility - In a
sensitivities and financial needs of Pakistan’s country where over 95% of the population practices
predominantly Muslim population. Islam, financial instruments that align with religious
beliefs are more likely to gain acceptance and trust.
Understanding Islamic Microfinance Many potential borrowers avoid conventional
finance due to the involvement of interest, which is
Islamic microfinance is a hybrid model that combines the
considered exploitative and un-Islamic. Islamic
outreach and objectives of conventional microfinance
microfinance, by offering Shariah-compliant
with the principles of Islamic banking and finance. It
alternatives, encourages a broader segment of the
provides financial services to low-income individuals and
population to engage with financial institutions.
small business owners, adhering strictly to Shariah
This cultural resonance enhances credibility and
(Islamic law). The core principles of Islamic finance
acceptance, leading to higher participation rates,
prohibit the payment or receipt of Riba (interest),
especially in conservative rural areas.
promote risk-sharing, ensure transactions are backed by
tangible assets, and emphasize ethical investment that
2) Enhancing Financial Inclusion - Pakistan has a
avoids sectors deemed harmful under Islamic tenets,
notably low level of financial inclusion. According to
such as alcohol, gambling, and weapons.
the Global Findex Database, nearly 100 million adults
in Pakistan remain unbanked, with women and rural
Some of the most commonly used Islamic microfinance
populations being disproportionately excluded.
instruments include:
Islamic microfinance can play a transformative role in
• Murabaha (cost-plus sale): The financier buys an bridging this gap by offering tailored products that
item on behalf of the client and sells it to them at a address the spiritual and economic needs of
markup, with the price and profit margin agreed marginalized communities. Institutions like Akhuwat
upon in advance. and Islamic Relief have already demonstrated success
in reaching communities often overlooked by
• Ijarah (leasing): The financier purchases an asset
conventional banks.
and leases it to the client for a fixed rental fee over a
specified period.
50 ICMA’s Chartered Management Accountant, Mar-Apr 2025