The role of islamic microfinance in poverty alleviation based on the perceptions of the key players in the market : the case of Pakistan

Abstract

This study raises the issues and challenges concerning the recognition of Islamic microfinance by the Islamic banks of Pakistan. This is based on perceptions of the key players in the market. The study gathered relevant information through conducting field surveys by employing convenience sampling technique, the most common of all sampling techniques. Two questionnaires were designed for the surveys. One questionnaire was administered to survey 270 micro-entrepreneurs and petty traders in three major cities of Pakistan including Rawalpindi, Lahore and Peshawar. Another survey deals with the perceptions of Islamic bankers and Shari‟ah scholars. 100 relevant respondents from middle and top managements related to Islamic banks were surveyed from five full-fledged Islamic banks of Pakistan. Three of the sample banks were selected from Islamabad and two banks from Lahore. The findings of the study are decomposed into two parts. Part 1 reveals the micro-entrepreneurs and petty traders‟ perspective, while part II focuses on the perspectives of Islamic bankers, regulators and Shari‟ah scholars. In general, the results indicate that presently, Islamic banking is not addressing the financing needs particularly of those micro-entrepreneurs who generally have preference for Shari‟ah-compliant finance. Islamic microfinance is constrained by lack of knowledge, experience and professionalism of supporting staff. Therefore, the majority of the Islamic bankers are not satisfied with the present structure for the implementation of Islamic microfinance. However, the Islamic bankers agreed that Islamic banks should offer Islamic microfinance and treat it separately from other products. Generally, both top and middle management agreed that Murabahah, Dimishing musharakah and Ijarah are most applicable models for Islamic microfinance schemes to the potential micro-entrepreneurs. On the other hand, micro-entrepreneurs and petty traders view Islamic microfinance as a preferred choice over traditional interest-based loans. Although, Islamic microfinance is a new concept, majority of respondents have basic understanding of this concept based on their Islamic knowledge and associations with social network. This study also examined the applicability of Theory of Reasoned Action (TRA) particularly in the context of Islamic microfinance among micro-entrepreneurs and petty traders of Pakistan. However, micro-entrepreneurs and petty traders expressed their dissatisfaction to the management of the Islamic banks. Moreover, the most consistent answer with major concerns from the respondents is that Islamic banks are same as conventional banks in dealings with clients. Therefore the findings could provide insights to Islamic banks in diversifying their products by offering Islamic microfinance to the low-income people but with proper guidelines and policies.