Islamic microfinance showing signs of germination

You have heard about Islamic finance, you have heard about Islamic investment and you have also heard about microfinance. But most likely you have heard little about Islamic microfinance - a niche that is likely to emerge over the course of years in Pakistan as the microfinance industry finds a new direction to cater to the religiously inclined rural and sub-urban population of the country.
The move in discussion is the recently signed MoU between the Al-Huda Centre of Islamic Banking and Economics and Asasah - a Lahore-based microfinance institution that plans to offer Islamic microfinance products with the help of the former and gradually Islamize all its conventional microfinance operations within the next one and half years, paving way to launch a Islamic microfinance bank.
"Once all the operations are converted into Islamic microfinance and we have tested the model, then we will apply to the State Bank to get the license for an Islamic microfinance bank," Imran Jaffery, Asasahs Enterprise Development Manger told BR Research.
Jaffery says the idea sparked when his colleagues encountered resistance against riba-based microfinance amongst the rural population his NGO caters to - an argument that is a reflection of several earlier studies.
Despite having a predominantly poor population (more than 50 percent according to last economic survey) only 600,000 people in Pakistan received microfinance in 2005, according to a USAID study. Although this was significant growth from 60,000 in 1999, and must have grown even further as of today, it leaves many people out. While some people not using microfinance are just not interested in it, many may opt out of conventional microfinance due to its reliance upon interest-based financing, prohibited by Islam as riba.
Islamic microfinance represents the convergence of two rapidly growing industries in the country: microfinance and Islamic finance. It has the potential to not only respond to unmet demand but also to combine the Islamic social principle of caring for the less fortunate with microfinances power to provide financial access to the poor.
Unlocking this potential could be the key to providing financial access to millions of poor many of whom currently reject conventional microfinance products that do not comply with Islamic law. But while it may be a growing industry with plenty of exploreable potential, three major challenges still loom.
First, there is a dearth of scholars. Although data for Islamic scholars involved in microfinance industry hasn been widely compiled as such, that compiled for the Islamic banking and investment industry - a much bigger industry - provides a clue.
Funds@Work, a global investment consulting firm, says top five scholars make up almost a third of all the 956 sharia board positions across the world, and top three sit on more than 60 boards each. Second, there are variations in the interpretation of Islamic finance. Experts say, the industry has seen a myriad of differences in opinion over permissibility, and its not just in Pakistan but all across the globe. Third, and on a related note, Islamic microfinance industry lacks a regulator. While the State Bank has issued regulations for both micro finance and Islamic microfinance, industry watchers say almost 80 percent of microfinance lending carried out in Pakistan is being done by NGOs i.e. they are outside the ambit of the central bank.
Even globally, there is no country known to regulate the Sharia jurisprudence to be used by Sharia Supervisory Boards in judging Sharia compliance of Islamic banks and investment firms, let alone Islamic microfinance. Can the industry, meet these challenges, one wonders.