KARACHI: SAFCO Microfinance Company Ltd (SMCL), one of the smaller players in an overwhelmingly interest-based microfinance industry, announced on Friday it has set up its inaugural Sharia-compliant branch in Hyderabad.

Unlike commercial banking in which Islamic players have carved out a solid market share of more than one-fifth, the microfinance industry is still dominated heavily by conventional banking players. Established in 2022, SMCL already operates 55 conventional microfinance branches in different districts of Sindh.

Speaking to Dawn on Friday, SMCL Managing Director Syed Sajjad Ali Shah said he plans to gradually convert the entire portfolio of the microfinance institution into Sharia-compliant in the next few years.

“One, there’s high demand for Islamic microfinance. Two, the Supreme Court has asked the financial sector to become Sharia-compliant, and we just want to be ahead of the game,” he said.

Only a handful of the 50-odd microfinance providers currently offer Sharia-compliant services. About 8pc of 9.2 million active borrowers received Sharia-compliant credit in the January-March quarter of 2023, according to the Pakistan Microfinance Network.

Similarly, the share of Islamic loans in the microfinance industry’s total gross loan portfolio of Rs510 billion was also 8pc at the end of the first quarter of 2023.

The pace of conversion from conventional to Islamic microfinance depends in large part on the availability of liquidity from large Islamic banks, said Mr Shah.

SMCL is a microfinance institution, which means the State Bank of Pakistan doesn’t allow it to mobilise deposits like its peers under the category of microfinance banks.

As a result, the company faces funding constraints like all other microfinance institutions. Therefore, it relies mainly on loans from commercial banks to generate liquidity for onward lending to small borrowers.

In other words, SMCL can’t grow its Sharia-compliant business unless it secures sufficient loans from large Islamic banks. But only Meezan Bank Ltd and Faysal Bank Ltd are enthusiastically providing microfinance institutions with liquidity at present,

Mr Shah said while urging large Islamic banks to up their game and be aggressive in their support for the Islamic microfinance industry.

Speaking to Dawn, Meezan Bank Ltd Senior Executive Vice President Ahmed Ali Siddiqui said the country’s largest Islamic bank has extended a financing line of Rs100 million to SMCL, which will help it increase its footprint in the Sharia-compliant segment.

In addition, Meezan Bank Ltd has also extended to SMCL its technical support for product development, capacity building and training of human resources, said Mr Siddiqui.

Published in Dawn, November 11th, 2023