ISLAMIC (MICRO)FINANCE

Punjab government has thrown its support behind Akhuwat with a multi-year, multi billion PKR
partnership, 121 that is still in the planning stages and will likely add additional international funding
partners.
Despite the success of Akhuwat and the positive reputations of the small but high-impact Islamic
microfinance campaigns of Islamic Relief Pakistan and Muslim Aid, Islamic microfinance remains
a niche industry in Pakistan’s strong, diversified microfinance sector. 122 Mainstream microfinance
institutions and apex funds like PPAF are not prioritizing adoption of IMF products or services.
PPAF only supports programs that are sustainable, further contributing to a national tilt toward
sustainable microfinance, with Akhuwat’s charity-based model standing apart as a notable
exception. For any organization interested in operating an Islamic microfinance program as more
than a 4-5 year, standalone project, financial sustainability must be at the center of planning.
Funding challenges for IMFIs: A critical challenge for Islamic microfinance in Pakistan is a
lack of Shari’a-compliant funding through partnerships with governments, commercial banks, and
apex funds. An NGO-MFI might transition into a full-fledged MFB, enabling it to access
commercial bank loans, capital markets debt financing, and then equity financing. However,
access to public savings is not an option for IMFIs: these typically interest-bearing funds are not
Shari’a compliant. PPAF supports about 40% of the microfinance in Pakistan, including from three
IMFIs. However, PPAF’s funding is not Shari’a compliant, and the liability side of the IMFIs it
supports is interest-bearing.
Charitable donations tend to be the safest option for Shari’a compliance, but public health, disaster
relief, and education tend to take priority among donors. With few exceptions, corporate banks
have been largely unwilling to subsidize or otherwise involve themselves with IMFIs, preferring
development projects with clearer deliverables. For some industry insiders, the fact that MFBs are
increasingly run by commercial bankers instead of development professionals has reoriented
microfinance toward financial sustainability at the expense of traditional impact and development
goals, deemphasizing outreach to women and other vulnerable groups in the process.
This conundrum becomes critical in the case of the Pakistan government’s own, new, qard hassan
fund of 5 billion PKR. Guided by recommendations from an advisory committee, it devised a
market segmentation-based disbursement mechanism targeting the chronic poor (particularly
youth and women), to address the shortfall in assistance to this demographic. 123 Microfinance
industry insiders readily agree that Islamic microfinance would have more appeal in the more
conservative, underserved Balochistan and Khyber Pakhtunkhwa provinces than conventional
microfinance. This makes the Shari’a non-compliance of the fund relevant: it is being marketed as
“quarz-e-hassna” even though it is not Islamic, nor is the government claiming it to be. The funds
are raised through debt; it is an interest-bearing liability for Pakistan’s government and citizens. In
Arabic, qard hassan/quarz-e-hassna means ‘benevolent loan,’ which is what the funds will
technically provide. Using a term aligned with Islamic finance suggests Shari’a compliance,
without actual compliance.
121 Abduhu 2012
122 Other sources of interest-free lending are family, friends, and ROSCAs, known as “committees.” Conventional and
Islamic MF clients typically combine financing with monies from these other sources.
123 While another government cash transfer scheme targets the ultra poor, resources for the chronic poor are slim,
particularly in areas with low MFI penetration.
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