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.

Dyeing wool

Photo Credit:Faseeh Shams

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.