Islamic Microfinance in Pakistan: The Experience so Far

While Islamic microfinance’s reach has increased considerably over the past few years, provision of Sharia-compliant products is still in its early stage, in Pakistan and globally. According to Trends in Sharia-Compliant Financial Inclusion, customers using Sharia-compliant products represent less than 1% of total microfinance outreach. At the same time, the overall demand for Islamic microfinance products seems to be growing rapidly, and Pakistan is set to be one of the most promising markets.

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Several institutions have launched Islamic microfinance products in Pakistan over the past few years, and there are two microfinance providers that offer a fully Sharia-compliant product line. One of these is Akhuwat, which operates primarily on the disbursement of Qard-Hassan, or interest-free loans offered through donations given by individuals and other organizations supportive of its cause. The delivery model is based on the concept of community, with most branches set up in mosques and churches. The second institution is Wasil Foundation, which offers a variety of Sharia-compliant products incorporating a margin of profit for the institution, including salam (advance against future delivery), istisna and murabaha (cost plus mark-up), diminishing musharaka (profit-and-loss sharing), and ijarah (leasing).

Based on the current state of Islamic microfinance in Pakistan, there is huge potential for these providers to expand outreach in this niche market. This can be achieved by focusing on diversification in the range of products offered (going beyond credit products) as well as expanding geographic outreach, which is currently heavily concentrated in the province of Punjab.

Financing Models

A June 2012 paper published by Pakistan Microfinance Network (PMN), Islamic Microfinance Models and their Viability in Pakistan, highlights the need for funding sources to fill the existing gap in Islamic microfinance provision in Pakistan. The different sources of financing include Waqf and Takaful models, each with their own strengths and weaknesses in terms of viability in the Pakistan context.

The Waqf model is based on the concept of dedicating resources for charity and creating an interest-free credit line for those in need. This model will allow microfinance providers to offer Qard-Hassan loans to the poor (from whom expectation of return of the loan is not assured) alongside other Sharia-compliant microcredit, savings, and insurance products for people with potential for entrepreneurship. The Waqf model has the potential to harness the charitable culture of Pakistani society and generate substantial donations for the cause. While depending on donations or charity is not financially sustainable, it would allow microfinance providers to offer Qard-Hassan and thereby have an impact on poverty alleviation.

The second financing model proposed for Pakistan is the Takaful model—a Sharia-compliant alternative to insurance. So far, this has proved challenging. Health insurance typically covers in-patient facilities only, which is a particular disadvantage for low income groups, as the   opportunity cost to missing a day of work is large. Another challenge with Takaful is building trust between the institution and clients, especially in cases where a large number of claims are rejected in a particular community.

To become viable, both Waqf and Takaful models require microfinance providers to have access to a certain amount of funds and, in the case of Takaful especially, resources are needed to hedge the risks of serving poor populations. 

A Growing Network

Nonetheless, there is now greater recognition among practitioners about the potential market for Islamic microfinance, as evidenced by increased membership in PMN’s Islamic Microfinance Working Group since 2012. The working group consists of 6 microfinance providers and was set up to facilitate and support these providers in their efforts to provide Sharia-compliant funding to lower-income groups.

More practitioners are now exploring Sharia-compliant product lines in the hope of expanding outreach to the underserved, especially to target those who previously declined conventional microfinance because of its non-compliance with Sharia guidelines.


----- The author works at the Pakistan Microfinance Network.



30 May 2013 Submitted by Khalid Kabeer (not verified)

Hi, I have two questions relating to this topic.

a) Is there any market study which has shown demand of Islamic Products in Pakistan recently being done?

b) When we say Islamic products, is it possible to share the definition and criteria used to categorise Akhuwat and Wasil foundation as Islamic.

Thank you.

27 June 2013 Submitted by Yasir Tariq (not verified)

As salam o laikum Wa rehmat Ullah

With regards to the questions asked, a market study is currently being done by International Islamic Microfinance Network with the help of its members about the current outreach and the potential market demand of the products.
As per your second question, Wasil Foundation is practicing Islamic Microfinance since the last 5 years. It has its Shariah Supervisory Board and a Shariah Advisor who audits and authenticates the transactions of Wasil Foundation. As listed in the blog, Wasil Foundation is currently offering 5 products which are all vetted by Shariah scholars, thereby categorizing the organization to be Islamic.

15 May 2017 Submitted by Irfan sheikh (not verified)

Dear friend I am a research scholar kindly let me know following information plz
1. How many islamic micro credit banks operate in pakistan
2. Can non muslim participate in it
3. Where from it get current financial statements of these institutions

27 January 2015 Submitted by HASAN RAZA (not verified)

I have studied various articles over credit lending models of Micro-finance in Pakistan but i have not been able to find out as what are the micro-finance models being used in Pakistan. This article does not also provide in-depth knowledge as well. Can you please provide me details as what institutions in Pakistan are using which models of micro-finance. or what are models of micro-finance models being used by majority of micro-finance institutions. kindly furnish me details and oblige me. thanks.

25 May 2016 Submitted by MUHAMMAD DAWOOD (not verified)

Salam brother, i have a research topic, comparison of financial performance of islamic and conventional micro finance instrument ? can you guide me, how i collect financial data of these institutions ?

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