Pakistan’s Islamic banking and finance industry is expanding to new fields. Last week the State Bank of Pakistan, the central bank, granted its first licence to a microfinance bank and brought it into the Islamic mode.

At the same time, National Bank of Pakistan (NBP), the biggest commercial bank in the country, announced a plan to raise its own network of Islamic banking to 100 branches. The third development was that Standard Chartered Bank won the Islamic Finance Award-2015. It is expected it would attract other foreign-based banks to start Islamic banking in Pakistan.

The SBP’s decision to grant Islamic banking licence to National Rural Support Programme Microfinance Bank (NRSP-MB) of Bahawalpur paved the way for introduction of Islamic banking to a number of microfinance banks. In fact, more such banks are projected to come into the field to fund small businessmen, especially women entrepreneurs. The second, and crucial element is that a large number of these entrepreneurs are willing to go for Islamic financing instead of interest-based credit from conventional banks.

By its very nature and the financial status of its potential clients it will have to be low-cost, cheap financing. The NRSP-MB will provide Shariah-compliant banking services, experimentally. Its operations started in March 2011. It chiefly caters to the needs of farmers in 61 districts all over Pakistan but mainly in the low-income central Pakistan region.

Abid Qamar, SBP’s chief spokesman, said: “NRSP Microfinance Bank Limited has been allowed to start Islamic microfinance operations as a pilot project for six months. However, the licence will be issued after successful completion of the pilot-run and fulfillment of other requirements.”

Pakistan now has a total of 44 microcredit providers, of which ten are micro-banks, six rural support programmes, 16 specialised micro institutions and 12 run by non-governmental bodies. The SBP estimates microfinancing is currently available to 3.32 million clients, and as of March this year they had 507 outlets. It estimates their advances to clients at Rs41 billion and deposits at Rs42.48 billion.

Nadeeem Hussain, CEO of Tameer Microfinance Bank, said: “Under the Islamic microfinance, the customers will have an opportunity to pay low mark-up on the cash they draw from the bank. Microfinance credits are generally expensive for households and small entrepreneurs. The operational cost of to the micro-banks is generally higher than the conventional banks, because these banks get their funding from commercial banks.”

A look around micro banks indicates that they charge the borrowers an incredibly high mark-up of 20-30 per cent on loans. Imagine how expensive they are when compared to the SBP-set Discount Rate under the current Monetary Policy is just seven per cent – the last in more than a decade. As a result of the SBP’s low interest rate policy, the conventional banks’ interest rates have declined considerably. The micro bankers justify this high mark-up rate because “they cover the likely default in and repayment by borrowers.” But the fact is that their small entrepreneurs rarely delay or default. This is also the experience of the trail-blazing Grameen Bank of Bangladesh.

“NBP will expand the number of its Islamic Banking branches from the existing 50 to 100 by December 2015. Islamic banking services will be provided under the brand name of Aitmaad (confidence),” Mufti Ihsan Waqar Ahmed, Sharia Adviser to the bank said. Aitmaad customers will also be provided special ATM cards.

The good news for overseas Pakistanis, especially those working in the UAE, Saudi Arabia, the GCC, UK and US, is that NBP will facilitate home remittances via more than 1,000 of its conventional branches, in addition to the growing number of the existing and the planned Islamic branches.

Mufti Ahmed said: “The Islamic finance industry is the fastest growing segment of Pakistan’s financial services. NBP has also recognised that there is a big increase in the demand for Islamic banking products and services.”

He said that the bank clients would be offered its services to convert their existing conventional accounts into Islamic and Shariah-banking principle.

Syed Ibne Hassan, NBP spokesman, said: “The bank will go through an online focusing on global home remittances that will play a significant role in contributing to the economic growth and livelihood in Pakistan. Remittances will be available to the beneficiaries for collection at any of the NBP’s 1,360 branches nationwide, without having the need of maintaining an account.”

The NBP has just started its “Foree Transfer” (instant transfer) remittance service, which equally provides convenience, security and reliability to beneficiaries and remittance receivers in Pakistan having accounts in Pakistan.