MPRA

Towards a Sustainable Islamic Microfinance Model in Pakistan

Salman ahmed Shaikh

National University of Malaysia

  1. May 2014

Online at https://mpra.ub.uni-muenchen.de/68748/

MPRA Paper No. 68748, posted 11. January 2016 14:50 UTC

Towards a Sustainable Islamic Microfinance Model in Pakistan

Salman Ahmed Shaikh[1]

Abstract

According to SDPI estimates, poverty rate in Pakistan has roughly returned to the mid-thirties level of the 90s era. Some 58.7 million Pakistanis are classified as poor while Microfinance beneficiaries are only 2.35 million people. The progress and penetration of Islamic Microfinance is even more insignificant in relation to the enormous underdevelopment challenges faced by Pakistan. In this paper, we document the progress of Islamic Microfinance in Pakistan and build the case for its importance for Pakistan and for the Islamic finance industry. We also document the various business models and institutional structures in vogue in offering Islamic Microfinance products and services. We also document the regulatory environment under which Islamic Microfinance products can be offered in Pakistan. We explain the two basic models of Islamic Microfinance using a mathematical representation. The paper highlights the reasons why Islamic Microfinance in particular and Microfinance in general is not growing as rapidly as it should have given the level of underdevelopment and poverty in the country. Lastly, we propose how standardized screening and complimentary operations of NGOs and commercial IMFIs together with fiscal and monetary support can make Islamic Microfinance sustainable and commercially viable.

Keywords Microfinance, Microcredit, Islamic Microfinance, Islamic Banking, Islamic Finance, Poverty

JEL Codes L38, I31, O10

1. Introduction

Islamic banking and finance industry has achieved substantial growth on a global scale since the dawn of the new millennium. In the middle of the financial and economic crisis of 2007-10 and even afterwards, the Islamic banking and finance industry has witnessed significant growth in double digits.

In Pakistan, Islamic banking has achieved market share of almost 9% in the total banking industry. Currently, there are 5 full-fledged Islamic banks and 18 other commercial banks that operate Islamic banking windows alongside conventional banking in Pakistan.

Figure 1 shows the growth in assets, deposits and advances in Islamic banking industry in Pakistan for the period 2006-12. It can be seen that the growth had been exponential and uninterrupted

Figure 1: Growth in Islamic Banking Assets, Deposits & Advances

Source: Islamic Banking Bulletin, SBP, Various Issues

Having said that, despite this unprecedented growth, none of the Islamic banks, either fullfledged or those with Islamic banking branches have ventured into Islamic Microfinance in Pakistan.

This trend of events is not due to low profitability. Figure 2 shows the profitability in Islamic banking during the period 2006-12 in Pakistan as measured by the accounting ratio, Return on Equity (ROE). It can be seen that initially some banks took time to consolidate and reach break even, but in later periods, they have registered strong growth with ROE reaching even 18% and sustaining to be in double digits despite the security, energy and fiscal crisis in the country.

Figure 2: Profitability Growth in Islamic Banking

Source: Islamic Banking Bulletin, SBP, Various Issues

Likewise, lack of attention towards Islamic Microfinance can also not be explained by lack of liquidity. Figure 3 reports declining advance to deposit ratio in Islamic banking over the period 2006-12.

Figure 3: Advance to Deposit Ratio in Islamic Banking

Source: Islamic Banking Bulletin, SBP, Various Issues

At least part of the reason behind negligence of Microfinance by Islamic Financial Institutions (IFIs) is to do with their management. The principal investors behind such institutions have limited inclination and vision for having an Islamic economy and mostly Islamic banking and finance for them is a new niche market.

In this paper, we document the progress of Islamic Microfinance in Pakistan and build the case for its importance for Pakistan and for the Islamic finance industry. We also document the various business models and institutional structures in vogue in offering Islamic Microfinance products and services. We also propose how the business models and operations can be standardized so as to make the operations more cost effective and pave way for more commercial investment in this sector.

The paper proceeds as follows. In section 2, we show the current progress in Islamic Microfinance in Pakistan and the regulatory environment through which Islamic Microfinance products can be offered in Pakistan. In section 3, we highlight the need for Islamic Microfinance in Pakistan by citing several economic indicators. In section 4, we explain the various models of Islamic Microfinance using mathematical representation. In section 5, we note reasons why Islamic Microfinance in particular and Microfinance in general is not growing as rapidly as it should have given the level of underdevelopment and poverty in the country. Lastly, in section 6, we propose how standardized screening and complimentary operations of NGOs and commercial IMFIs together with fiscal and monetary support can make Islamic Microfinance sustainable and commercially viable.

2. Current State of Islamic Microfinance in Pakistan

According to the State Bank of Pakistan (SBP) guidelines for setting up Islamic Microfinance institutions, following are the possible modes of organizing Islamic Microfinance operations:

  • Establishing Full-fledged Islamic Microfinance Banks (IMFBs) o Nationwide o Province wide o Region wide
  • Islamic Microfinance Services by Full-fledged Islamic Banks o Mode 1- Islamic Microfinance Counters at Existing Branches  o Mode II- Standalone Islamic Microfinance Branches & Mobile Banking o Mode III- Establishing Independent IMFBs as Subsidiaries of Banks o Mode IV- Developing Linkages with Islamic MFBs/MFIs
  • Islamic Microfinance Services by Conventional Banks o Mode 1- Islamic Microfinance Counters at Existing Branches  o Mode II- Standalone Islamic Microfinance Branches & Mobile Banking o Mode III- Establishing Independent IMFBs as Subsidiaries of Banks o Mode IV- Developing Linkages with Islamic MFBs/MFIs
  • Islamic Microfinance Services by Conventional Microfinance Banks (MFBs)


    • In Pakistan, the minimum capital requirement for different MFBs is as follows:

    Table 1: Minimum Paid-up-Capital Requirement for MFBs

    Type of Institution Minimum Paid-up-Capital (in mln Rs.)
    Nation wide MFBs 1,000
    Province wide MFBs 500
    Region wide MFBs 400
    District wide MFBs 300

    The MFBs are also required to maintain Capital Adequacy Ratio (CAR) equivalent to at least 15% of their risk-weighted assets.

    Currently, there is no Islamic Microfinance bank in Pakistan at the moment. Akhuwat, Wasil, Farz Foundation and Naymet are the major institutions offering Islamic Microfinance through Qarz-e-Hasan and Islamic modes of financing which mostly include Murabaha, Ijarah and Salam.

    In Table 2, we report the most recent statistics issued by Akhuwat in 2013. Akhuwat with uncomplicated procedures and humble setup had disbursed Rs 8 billion worth of loans without interest with 99% recovery rate. Qarz-e-Hasan is the major mode used for disbursing loans. The different products include:

    • Family Enterprise Loan.
    • Liberation Loan.
    • Education Loan.
    • Health Loan.
    • Emergency Loan.
    • Housing Loan.
    • Marriage Loan.
    • Silver Loan.
    • Akhuwat Mutual Support Fund.

    Table 2: Progress Indicators of Akhuwat

    INDICATOR TOTAL
    Total Benefiting Families 460,612
    Loans Utilized by Males Entrepreneurs 287,171
    Loans Utilized by Females Entrepreneurs 173,441
    Amount Disbursed PKR 7,200,613,842
    Percentage Recovery 99.83%
    Active Loans 208,303
    Outstanding Loan Portfolio PKR 2,187,119,606
    Number of Branches 256
    Number of Cities and Towns 136

    In Table 3, we report the progress indicators of Wasil for the year 2010 since recent data is not reported by the organization. Wasil also provides loans using Islamic modes of financing which enable it to generate profits on sale and lease of assets. As is the case generally with Microfinance institutions, the yield on loan portfolio as well as recovery rates are higher.

    Table 3: Progress Indicators of Wasil

    INDICATOR TOTAL
    Assets PKR 210,306,895
    Gross Loan Portfolio PKR 131,516,885
    Yield on gross loan portfolio 31.88%
    Write off ratio 9.41%
    Active clients / staff members Times 74
    No of active borrowers 12,897

    Wasil provides a range of business development services delivered through the platform of Micro Enterprises Support Services and Advocacy Cell (MESSAC). The programs include vision & skills enhancement sessions, value addition to products and processes and redesigning service outlets and branding.  

    In Table 4, we report the progress indicators of Naymet. It basically provides loans using Qarze-Hasan and Murabaha with respective shares of 43% and 57% in the loan portfolio.

    Table 4: Progress Indicators of Naymet

    INDICATOR TOTAL
    Murabaha Portfolio PKR 4,350,000
    Qarz-e-Hasan Portfolio PKR 5,744,632
    Income PKR 14,330,608
    Total Assets PKR 10,740,429
    Income to Loan Portfolio Ratio 1.41

    The different products of Naymet include:

    • Islamic Enterprise Loan (Qarz-e-Hasan).
    • Marriage Loan.
    • Social Development Loan.
    • Islamic House Renovation Loan.
    • Technical Training of Unemployed Youth.
    • NGO Networking Loan.
    • Sustainable Livelihood program through Goat farming, poultry farming & kitchen gardening.

    3. Need for Islamic Microfinance in Pakistan

    Half of global poverty resides in Muslim world while the Muslim population is 24% of the total global population. Islamic Microfinance is just 1% of the total micro financing of the world. Microfinance reach is low because of voluntary and involuntary financial exclusion. Involuntary exclusion is due to supply side constraints like lack of collateral and high cost of operations. Voluntary exclusion is due to religious reasons. Most Muslims do not opt for interest based modes of financing.

    In Pakistan, Naveed & Ali (2012) in a most recent study conclude that as many as 58.7 million people in Pakistan are living in multidimensional poverty with 46 per cent of rural population and 18 per cent of urban households falling below the poverty line.

    In table 5, we report Microfinance penetration in Pakistan. It can be seen that only 2.35 million people out of 58.7 million poor people are served with Microfinance. It shows that only 4% of the potential target market is currently served with Microfinance.

    Table 5: Microfinance Penetration

      Micro-Credit Micro-Savings Micro-Insurance
    Period Active Borrowers Value (in mln Rs.) Active Savers Value (in mln Rs.) Policy Holders Value (in mln Rs.)
    2011-12 2,090,617 28,959 3,692,909 12,924 2,439,890 28,203
    2012-13 2,355,943 38,238 4,682,422 24,974 2,854,194 36,054
    % Change 13% 32% 27% 93% 17% 28%

    Source: Pakistan Microfinance Network

    In Pakistan, inflation had remained in double digits during the last decade and real incomes for people in bottom pyramid had not increased. To make the task more challenging, in-migration rate in small number of mega cities is as much as 2% per annum. Almost all in-migrants become part of the urban labor force right after migration. This together with natural rate of increase in population brings 4% additional labor force in urban areas seeking employment. This pressure had resulted in unemployment rate in urban areas exceeding the unemployment rate in rural areas as can be seen in Figure 4.

    Figure 4: Unemployment Rate in Rural & Urban Areas

    Source: Economic Survey of Pakistan 2012-13

    Hence, Islamic banks and conventional banks with Islamic banking branches in urban areas can use their existing branch network to cater to Microfinance needs in urban areas. Documentation, collateral and contract enforcement problems are also less challenging in urban areas as compared to the rural areas.

    Nevertheless, rural areas also require attention since 46% of rural population is living below the poverty line. High labor force participation rate and low unemployment rate in rural areas had still not been able to reduce rural poverty. This phenomenon hints at more exploitative labor management practices in rural areas. Islamic Microfinance by increasing the availability of income generating assets in the hands of the rural poor can contribute in generating selfemployment and reducing rural poverty.

    Figure 5: Labor Force Participation Rate in Rural & Urban Areas

    Source: Economic Survey of Pakistan 2012-13

    Furthermore, Islamic finance industry itself is in search of a distinctive identity in terms of its achievement and contribution rather than the differences in contract mechanics alone. El-Gamal (2008) criticized that currently, the emphasis in Islamic finance is on contract mechanics and certification of Islamicity by “Shari’ah Supervisory Boards”. Ismail (2011) also stated that recent growth experience and product innovation directed towards coming up with more sophisticated products using debt based structure exhibit that growth has taken more precedence over Shari‟ah compliance in letter and spirit. Hence, venturing into Islamic Microfinance can also provide more legitimacy and support to the Islamic finance industry and its search for models to realize egalitarian distribution of income.

    4. Islamic Microfinance Business Models

    Obaidullah (2008) explained that there are two broad categories of Islamic Microfinance models that are globally used:

    • Charity-Based and Not-For-Profit Models
    • Market-Based and For-Profit Models

    Charity-Based and Not-For-Profit Modes includes Qarz-e-Hasan, Waqf and Zakah funds for providing non-compensatory loans or non-repayable grants. Market-Based and For-Profit

    Modes include Micro-Credit using Murabaha, Micro-Leasing using Ijarah and Micro-Equity or a Composite Model of Microfinance which is a hybrid of these modes.

    Equity based modes are usually not used because of agency problems. Bacha (1997) highlighted serious agency problems in Mudarabah and argued that it lacks the bonding effect of debt financing and can induce perverse incentives. Using scenario analysis, he showed that for a „borrower‟ faced with the alternative of using Mudarabah, debt or equity financing, Mudarabah would be best in a risk-return framework. For a financier faced with the same three alternatives however, Mudarabah financing would be the worst. Likewise, Khalil et al. (n.d), Dar & Presley (2000), Warde (1999) and Rosly & Zaini (2008) also highlighted the structurally chronic agency problem in Mudarabah.

    State Bank of Pakistan in its report „Financial Stability Review for 2007-08‟ commented on the issue in following words:

    “In fact the agency problem is one of the major factors for the reluctance on the part of banks to undertake equity based modes of financing, as it gives entrepreneurs the incentive to understate profits.” (p. 7, Chapter 8).

    4.1. For Profit Business Models

    The basic structure of Islamic Microfinance banking can be explained mathematically as follows. First, an Islamic Microfinance bank creates an asset pool (AP) which consists of bank‟s equity (E) and deposits (D). Deposits include two further classifications, i.e. remunerative deposits (RD) and non-remunerative deposits (NRD). RDs are mobilized using partnership mode „Mudarabah‟ with bank‟s shareholders and depositors as partners. Profit sharing ratio is agreed at the start of this partnership. NRDs are mobilized using Qarz (noncompensatory loan).

    Mathematically, we have:

    AP = E + RD + NRD ….. (i)

    This pool of assets is used to provide asset backed financing (ABF). In an Islamic Microfinance banking model:

    AP = ABF ….. (ii)

    ABF consists of various financing assets based on different underlying financing contracts, i.e. Ijarah, Diminishing Musharakah, Murabaha, Istisna etc. Islamic bank does not lend money. It provides asset backed financing in which the asset is owned by the bank. These financing modes can be categorized as lease based financing (LBF) or credit sale based financing (CSBF).

    Hence, (ii) can also be written as:

    AP = ABF = LBF + CSBF ….. (iii)

    Income stream is generated either through profit on credit sale or rent for the use of asset.

    Hence, income (I) comes in the form of rent (R) or profit on sale (P).

    I = R + P ….. (iv)

    If R is some proportion of LBF and P is some proportion of CSBF, then (iv) can also be written as:

    I = α LBF + β CSBF ….. (v)

    Islamic banks use the same interbank benchmark rate (KIBOR) for pricing assets in credit sale for profit determination and computing rentals necessary to amortize the cost of asset during lease period. We can assume the average rental rate or profit rate to be same except for term premia and counterparty risk premia in customized financing assets.

    I = r x (LBF + CSBF) ….. (vi)

    Where „r‟ is average rental and profit rate.

    Replacing AP for (LBF + CSBF) in (vi), we can see that income is distributed among the contributors in pool, including bank‟s shareholders and depositors. To achieve spreads for financial intermediation function, profit sharing is done between bank and depositors as per the pre-agreed profit sharing ratio.

    I = PSRRD I + PSRB I ….. (vi)

    Where, I = IRD + IB. IRD represents income share of depositors and IB represents income share of the bank.

    In a non-depository Islamic Microfinance institution, the asset pool (AP) will comprise of bank‟s equity only.

    4.2. Not for Profit Business Models

    The basic structure of not-for-profit Microfinance model can be explained mathematically as follows. First, an Islamic Microfinance institution creates an asset pool (AP) which consists of bank‟s equity (E) and donations (D). Donations include Zakat funds, voluntary charity payments by individuals and institutions. It may also include aid and grants provided by government or other donors.

    Mathematically, we have:

    AP = E + D ….. (i)

    This pool of assets is used to provide Qarz-e-Hasan (Q). In this model:

    AP = Q ….. (ii)

    In the next period, the fee income (I) net of expenses is again reinvested in asset pool from which more non-compensatory loans (Q) are provided. In some institutions like Akhuwat, the beneficiaries also become donors later and hence enhance the asset pool (AP) which makes the model sustainable from the supply side.

    5. Issues in Commercial Viability of Islamic Microfinance

    5.1. Lack of Collateral

    Most poor people do not own much valuable fixed assets. Hence, they are unable to furnish collateral and hence remain underserved by the commercial banks. Even the assets they own like land, livestock, furniture etc are not admissible as collateral by the commercial banks.

    Islamic Microfinance institutions providing asset backed financing have this in-build cushion that all their financing activities are real asset backed. For some cases, hypothecation of client‟s assets can be used for collateral besides the personal and third party guarantee. However, collateral is not much of an issue with recovery rates of as high as 99%.

    Komi & Croson (2013) also find significantly higher compliance rates for the Islamiccompliant contracts (profit-sharing and joint venture) than for the traditional contract (interestbased).

    Especially in rural areas, poor villagers have limited capacity to enter in corruption. They can hardly migrate abroad. Poor villagers are members of a family system and people have closer relations with other families in the villages.

    5.2. High Cost of Operations

    Commercial banks look for serving bigger clients by offering large credit lines on long term basis to reduce cost per each fresh loan. In Microfinance, the fixed cost of administering a small loan is usually high.

    Islamic banks can economize on their operations by using their existing branches and subbranches as well as the existing staff. Since banks currently employ human resource usually on permanent basis for branch operations, the additional work can still be delegated without much additional human resource hiring. For Qarz-e-Hasan, the Islamic banks can forgo the service charge or substantially reduce it if client repays the loan or installment due by coming to the branch office himself.

    5.3. Incompatible Monetary & Fiscal Policies

    What further discourages the commercial banks to not venture in Microfinance is the tendency for government of Pakistan to keep large fiscal deficit (8% of GDP) and heavy reliance on indirect taxes (60% of total taxes) to fill exchequer. High fiscal deficit means that government crowds out private sector borrowers and finance its deficit at high domestic interest rates. Domestic interest rates have to be kept higher by the central bank to control inflation fueled by indirect taxes, high negative trade balance, currency depreciation and monetization of public debt.

    Hence, when better yields are offered to commercial banks on the purchase of sovereign securities, the high-risk high-return based Microfinance remains much less of an attraction.

    6. Towards a Standardized Cost Effective IMF Model

    In this section, we discuss how commercial viability of Microfinance can be ensured through standardized processes.

    6.1. Standardized Client Screening

    Recently, there have been attempts by the government to create profile of poor people by identifying and collecting information on their demographics for various government sponsored welfare programs. Microfinance institutions can benefit from such expensive and time taking exercise by not having to reinvent the wheel.

    In Table 6, we present a brief, but a comprehensive survey form which can be filled for each client to ensure client screening before judging whether the client is eligible or not.

    Table 6: Client Screening Form

    Demographic Information Response
    Age (in years)  
    Gender
    Household Size (in nos.)  
    Number of Dependents (in nos.)  
    Earning Members in Family (in nos.)  
    Income / Wealth Related Information  
    Household Monthly Income (in Rs.)  
    Liquid Assets Historical Price Market Value
      –   Cash in Hand    
      –   Savings Funds (Bisee)    
      –   Other Receivables    
      –   Gold Jewelry    
      –   Other Jewelry    
      –   Other Liquid Assets    
    Fixed Assets Historical Price Market Value
      –   TV    
      –   Fridge    
      –   Furniture    
      –   Oven    
      –   Motorcycle    
      –   Mobile Phone    
      –   Other Fixed Assets    
    Expenditure Details  
    Utility Bills  
      –   Electricity (in Rs.)  
      –   Gas (in Rs.)  
      –   Telephone (in Rs.)  
    Size of Dwelling (in rooms)  
    Nature of Dwelling
    Income Earning Assets Owned (in nos.)  

    6.2. Matching Need with Income Earning Assets

    In Table 5, there is one field which asks about how many income generating assets the client possesses. If the client possesses an existing income generating assets, then, the client can be given Qarz-e-Hasan for meeting variable cost like 3 months fuel cost for electricity, petrol, gas, other overheads etc. If the client does not own an existing income generating asset, then, the client can be given asset backed financing.

    In Table 7, we present a tentative list of income generating assets that the client can use to choose the asset himself for which financing will be provided by the Islamic Microfinance institutions.

    Table 7: List of Income Generating Assets

    Category A (Rs 1k – 20k) Category B(Rs 20k – 50k)
    Juicer Motorcycle
    Iron Copier
    Sewing Machine Oven
    Grocery / Fruit Carrier Livestock
    Donkey Cart Merchandise Inventory
    Drilling Machine Construction Tools
    Personal Computer Gas Stove With Cart for Popcorns
    Stove Construction of Road-Side Cabin
    Potato Fries Machine Partial Financing for CNG Rickshaw
    Coal Run Stove on Cart Blender / Chopping Machine

    The credit disbursement criteria can be made standardized as well by using following screening and disbursement methodology.

    Provide financing if:

    • Client does not own an income generating asset in category B, and
    • Household size to dwelling size ratio is less than unity, and
    • Sum of household income and one sixth of value of aggregate liquid assets is less than the product of basic income required per person times household size, and
    • Value of aggregate liquid assets is less than Rs 20,000, and
    • Value of aggregate fixed assets is less than Rs 50,000, and
    • Sum of value of utility bills paid is less than Rs 2,500 per month on average.

    Provide non-compensatory loan if:

    • Household size to dwelling size ratio is less than unity, and
    • Sum of household income and one sixth of value of aggregate liquid assets is less than the product of basic income required per person times household size, and
    • Value of aggregate liquid assets is less than Rs 5,000, and
    • Value of aggregate fixed assets is less than Rs 20,000, and
    • Sum of value of utility bills paid is less than Rs 2,500 per month on average.

    The government can support the operations by levying low or no sales tax on these income generating assets. Islamic Microfinance institutions can also look into the possibility of bulk discounts from manufacturer / vendor of these income generating assets.

    6.3. Skills Training Through NGO / Waqf

    Obaidullah (2008) explains the difference between livelihood enterprise programs and growth oriented programs. The former only offer credit facility, while the later also provide training, insurance and skills enhancement facilities.

    Rashidah & Faisal (2013) also highlighted that provision of education and training, better coordination and networking and technical assistance through Waqf and Zakah funds is necessary for the effectiveness and sustainability of Islamic Microfinance.

    The NGO or Waqf model can be used to fund the establishment of training and business support centers. The recurring costs can be managed by taking a fee in terms of requiring the trained person to further train fixed number of clients. Hence, no monetary fee will be charged for training facilities, but, the person provided with training shall further train a fixed number of other people so that the model becomes financially sustainable and maximum leverage can be obtained from the funds that are used to establish these centers and training the first few batches. The list below mentions the priority segments for which training can be provided.

    • Carpentry
    • Welding
    • Stitching
    • Dying
    • Cooking
    • Office Automation
    • Electrician
    • Mechanic
    • Electronics Repairing
    • Beautician & Personal Grooming Services
    • Driving
    • Flower Making

    These training centers will compliment the financing functions of Microfinance institutions as the people with required human capital are expected to be more productive and hence earn income levels that can cover the cost of financing and leave some surplus for the client.

    6.4. Priority Finance to Projects with Employment Generation Capacity

    There are certain businesses that are more labor intensive than others. Organizing such businesses as a micro enterprise has the benefit of obtaining technical and financial economies of scale. Such businesses can be financed at a cheaper cost provided that they hire at least 70 to 100 new laborers. The subsidy in the cost of finance can be provided through the central bank. The State bank of Pakistan (SBP) is already providing export refinance facility and Islamic banks had also developed a Shari‟ah compliant alternative to offer such schemes as well. Hence, the same structure and mechanism can be utilized for financing the priority sectors with a relatively more labor intensive nature. Below, we list such sectors in the manufacturing, agricultural and services category.

    • Services Category o Furniture Making o House Maintenance o Catering
    • Manufacturing o Textile o Light engineering
    • Agriculture o Dairy Farms o Fruit Gardens o Fish Farms

    Conclusion

    In this paper, we explored that Islamic banking industry had achieved exemplary growth and profitability, but despite this profitability and ample liquidity, they had not focused on Microfinance. We documented the need for Islamic Microfinance as Pakistan faces rising poverty, high unemployment, high food inflation and an underserved population of 55 million poor people. We explored the two basic Microfinance models used in Islamic Microfinance in a mathematical representation. We also documented the various business models and institutional structures in vogue in offering Islamic Microfinance products and services. We also proposed how the business models and operations can be standardized so as to make the operations more cost effective and pave way for more commercial investment in this sector.

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    [1] Salman Ahmed Shaikh is pursuing PhD in Economics. He can be contacted at: salman@siswa.ukm.edu.my