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THE ROLE OF ISLAMIC MICROFINANCE IN EMPOWERING WOMEN ENTREPRENEURS: An exploratory

study in the context of Pakistan

1.0 Introduction

Women constitutes an integral part of any society but their importance is undermined due to gender
discriminatory policies set by the government and norms by societies in both developing and developed
world. The poverty burden is beard by them. Women perform 66% of the global work, contribute to the
production of 50 % of global food, and in return receive only 10% of world income and 1% share of
property. 38% of the world registered business is owned by women and its rate of growth is increasing
in Asia, Europe, Africa and Latin America (GEM2009). Despite the fact that women constitutes major
share of the population, they experience status disparity in developing and developed nations
(Rehmanand Naoroze, 2007).Women are the untapped sources of economic growth. International
organizations like United nation is using women empowerment as a strategy to reduce poverty and
population growth rate (Kabeer,2001) An economically independent woman invests more in the family
and community, therefore , women economic empowerment is a prerequisite for sustainable economic
development and pro poor growth. Hisrich (1984) argues that the financial community rates women as a
second class citizen. Financial markets have been showing gender discrimination and possess a certain
bias towards women entrepreneurs’ and had been a major obstacle in their efforts to start up a new
business or strengthening their position (Thabethe, 2006). Furthermore as per Khan & Noreen (2012) 70
% of world poor are women who are rarely financially independent due to hurdles in accessing credit
and financial services. This makes them most vulnerable members of the society. In order to overcome
this financial, social, and economic instability, microfinance can be considered as an integral source of
contribution through targeting women. Littlefield, Murduch, and Hashemi (2004) argue that
microfinance can be used as a developmental tool to create emancipation and women empowerment.
In concordance Holvoet (2005) suggests that the only platform that can encourage women social,
economic and political empowerment in the wake of skeptical financial instruments is microfinance. The
role of microfinance isconsidered significant by many researches (e.g. Mayoux 2001 or Guérin 2006 for
the African context;Mahmud 2003, Holvoet 2005 or Moodie 2008 in Asia; Velasco and Marconi 2004 in
Latin America)

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Researchers from different parts of the world agreed that women empowerment is created
bymicrocredit if the program is structured according to social and economic context of
women.(Hartungi,2007; Holvoet, 2005; Guérin, 2006).Saqib, ( 2006:2) argued that Muslims deterred
participation in conventional microfinance programs dueto Riba (interest) that is forbidden in Islam. This
becomes the basis for the development of Islamicmicrofinance products. Islamic microfinance is in
nascent stage of its evolution, contributes 1% of totalIslamic banking outreach globally. The existing
studies on Islamic microfinance are mainly done inMalaysia, Bangladesh, Indonesia and Egypt. Many
writers such as El-Gamal (2006), Ahmed (2001), andothers, believe in the great potential of Islamic
banking to be involved in microfinance programs to caterfor the needs of the poor who usually fall
outside the formal banking sector. Moreover differentresearchers are of the opinion that diverse nature
of Islamic instruments in collaboration withmechanisms like Zakat, charity and waqaf can promote
entrepreneurship (Akhtar, 1996, 1998; S. Al-Harran, 1995, 1996, 1999; S. A. S. Al-Harran, 1990 Al-
ZamZami & Grace, 2000; Dhumale & Sapcanin,1998; Hassan & Alamgir, 2002). A study of Lebanese
Islamic microfinance products (Chammas ,2006)uncover the problems with them in terms of application
of financial instruments. A study in Bangladesh(Hossain and Siwar,2008) explores the prospects and
problems of Islamic micro finance uncover theuntapped opportunity. Isler (2010) attributes the
inefficiencies in Islamic microfinance operations to thenature of Islamic Products. The above mentioned
studies mainly explore or describe the nature ofIslamic micro finance products and their respective
mechanisms. Little research is done in gauging theirimpact on women empowerment.There are very
limited offerings of Islamic microfinance products in Pakistan. Therefore, majority ofMuslims are forced
to use interest based products or exploitive informal money lender. Only twoinstitutions Akhuwat
foundation and Wasil Foundation are offering limited Islamic microfinanceproducts to both men and
women. No exclusive offerings are designed for women. The importance ofwomen empowerment
through micro credit and possible bridging of gap that exists between religiousbeliefs and practice
demands a study to explore the role that Islamic microfinance can play in theempowerment of
women.The aim of this research is to explore the role of Islamic Microfinance products in the
empowerment ofwomen entrepreneurs in the light of social and financial structures in Pakistan. The
study focuses on thewomen entrepreneurs from Lahore District that are using Islamic Microfinance
products to reveal theirrich experiences and challenges in accessing and using the Islamic Microfinance
products. In addition, the current research will explore the perspectives of Islamic and conventional
microfinance providersoperating in Pakistan on the challenges faced by them in offering the Islamic
microfinance products andthe possible reasons behind the low outreach of these products.

Background of Research

Women possess a disadvantaged position in developed and developing countries. This can be
trackedfrom studying history starting from post-world war II period. Women were considered
unproductive andisolated as housewives till 1970. Post 1970 era is characterized by industrial
development where womenremained an unequal recipient. This resulted in receipt of only 10% of world
income by women evenafter performing 67% of world working hours as reported by GEM (2010). This
reflects that womeneconomic health globally. Cheston and Kuhn (2002) argue that women hold low
paid jobs mostly ininformal sector in most economies of the world. This is further supported by the work
of Islam (2006)that highlights the contribution of women in the economic development. Consequently,
World bank(2002) acknowledge that the ease of access of financial resources to women creates
womenempowerment and subsequently contributes to the development of economy. Mayoux (1998)
notedthat increasing women's access to micro-credit has the tendency to initiate a series of 'virtuous
spirals'of economic empowerment, increased well-being for women and their families and on the wider
scale,on social and political empowerment.Recently increased attention is given to the gender
dimension of microfinance due the fact thatresearchers consider women role as instrumental in societal
change and development. Theirempowerment can bring great social and economic benefits to society.
In a study of Bangladeshi womenby Kossmann (2008) women strategic needs like gender equality and
their everyday practical needs areanalyzed as a result of availability of microfinance. Kabeer (1998)
reveal that Bangladeshi womencontribution to household wellbeing due to access to micro credit
reduced domestic abuse. In a similarstudy by Cheston and Kuhn (2002) confirms that access to
microfinance by women reduced domesticviolence in Nepal thus creating social and economic
empowerment. Høgh and Petersen (2009) studiedthe behavior and actions of women on the success of
microfinance. Similarly , Joloshev ( 2010) arguesthat microfinance provides an empowering sustainable
path for women entrepreneurs. Mahmood(2013) investigates the role

of microfinance in women’s economic empowerment, well

-being of thefamily and lack of access to finance from commercial banks due to non-availability of track
record andcollateral. Three paradigms on microfinance and gender are discussed by Mayoux (1998) are

Financial self-sustainability paradigm

focuses on providing the right interest rate to poorand is followed by donor agencies. Gender lobbies
argue that women repayment rate andwomen contribution to economic development demand support
of donors to women forfinancial sustainability.ii.

Poverty Alleviation Paradigm: Its focus is client group in a contextual based program. Ruralareas are
targeted. The women are responsible for household wellbeing therefore access toeasy finance for
women will increase the wellbeing of household in particular whilebenefiting the society in general.iii.

Feminist Empowerment Paradigm: The underline assumption is creating gender equalitywith help of
women targeted microfinance programs.The microfinance programs can follow any one or a mix of the
three paradigms. In the current researchthe Financial self-sustainability paradigm and Feminist
Empowerment paradigm will be explored.Jolosheva (2010) argued that microfinance rates are higher for
women and creates distress in women inKyrgyzstan. The inherent problem with the conventional
microfinance products are high interest rates.Also Interest or Riba is forbidden in Islam. Therefore the
conventional microfinance products create a

conflict in one’s religious belief system and

the practical needs. The emergence of Islamic banking andsubsequently development of Islamic
microfinance products are the solutions that can resolve thisconflict but it is not that easy. Riba is
prohibited in Islam and this poses a major challenge to Islamicbanks to extend credit in an efficient and
profitable manner that is Shariah compliant. A study by Isler(2010) revealed an efficiency gap in
conventional and Islamic microfinance products. He proposed thatthe gap can be bridged by improving
the nature of products offered by Islamic banks. He proposed astudy to understand the nature of
products that can improve the profitability of banks.Moreover different researchers are of the opinion
that diverse nature of Islamic instruments incollaboration with mechanisms like Zakat, charity and waqaf
can promote entrepreneurship (Akhtar,1996, 1998; S. Al-Harran, 1995, 1996, 1999; S. A. S. Al-Harran,
1990 Al-ZamZami & Grace, 2000; Dhumale& Sapcanin, 1998; Hassan & Alamgir, 2002) A similar study in
Pakistan (Akhter,2009) propose the use ofZakat, Waqaf and Takaful to increase Islamic microfinance
products contribution to entrepreneurship.Dusuki(2007) proposes participatory bases, sale based. Lease
based and voluntary charitable contractIslmaic finance models need to be tested in different contexts. A
study of Malaysian Islamicmicrofinance market revealed that weak credit evaluation mechanisms of
Islamic microfinance productsundermine the effectiveness of microcredit. Similarly, Isler (2010)
attributes the inefficiencies in Islamicmicrofinance operations to the nature of Islamic Products. A study
of Lebanese Islamic microfinance