Akhuwat – Exploring New Horizons in Microfinance


24th March, 2011


It was 1998, when I first met Dr. Amjad Saqib, a young DMG officer, who had turned his back on pomp and authority and chosen the path of social mobilization of the rural poor, irrespective of caste or creed, to improve their lot. At the end of five years, when the period of his extraordinary leave to which he was entitled under the service rules, came to an end, Amjad Saqib decided to say farewell permanently to the government job. Since then, he utterly dedicated himself to the service of the deprived segment of the society. This was a courageous and bold step which increased my respect for him beyond measure. He silently, without complaints, suffered when he had given up his service in Punjab Rural Support Programme (PRSP) because of differences with management but did not give up his mission.

In early days of PRSP, when I was at the helm of affairs, Amjad Saqib’s dedication and commitment to improving the situation of rural poor communities, christians or muslims, men or women, left a lasting impression on me of his sincerity and empathy with the poor. In addition, he is endowed with a literary streak which gives his expression the sparkle of a diamond. Sometimes I feel at awe of what he has set out to achieve, but I am confident of his success.

The journey of Akhuwat began in 2001 when a loan of ten thousand rupees was given to a woman. In a span of ten years, this amount has grown a hundred thousand times into a staggering one billion. The achievement of Akhuwat extends beyond the numerology; it lies in the initiation of a movement guided by a unique philosophy that has added new dimensions to microfinance. In an era where microfinance organizations have largely preoccupied themselves with the quest for organizational sustainability,

Akhuwat takes us back to the root purpose that microfinance was intended for; poverty alleviation. This document is a collection of scholarly articles by various experts who offer exhaustive analysis of different aspects of the Akhuwat Model and bring forth the salient features of the model that makes it stand apart from its counterparts.

The journey of Akhuwat is a testament of the ability of volunteerism and self reliance to transform the lives of thousands. It is a story that seeks to inspire and rekindle the faith in the strength of communities and populations to contribute to efforts at poverty alleviation. But most importantly it serves as a reminder of the spirit and objectives which initiated the birth of the microfinance movement. This collection of articles traces the evolution of Akhuwat, reinforcing the distinctive place it occupies as a microfinance institution guided by a unique philosophy which has steered it to reach extraordinary success in a short span of time.

Shoaib Sultan Khan


Rural Support Program Network


To mark Akhuwat’s journey from rupees ten thousand to rupees one billion, an international conference entitled ‘Akhuwat-Exploring New Horizons in Microfinance’ was held at University of Central Punjab. The event brought together eminent scholars and experts who offered exhaustive analysis of different aspects of the Akhuwat model and brought forth its salient features that continue to define Akhuwat’s philosophy and operation. The conference reflected our desire to learn from the past, gain from the knowledge and expertise of the speakers, and continue our journey with a new vigor; a journey of scale, sustainability and impact. To this end, at the conclusion of the conference, it was decided to publish a collection of the essays that were presented by the esteemed speakers.

It is how frequently said that there has been a drastic paradigm shift in the concepts and objectives of the microfinance movement. It has become heavily laden with modern economic rationality causing microfinance institutions (MFIs) to be characterized as business ventures. In popular discourse, we talk of the commercial success of MFIs, treating them as practical solutions to a complex business problem. No doubt such a treatment of microfinance has led the movement to grow but one must be reminded here that growth is neither the sole indicator of success nor is it an absolute measure of socio-economic improvement. Growth is merely expansion; development in the true sense of the term however refers to change. The guiding principle of microfinance must be to inspire a change for the betterment of society. Of course growth entails that microfinance will be able to reach a larger segment of deserving populations, however that alone does not guarantee that it will inspire development or a meaningful change in their socio-economic position.

Thus in prioritizing growth, it is widely believed that microfinance has become more of an economic process or a business venture than a tool for poverty alleviation. This is not to suggest that microfinance has not been successful or that it has become redundant. In fact, given that one third of the world’s population still lives below the poverty line, the need for microfinance is glaringly evident.

The idea of Akhuwat was presented before a group of friends in Lahore Gymkhana ten years ago. As a result, the first interest-free loan of Rs. 10,000 was extended to a widow striving to earn a decent earning through honourable means. By utilizing and returning that loan within a period of six months, she reinforced our belief in the integrity that the poor exhibit when we trust them and respect them. Herein lay the birth of an ideology that founds its inspiration not in economic logic but in the spirit of compassion and generosity of man. “Brotherhood,” the literal meaning of the metaphor ‘Akhuwat’ as derived from the Islamic tradition, remains the underlying philosophy that drives the organization. To us, Akhuwat was the birth of a new chapter in micro-finance; one that looks beyond profitability and works exclusively for alleviating poverty through the development of a mutual support system.

In the early years of Akhuwat, people told us that we were being idealistic, that this experiment would fail miserably. We were repeatedly advised that the idea was neither economically feasible nor would it be able to sustain itself over time. But at every turn, we were overwhelmed by the response of the community. Throughout these strenuous years of struggle, the generosity and compassion of our people have been the most important factors in ensuring the success of Akhuwat.

One of the recurring questions that people continue to ask us is how we ensure the sustainability of Akhuwat’s model. Sustainability of an organization refers to the ability of the organization to endure and conventionally this is achieved through recovery of costs and creation of some additional funds that allows the organization to grow. But we do not charge interest nor are we motivated to gain profit out of this venture. This is what strikes most people who doubt the efficacy of the Akhuwat model.  Our answer is that it is through the spirit of volunteerism, the principle of low operational cost and dependence on generosity of the community that Akhuwat has not only sustained itself but is also expanding and being replicated. As a philosophy, Akhuwat cannot fail; if our movement does not succeed, it will not be a failure of the principles and ideals that guide us. The inability to realize our vision will only expose the weakness in our own resolve and commitment to wage this struggle against poverty.  

Akhuwat has a unique approach and the essays collected in this volume shed light on the methodology and ideology of the Akhuwat model. The first section of the volume gives an overview of Akhuwat; highlighting the unique features of the model and evaluating the efficacy of its operations. In the second section, authors bring forth the role played by religion in the evolution of the organization and the incorporation of Islamic values and traditions within the model. The third section compiles discussions pertaining to the challenges of growth and sustainability of the Akhuwat model in the present times. The last section explores mechanisms to enhance Akhuwat’s work and gives recommendations for a way forward.

Religious teachings have played a pivotal role in formulating Akhuwat’s philosophy and system but Akhuwat itself has never been a religious organization. In drawing strength from all great religions of the world, Akhuwat’s message is for all mankind. The concept of brotherhood in itself cannot be restrictive; it allows for no discrimination on the basis of religion, cast, creed or ethnicity. Akhuwat stands for brotherhood among all, an ideal which is also reflected in the spirit and essence of Islam and other religions.

I am grateful to the authors for presenting thought provoking and scholarly papers and having contributed to this volume which we hope will bring the message of Akhuwat to a wider audience. We expect that this book will not only serve as an insight into Akhuwat’s work but will also encourage others to join our efforts. The change that Akhuwat seeks to inspire is not limited to improved incomes or reduced poverty levels; it is a change in the hearts of all men and women, rich and poor, Muslims and non-Muslims. It is this change in our perspective, which prompts us to embrace the misfortunate as our brothers that will truly sustain efforts at poverty alleviation throughout the world. Akhuwat is not only a system of microfinance; it is a model of compassion, of social justice and of brotherhood.

Muhammad Amjad Saqib (SI)

Executive Director, Akhuwat

Akhuwat – It Sometimes Makes Sense to Break the Rules Malcolm Harper

Microfinance has come of age and has lost its innocence. It is now coming to be seen as just another business, which makes its profits as and where it can. Microfinance is not the only business to have chosen the poor as it’s preferred ‘market segment’. The late CK Pralahad showed that there are many ways of making profits at ‘the bottom of the pyramid’, and we do not criticise Unilever for marketing shampoo in tiny sachets, or Colgate for its profitable ten rupee toothpaste tubes.  We assume that the people who buy these products are satisfied with their purchases, and we do not expect their producers to lose money on their sales to the poor.

Most microfinance institutions (MFI), at least until recently, were started with public interest funds, and with welfare objectives, but they have successfully ‘graduated’ from these limited sources of support. Their promoters argue with some logic that they must make high profits to access equity from profit-seeking investors. They must have this equity in order to leverage commercial debt which they will on-lend to satisfy the credit needs of the millions of poor people who are presently not served by traditional commercial banks.  These institutions must also hire qualified and experienced managers; they must also be able to offer competitive salaries, to replace the well-meaning but unskilled voluntary sector staff who may have started the institution.

Microfinance practitioners have also learned many lessons (although perhaps not enough), and a body of ‘best practice’ has grown up. Not every institution adheres to every practice, but it is generally accepted not only that they must be ‘sustainable’, that is profitable, in order to survive and to attract and retain investors, but that MFIs should lend through some form of group mechanism, that they should lend mainly to women, and that they should make rather high charges, not only to be ‘sustainable’ but also to discourage misuse of loans, to encourage repayment and to ensure that their loans are not ‘hijacked’ by those who are not needy, as so many subsidised goods and services are.

This paper describes some aspects of the operations of Akhuwat (meaning ‘brotherhood’), an MFI which operates in Lahore and elsewhere in Pakistan. It was started in 2001, its present portfolio is around two million dollars, lent to some 30,000 clients, and its cumulative disbursements amount to about ten million dollars, which has been lent to almost one hundred thousand clients, and it is growing quite rapidly.

Akhuwat is unique because it breaks just about all the generally accepted rules of microfinance, but has nevertheless (or perhaps for that reason) survived and grown. In the present crisis of opinion and reputation which is swirling around microfinance, not only in Andhra Pradesh and India, but globally, Akhuwat is a lively proof that there is ‘another way’, which may also be a better way.

Akhuwat is not as large as the largest for-profit MFIs, but it is large, and growing; it has long passed the stage where it might have been dismissed as the dream of an idiosyncratic idealist. It is a large going concern, reaching towards a client base of one hundred thousand people, and it has also been widely copied.



First and most obviously, because its loans are interest free. There is endless debate about the meaning of ‘usury’, or riba, which is condemned in both the Christian Bible and the Holy Koran; does it mean ‘excessive’ or ‘unreasonable’ interest rates, however those imprecise terms might be defined, or does it mean any kind of fixed interest charge, a cost for the use of the money, even one which is levied to cover the bare administrative costs of the lender, or to compensate for the loss in the value of money over time which is caused by inflation?

One way to avoid this dilemma is to adopt one of the profit sharing modes of Shariah-compliant finance, such as musharaka, or mudaraba.  Or, more understandably in the West, ‘venture capital’, or ‘equity’ investing, where the person or business that has been financed shares its profits with the institution which provided the finance.  These methods are never easy; the prospective profit shares of each party have to be negotiated at the time when the investment is made, and the precise definition and calculation of the profit from a single transaction or from a business as a whole, are complex and fraught with potential for disagreement.

There are many well-known venture capital investors, some of which have taken stakes in microfinance institutions, but they rarely take stakes in start-ups, or ‘ventures’. They should more correctly be called ‘development capitalists’, who invest substantial sums in business which have survived their earliest years and have proved that they can make profits. The ‘transaction costs’ of such investments are high even in relation to the several millions of dollars which are invested.

There have been a few isolated attempts to apply profit sharing methods to microfinance.1 These have generally foundered, or have remained very small, because of the issues mentioned in the preceding paragraph.

Larger businesses do at least keep records of their profits, even if they are not always accurate. Many of the microentrepreneurs who are served by microfinance are illiterate, they do not separate their personal incomes from the profits of their tiny businesses, and it may even take longer to figure out what their profits may be in the future, and are at present, and how to share them, than it does for a multimillion dollar business with audited accounts. If the investment is as little as $100, or even $1000, the transaction costs may exceed the amount invested. There are other sharia compliant financing methods, such as mudaraba sale and leaseback, but I hope I will be forgiven for my sense that these adhere to the letter of ‘no fixed interest’ but not to its spirit.

Hence Akhuwat has chosen what may be the only totally genuine way of avoiding interest or other disguised charges; they make no charges at all. Initially, Akhuwat levied a flat fee of five per cent to cover some of its administrative charges; this was of course very low, except for short duration loans, and it did not cover of all Akhuwat’s very low costs. After a few years, management decided to be completely absurd, to stop levying any charges at all. This may appear crazy, the antithesis of ‘sustainability’, but Akhuwat is still alive and well, when other MFIs have disappeared, and many others may do likewise in the next few months, while Akhuwat is growing, fast. How has this been achieved?

The answer lies in the name; Akhuwat, brotherhood, looking out for those who are less fortunate than yourself. Even before Akhuwat abandoned the five per cent charge, some clients had made voluntary contributions to its costs, in gratitude for their assistance. I myself met one such person in Lahore. He was a small mechanic; a loan from Akhuwat helped to expand his business, he used the profits to finance a trip to the Gulf, and had returned relatively well-off; he felt that it was only right to contribute something to allow Akhuwat to do the same for others.

This system has now been formalized, and clients’ voluntary contributions cover about sixty per cent of Akhuwat’s operating costs. The borrowers contribute what they can; those who have been successful give more than those who have not, and some give nothing; there is no compulsion, moral or otherwise, and clients who have made donations are treated no differently from those who have not when decisions are being made about new loans.

For this reason alone, Akhuwat is unique, but there are many other features which make it an ideal, and also a model from which others can and should learn, irrespective of their religion or other motivation.


Akhuwat is the final link in a value chain of generosity. Its funds are donated, from all manner of sources, large and small, rich and not so rich; those who give their money in this way clearly feel that this is a more productive way of helping poorer people than giving them grants or doles.  The funds are recycled, the same sum can continue to help people forever, subject only to inflation, and Akhuwat’s recovery rates are as high as any ‘normal’ MFI.

One major argument for charging interest, and high interest at that, levied according to the period for which the loan is not repaid, is the fact that borrowers will obviously repay faster if the amount to be repaid increases over time. What is more, they will be ‘economic women, and men’; they will tend to repay the most expensive loans first, and to delay repayment of the cheaper ones.

Akhuwat’s performance gives the lie to this statement of obvious economic common sense. Its loans are the cheapest, in fact they cost nothing at all, but they are still repaid on time. Its on-time repayment record is about ninety-nine percent.

Conventional wisdom may be overturned in this case, but Akhuwat’s choice of sources for its funds seems even more foolish. It might have been possible to raise some donations at the start, but is it not irresponsible to build an institution on which its clients will depend on such an unreliable and unpredictable source of funds?  Experience so far suggests otherwise; Akhuwat has until very recently taken no official foreign grants at all, and the only grant of that kind so far has been a capital sum to finance expansion to a new area. Akhuwat has also avoided taking ‘official’ local funds; they have relied entirely on individual donations, large and small, from clients, from well-wishers and from all manner of other sources.

Can this be ‘sustainable’? Will the funds keep on coming? Commercial loans and investments are not themselves wholly reliable, as we all found in the recent financial crisis, and as many businesses and individuals of the kind who are assisted by Akhuwat have always found.

But human generosity seems to continue. There are now over one hundred ‘micro-finance investment vehicles’ or ‘MIVs’. Most of them are financed by wealthy individuals and institutions who are not wholly profit maximisers, who want to ‘give something back’, who are looking for below market returns in order to do more than make more money.

This sacrifice is in itself generous, and the managers of these funds are now searching hard for effective ways to measure the social impact and poverty outreach of potential investee MFIs; they want to reduce their profits in order to do more good.

These are investors who want to preserve their capital, and to receive a sub-optimal and modest return on it if they can. They are already started on the slippery slope down, or perhaps up, towards straight giving, even though some of them are in some sense embarrassed by their own behavior, and are anxious to portray themselves as hard-nosed capitalists; ‘brotherhood’ lurks in all of us, as Akhuwat has found.

The international aid world is embarrassed with funds, both private and public, and donor agencies’ main concern is often to ‘move the money’, in order to achieve their spending targets. There are many reasons why people donate to Christian Aid or to Islamic Relief, or willingly pay their taxes to DFID or USAID, but we must not be too cynical. Generosity, brotherhood in the broadest sense, has a great deal to do with it. People keep on giving, rich and poor people, NGOs and governments, and the flow of such funds is probably as reliable as the flow of commercial funds. Akhuwat has designed a unique value proposition for those who want to get the biggest ‘bang’ for their donated ‘buck’, and there is no reason why this should not continue.

It is quite easy to give money, even if you do not have very much, but it is much harder to give time. Not an hour here or there to attend a committee meeting, to talk to a group of children or to organise a fund-raising event, but regular time, just like paid time, except that it is unpaid. Akhuwat has also successfully mobilized this source of support. This is in part due to the remarkable example of Akhuwat’s founder, but it also comes from the same natural generosity, the spirit of brotherhood, that encourages donors to give money.

Many of Akhuwat’s senior staff are volunteers, and most are paid far less than they could earn elsewhere. Only the junior staff, who are mainly drawn from the same communities as the clients, are paid the ‘market’ rate for their work. They too tend to work harder and for longer hours than they would elsewhere; they also become infected with the dangerous spirit of brotherhood which pervades the whole institution. The market, for money, for labour and for skills, need not always be the king.


Group intermediation is almost axiomatic in microfinance, outside Latin America and Indonesia. The groups may themselves borrow and then on-lend to their members, as in the Indian self help group model, or the groups may only be ‘social’ intermediators, as in the conventional and widely replicated Grameen Bank approach, where the groups appraise and approve each others’ loans, and assist with recoveries, and, in some cases, act as guarantors for their fellow members’ loans.

Similarly, and for related reasons, microfinance is everywhere dominated by women. There are good reasons for this; women are generally the poorest and most marginalized members of society, and they can be ‘empowered’ to improve their situation through group membership and by having some control over small sums of money. Women also work better in groups than men do, and they are weak and have fewer options; it is therefore easier to put them and keep them in groups, and to ensure that they repay their loans.

There are also some reasons why it may not be so good to work in groups, and exclusively with women. Groups tend to discourage and even to crush individualists, and entrepreneurs are above all individualists. Group guarantees are inequitable if some members want to borrow more, or more often, than others; groups tend towards the lowest common denominator.

Women are more than half the population, and in most societies and activities their skills and entitlements are woefully neglected. The family, however, is the basic building block for most societies, and families include women and men. Discrimination in favour of women can have its downsides; men may force their wives to take loans and to repay them, but then use the money for liquor or other amusements, and the family disharmony can end in disaster. Anyone who has seen a Bangladeshi woman’s face which has been foully disfigured by the acid which was thrown at her by her frustrated husband will be aware that family unity should be enhanced, not destroyed.

Men also tend to start more business that eventually grow and employ many others, than women, but they also tend to take bigger risks, to be less reliable, and to fail more often. Both sexes have their roles to play.

Akhuwat started with groups, and still uses them in some particular cases, but the main customer unit is the household, the wife and the husband. Both co-sign their loans, and are responsible for repayment, and the household also takes a guarantor, who is usually also an Akhuwat client. The guarantors are themselves not allowed to borrow until the loans which they have guaranteed have been fully repaid.

For this reason, some borrowers prefer a more traditional group system, and Akhuwat has recently re-introduced group borrowing to satisfy them; prospective borrowers can chose whether to take a guarantor, or to join a group.

Here again, Akhuwat’s practices fly in the face of accepted best practice, but they achieve good results. Any MFI can learn from them, whether its goals are to make big profits, or to create a ‘big society’.

Akhuwat has another unusual strategy which saves money and also strengthens commitment and the sense of brotherhood. Loan repayment and disbursement takes place in mosques, or churches, not in Akhuwat’s own very modest offices. Jesus Christ threw the money changers out of the temple in Jerusalem, saying that they had made the house of God into a den of thieves, and some of them may indeed have been money-lenders also. Akhuwat may be accused of being foolish, although its results tell otherwise, but it is certainly not a thief.

These meeting places involve no cost, because they are not needed for worship at the times when Akhuwat uses them, and they confer a sense of solemnity which surely enhances borrowers’ commitment to repay. The priests and imams also welcome Akhuwat as a bridge between people’s spiritual and secular lives. The Holy Koran says that money is given to us in trust, to be used wisely and then handed on to others; a loan which has been received and acknowledged in a place of worship is probably more likely to be viewed in that light than one which is taken in a banker’s office.


Most MFIs are businesses, and businesses do not like to lose their best customers, or to discourage them from buying more of what the business sells, and to keep on buying it. Hence, MFIs encourage their clients to move up the ‘loan ladder’ to borrow larger sums, and to keep on borrowing. Some MFIs even expel customers who repay a loan and then do not take another within a set period, usually a month or so. They are permitted to ‘rest’, as the MFIs call it, for this period, but then they have to get back into debt, or get out. This is a sensible business practice, because non-borrowing clients are unprofitable.

Akhuwat adopts a very different policy. It is understood that clients are being helped to become better-off, and that they should ‘graduate’ to regular banks as soon as they have outgrown Akhuwat’s scale of lending. Akhuwat’s staff make every effort to introduce such clients to banks, and to facilitate the transfer, and only a very small number of larger so-called ‘silver’ loans are approved, for special cases.

In general, Akhuwat aims to ‘process’ its clients to ‘mainstream’ banking, not to retain them for its own profit. It is a school which prepares people and helps them grow for larger things, not a prison which retains them in perpetual indebtedness. Akhuwat has lent to 93,000 people in the ten years of its existence, but now only 30,000 are borrowing. The remaining 63,000 have ‘flown out’, that is, they no longer need credit from Akhuwat or they have ‘graduated’ to banks from where they can borrow larger sums, or they have ‘dropped’ out, because they failed to repay on time and were not allowed to borrow again. Brief visits to a sample of ex-borrowers suggested that around one on five would like to borrow from Akhuwat again but cannot, and the remaining eighty per cent do not need to borrow.

Most institutions of all kinds like to grow, as Akhuwat has grown and is still growing. Growth enables more people to benefit from their products and services, it enhances the ego and reputation of their founders and it also enables promoters and investors to make more money. Growth is often hard to manage, and it involves losing the ‘personal touch’ which comes from association with particular communities.  But the mantra is that businesses must grow or die, so grow they do, and sometimes die in the process.

Here again, Akhuwat is different. It has grown and is still growing in Lahore, its birthplace, but it has adopted two different approaches to growth beyond Lahore. In some towns, local groups are willing to sponsor new units. They are encouraged to do so, using the Akhuwat name, and Akhuwat works with them to show them what has to be done, it sends its own staff to assist them in their initial efforts, but then they are encouraged to move forward on their own, to develop their own approaches and solutions, to be local successes, rather than branded clones of Akhuwat itself.

In other places, where suitably committed people do not come forward, Akhuwat grows in a more traditional way, by opening its own branches. This dual track approach does not maximise Akhuwat’s earnings, but it does maximise the extension of what Akhuwat is doing. Akhuwat’s concern is not to grow as large as it can; it is to succeed in its mission, to bring its services and its spirit of brotherhood to as many people as possible.

There are of course a number of challenges; some are similar to those which face any microfinance institution, while others relate to Akhuwat’s unique business model.

Generosity is probably as ‘sustainable’ as the market, but it is not always as predictable, and this makes it difficult to plan future developments. Because so many of the senior staff are volunteers, the management structure is less hierarchical than is usual in South Asia; the informal trusting culture of Akhuwat is in many ways more like that of a hi-tech start-up in California, and some managers themselves find this difficult.

Clients often complain that Akhuwat’s loans are too small, and demand naturally exceeds supply. This in itself ensures that clients are not encouraged to become over-indebted, which avoids some of the difficulties which have caused so many problems in Andhra Pradesh in India, and it also encourages clients to ‘graduate’ to banks when they have outgrown the scale of credit that Akhuwat can offer.  This is not always easy, but it is in Akhuwat’s interest to help its clients to do this, so that Akhuwat’s funds can be used to assist clients who are further down the ‘ladder’ of growth.

In a very broad sense, Akhuwat is itself a paradox. It depends on the generosity of people who have made their money in the ‘greed-based’ market system, but is at the same time promoting a quite different model. If this model was universally adopted, there would be no surplus funds for Akhuwat. This possibility is however somewhat theoretical, and very remote. For the foreseeable future, Akhuwat should be able to access generous people’s funds, and skilled people’s time, and to continue to grow and to demonstrate new possibilities.


Microfinance is becoming a mature industry, with set principles and practices. It is also moving away from government and NGO, into the hands of real businesses; it has been ‘Wal-Martised’.  

Akhuwat is supremely important because it reminds us of what we set out to do, and why we did it. Akhuwat takes us back to the early days of innocence, when poverty alleviation was what microfinance was for, and this reminder is healthy, and necessary.

At the same time, however, Akhuwat is breaking the mould, and is one of the most important innovators in microfinance, anywhere.  Anyone who is setting up a new MFI anywhere, with whatever motives, should at least question the accepted wisdom of working with groups, client retention, focus on women, and approach to growth. The conventional practices may still be the correct ones in some circumstances, but Akhuwat shows that there are other ways, which can work equally well or better.

Above all, however, and most significant in these marketdriven times, Akhuwat demonstrates that there is another way, that generosity and brotherhood can be equally powerful motivators as profit maximisation. This conclusion goes far beyond microfinance.


1 See Harper M, “Islamic Partnership Financing for Small and Microenterprise”, Small Enterprise Development, Vol. 5, No.2, 1996, and Harper M, Rao DSK and Ashis Kumar, Development, Divinity and Dharma, The Role of Religion In Development Institutions and Microfinance, PA Publications, Rugby, 2008

Metaphor as a Source ofOrganization Development;  A Case Study of Akhuwat

A G Ghaffari, Mobin-Ul-Haq, Naveed Yazdani

To understood using the concept of metaphors.  The purpose of this article is to determine how and to what extent an organization can be article seeks to explore and understand the impact of metaphors in the development of an organization’s culture, structure, internal and external communications and its impact on overall performance. This study is conducted on a microfinance organization operating in Pakistan by the name of “Akhuwat” (brotherhood). The very word “Akhuwat” is a metaphor in Islamic tradition and has a deep historical and religious meaning. Using the concepts of modern organization theory, we seek to understand whether this metaphor has any impact, whatsoever, on this organization.


Akhuwat was setup in 2001 as a microfinance NGO offering interest-free credit by a group of people who shared an interest in poverty alleviation and improving the quality of life of the poor and destitute in Pakistan. Akhuwat started its function with a model based on the Islamic tenets of muakhaat i.e., brotherhood and qardehasan. The model was distinctively different from all existing models in the field of microfinance.  Akhuwat is a glaring example of departure from tradition, whereby it has so far defied the widely practiced ‘golden’ microfinance principles. Malcolm Harper (2008)1 acknowledged the unique contribution of Akhuwat and said that “Akhuwat is already doing for conventional microfinance what Professor Younas did for conventional banking in the late 1970s.”

The first loan was given to a woman and the successful return of the first loan convinced the friends of the viability of the model and it was named Akhuwat, the first Microfinance Institution (MFI) based on the concept of qarz-e-hasan and zero interest rate. Soon the equity started to grow and people after hearing the methodology and success started to entrust Akhuwat with more and more donations. The rise in donations and the sense of responsibility led the group to evolve a novel organizational structure revolving around volunteerism, values, and lowcost operations. The group of friends turned into the first Board of Governors [BoG] and voluntarily took the responsibility of looking into the strategic and operational issues of significance to Akhuwat. The idea was to discharge societal responsibility by bridging the gap between haves and have-nots and to financially and socially support the needy and deserving and so help them get out of the vicious trap of poverty and debt.

In the last ten years of its existence, since its inception, Akhuwat has shown unprecedented growth; from serving one female with Rs 10,000/- only in one district to extending loan to 100,000 families to the tune of one billion rupees in more than 20 districts of Pakistan with a loan return rate of 99.85%. The success of the organization is not only due to the untiring efforts of its founder Dr Amjad Saqib and its BoG but also owes to the fact that the whole organization embodies the concept of Akhuwat in every sphere of its operations. The concept has proven to be so powerful that it has transcended the organization’s boundary and has taken its roots in the hearts of the community it serves, bonding them strongly with the cause of the organization. For the first time in the history of microfinance the poor, one who took a loan, has become a donor. A miracle that was possible solely because of the metaphor, “Akhuwat”.


The very name “Akhuwat” draws its roots from the core Islamic belief of ‘Muakhaat’ i.e. ‘brotherhood’, a term central to the culture of Muslims which represents the sense of love, belongingness, and sacrifice. Islam declares that all Muslims are brothers to each other and many sayings of the Holy Prophet (PBUH) highlight the significance of this notion. ‘Brotherhood’ was witnessed at its zenith in the history of mankind when Muslim immigrants called the ‘Muhajirun’ from Mecca were hosted by their Muslim brothers called the ‘Ansaar’ or ‘Helpers’ in Medinah, on the call of the Holy Prophet (PBUH), who said, “All Muslims are brothers of each other.” “Our Muhajir brothers have left their homes in Mecca. They have given up everything they owned for the sake of the Almighty Allah swt. I want each Ansaari to accept one Muhajir as his real brother,” he said.  In response to the call, each of the Ansaar adopted a Muhajir as his brother and said to his Muhajir brother, “You have an equal share in everything that Almighty Allah has given me. Almighty Allah will bless me and my property if you will share it with me.” The brotherhood of the Ansaar and the Muhajirun was termed as “Muakhaat”. This act of Muakhaat is also reflected in the Holy Quran: “Those who believed, and adopted exile, and fought for the faith, with their property and their persons, in the cause of Allah, as well as those who gave (them) asylum and aid – these are (all) friends and protectors, one of another…” (Chapter 8: Verse 72). Dr Amjad Saqib talks of the universal meaning of ‘brotherhood’ as envisaged by Imam al-Nawawi in his famous work “Arba`în of an-Nawawi”, in which Imam anNawawi views that Akhuwat [ukhuwwa] in the saying of the Prophet (PBUH) pertains to bani Adam (i.e. of all humanity).2

The concept of Akhuwat is clear, very strong and dearly held in Islam. All Muslims accept and try to practice this concept in their everyday life. It is this concept that makes Muslims all over the world brothers to each other, making them one nation. Love for each other and sacrifice is at the heart of this concept. Hence, when used as a metaphor it embodies the whole meaning and communicates the same without much effort. The simplicity and clarity of this concept makes it easy to communicate and draw inferences from. It even allows people to judge the performance and policies of the organization. Since it is an everyday phenomena, a dignified value to hold, and a noble practice to indulge in, the metaphor of Akhuwat has the power to shape an organization’s structure, culture, strategy, communication, etc and as such all this makes this metaphor –Akhuwat— ripe to study in the organizational context.


Organization theory helps us in the study of organizations from multiple viewpoints, methods, and levels of analysis. Organizations could be studied at the  “micro” level also called organizational behaviour — which refers to individual and  group dynamics in an organizational setting — and “macro” strategic management which studies whole organizations and industries, how they adapt, and the strategies, structures and contingencies that guide them.

Organization studies pertain to the study of individual and group dynamics in an organizational setting, as well as the nature of the organizations themselves. Whenever people interact in organizations, many factors come into play. Modern organization studies attempt to understand and model these factors. Like all modernist social sciences, organization studies seek to control, predict and explain. One of the main goals of organization theorists is to develop a better conceptualization of the organizational life.

Organizations could be studied from various perspectives. Organizational analysis draws upon a number of theories in this respect. Metaphor is one such way that helps us in understanding how the organization manages itself (Morgan, 1980)3. The central thesis of this theory is that organization and management are based on implicit metaphors. Metaphors help us to understand and highlight certain aspects of organizations. For example, Morgan (1997)4 uses a very common metaphor of a machine for an organization. He states that we use the term that when things are going well we say the organization is ‘running like clockwork’, a ‘well-oiled engine’ or an ‘assembly line’. When they are not, then communication has ‘broken down’ and ‘things need fixing’.  He argues that using this metaphor makes people regarded as ‘cogs in a wheel’, and attempt to quantify and measure everything. He says, “One of the most basic problems of modern management is that the mechanical way of thinking is so ingrained in our everyday conception of organizations that it is often difficult to organize in any other way.” In his book (Morgan and Video Training, 1997)5 Morgan illustrates his ideas by exploring eight archetypical metaphors of organization: Machines, Organisms, Brains, Cultures, Political Systems, Psychic

Prisons, Flux and Transformation, and Ugly faceInstruments of Domination. He highlights how various metaphors can help in understanding organizational structure and systems. Metaphors provide a ‘common definition language’ with which organizational stakeholders communicate to each other and get to the underlying reasons why something is the way it is.

Cornelissen (2005)6 highlighted the growing acceptance of metaphor in organizational theory and suggested that work should be done to understand how metaphors operate in an organization. He highlighted that locating the metaphor is the first step in reading the organization and put forward three main reasons for using metaphor as a tool for organization study:

  1. It provides a vocabulary which can be used to express, map, and understand a particular organizational phenomenon that otherwise is difficult to study.
  2. Metaphor exhibits broader meaning and are not constrained to one sense or a single interpretation, but, rather have a distinct quality of opening up new and multiple ways of seeing, conceptualizing, and understanding of organizational systems.
  3. Metaphors have a strong semantic quality that makes them irreducible to “non-metaphorical language.”


  1. a) Culture: Culture could be defined as the shared patterns of values and beliefs of the people that helps them understand how the organization functions (Deshpandé, Farley et al. 1993)7, while Schein (1984)8 highlights that culture could be studied at various levels like office layout, behavior of the people, dressing, stories etc. If we look at Akhuwat’s culture from the aforementioned points, we can clearly see that unlike offices of other microfinance organizations which are lavishly furnished and are located in posh areas with very high overheads, lots of cars and fanfare, Akhuwat offices are located in mosques, in small communities, with very minimum furniture. All guests are seated on the carpeted floor, there are no air-conditioners.

For Akhuwat, the association with the Masjid became a source of inspiration and strength, and supplemented the lending philosophy and methodology of Akhuwat. The centrality of the mosque in Akhuwat’s operations helped Akhuwat in achieving multiple objectives. Firstly, it helped them revive an old tradition set by the Holy Prophet (Sunnah)9 of using the mosque for social purposes. Secondly, the place and context of the mosque added a sense of sacredness, honesty, trust and responsibility. Thirdly, a vast network of mosques is spread throughout the country. The catchment area of each mosque is usually a small community of 200-300 houses. Fourthly, the aggregation of the populace at the mosque five times a day for prayers allows Akhuwat to market its cause and products without investing heavily in marketing workforce or promotional drives. Fifthly, the traditional models of group lending require one person to interact with a group, whereas for individual lending mass mobilization was the major constraint, both in terms of effort and Human Resource (HR) requirement. The use of mosque by Akhuwat reduced the effort of mobilization as well as the HR needed to manage the loan operation. Signing of the loan documents in the mosque made the document sacred and was instrumental in reducing the default rate. Moreover, since a mosque represents aggregation of a small community whose members know each other, socially and economically, it was easy to gather ‘guarantors’ for social collateral.

Centrality of the mosque in Akhuwat’s lending methodology enhanced the operational efficiency, while the effectiveness increased multi-fold.  The stakeholders are meaningfully engaged through the mosque for transactions and agreements. Governance, transparency, participation and societal responsibility are best manifested. As such the mosque becomes a catalyst for socio-economic development of the community and moral uplift of the society.

The office environment gives a clear message to its community that we are not about making money and we live and practice the concept of Akhuwat. Low-cost office locations in mosques (Masjids) help them reduce their overheads and give an aura of trust and at the same time saves money in creating awareness and provides easy access to its customers. This entire system creates a culture of brotherhood. People who visit offices are impressed by the simplicity of the organization and readily buy the concept that it has to offer.

Employees of the organization also exude the same spirit of Akhuwat. Most of them belong to the area which Akhuwat is serving. They work there with zeal, a sense of ownership, and mission. They all talk the same organizational language and communicate more or less the same message. They believe in the concept of Akhuwat and are proud to be associated with it.

  1. Volunteerism: One very important contributor to the success of Akhuwat is volunteerism. According to Dr. Amjad Saqib, the founder and Executive Director, “In Akhuwat, we expect people to give their time and their abilities for free; the spirit of the entire organization is based on volunteerism. This is also derived from our faith, in which the principle of volunteerism is the most important part of our tradition. Every prophet is a volunteer, right from Abraham, Moses, Jesus, and the Holy Prophet (PBUH). The Prophets always looked beyond themselves to help the community socially, morally, economically, and politically. We wanted to follow the footsteps of these great prophets and adopt their methods of bringing change to the community through participation.”

Akhuwat has two types of organizational streams running in parallel: ‘hired management’, and ‘volunteer management’. The ‘hired management’ is responsible to run the operational affairs, adheres to the Akhuwat values, and has committed itself to the cause. Its untiring effort in loan disbursement and recovery, and to make the new model successful, makes it exemplary in the highly materialistic micro-finance world. Volunteers make a steering committee that not only looks after some aspect of the operations of the branch but also acts as a mouth piece, face and event organizer of Akhuwat. Most of the volunteers are well-to-do persons of that community or of the adjoining area. These volunteers join only because of the concept of Akhuwat and are not motivated by any financial or personal rewards.

  1. Performance: According to the audited statement of accounts of Akhuwat, the fund has crossed the 1 billion mark. Today, Akhuwat has 54 branches in 10 cities of Pakistan and has a recovery rate of 99.85%. This is exceptional by all standards. The performance of Akhuwat surpasses any other microfinance of the world in two major ways:
  2. It is the only micro-finance organization that takes no processing fee, late surcharge, or profit on its loans.
  3. It is the only micro-finance organization that has converted its borrowers into donors.

This again was made possible by highlighting the true spirit of Akhuwat as envisaged by the Holy Prophet (PBUH). The contribution achieved in some branches is enough to cover the overall operational cost.


Akhuwat loan philosophy and portfolio differs from traditional MFIs. It offers not only micro-finance loans for entrepreneurial purposes but also provides social loans targeted to address social needs of the deserving, such as marriage loans, health loans, educational loans, and liberation loans meant to liberate people from the clutches of loan sharks.  Akhuwat also distinguishes itself from other MFIs by being the first MFI which writes-off the loans if the borrower becomes physically handicapped and is unable to pay back the loan, besides providing a wheel-chair to the handicapped free of charge. Furthermore, in case of death of the borrower, Akhuwat extends support to the bereaved family and gives monetary support to cover funeral charges and provides subsistence allowance for three months if the deceased was the only earning member of the family. Akhuwat expands its donor base not by going to international donor agencies; rather it encourages existing borrowers, who have improved their economic condition through loans borrowed from Akhuwat, to participate in the uplift of their brethren and become donors.


Unlike group finance methodology adopted by conventional MFIs, where group members provide social collateral, Akhuwat gives loans to families and not to individuals and furthermore, it requires personal guarantors in order to disburse the loan. The borrower family is required to present one individual guarantor, preferably from the neighborhood.  In case of failure to repay the loan, the borrower may be relaxed by extending the stipulated timeframe. Later, the guarantors are approached and reminded of their responsibility and relation to the borrower i.e., of brotherhood, and are asked to support and facilitate payment of the due amount.


Akhuwat disburses loans in a ceremony performed inside the mosque which is a symbol of harmony among people where all converge regardless of caste, color and creed. The whole community is invited where first the introduction to Akhuwat, its cause, guiding principles and methodology is given. The local speakers like Imam Masjid10 and social activists also participate in such events. This helps Akhuwat in efficiently promoting its cause and helps bring in more donors as well as borrowers.  The occasion is also used to highlight the social agenda of Akhuwat and an attempt is made to instill ethical values required for business.


Akhuwat also engages in the capacity-building of people by advising for business, arranging seminars, conducting entrepreneurial trainings, and distributing literature. The propagation of the social agenda at the platform of the mosque further emphasizes female education, community service, plantation, and adherence to law and ethical values. The participants of the loan disbursement events are also moved to contribute to the cause and help their brethren in need.


Although they reveal reality partially, metaphors are a strong tool to understand and analyze organizations. Akhuwat as an organization exemplifies the use of the ‘Akhuwat’ metaphor as a guiding philosophy, in both letter and spirit. In fact, Akhuwat mirrors the metaphor ‘Akhuwat’. It not only has developed its organizational and financial model in the broad interpretation of the spirit of ‘Akhuwwah’ but has also demonstrated that poverty cannot be alleviated without taking care of the feelings and wellbeing of the community. Unlike other micro-finance models, where individuality is highlighted in the name of group-lending, this model creates collectivism and brings the community together. This is the only model in the world that encourages the borrower to become a donor and take part in uplifting the overall community. The voluntary model of Akhuwat ensures that the spirit of ‘Akhuwwah’ is executed in its truer sense, in totality. Well-to-do people of the community converge to dedicate their time, energy and skills for the cause of ‘Akhuwwah’.  This leads us to conclude that ‘Akhuwat’ as a metaphor has delivered to the organization of Akhuwat more than any other metaphor could have ever delivered to any organization. Moreover, Akhuwat–the organization—that embodies ‘Akhuwat’ – the metaphor— has delivered more to the world than any other micro-finance model or metaphor. Certainly, ‘Akhuwat’ as a metaphor and Akhuwat as an organization, both offer interesting insight and great promise and urge the microfinance world to rise above financial interests and look for and embody some ‘larger than life cause’ to serve the lives of the poor. While other organizations claim “we mean business,” Akhuwat claims “we mean Akhuwat.”


1) Harper, M. (2008). “Akhuwat.” Akhuwat: Microfinance with a Difference”: Friends of Akhuwat (1) 29-40.

2) The saying narrated by Anas ibn Malik (may Allah be well pleased with him!): lA yu’minu aHadukum HattA yuHibba li-akhIhi mA yuHibbu li-nafsihi [literally: None of you believes until he wants for his brother what he would want for himself.]

3) Morgan, G. (1980). “Paradigms, Metaphors and Puzzle Solving in Organization Theory.” Administrative Science Quarterly 25(4): 605622.

4) Morgan, G. and K. I. Video training (1997). “Images of Organization.”

5) Ibid.

6) Cornelissen, J. P. (2005). “Beyond Compare: Metaphor in Organization Theory.” The Academy of Management Review 30(4): 751-764.

7) Deshpandé, R., J. U. Farley, et al. (1993). “Corporate Culture, Customer Orientation, And Innovativeness In Japanese Firms: A Quadrad Analysis.” The Journal of Marketing 57(1): 23-37.

8) Schein, E. H. (1984). “Coming To A New Awareness of Organizational Culture.” Sloan Management Review 25(2):3-16

9) Sunnah, the way Prophet PBUH used to do things. In Islamic tradition, to practice Sunnah is considered an act of high virtue and every Muslim tries to uphold Sunnah.

10) A person who leads prayers and is responsible for the mosque operations and is held in high regard by the community.

Achieving Triple Bottom Line: Sustainability, Growth and Welfare

Ather Azim Khan  agencies give a large amount of money to icrofinance is now a popular form of poverty alleviation. Many   international   donor

Microfinance Institutes (MFIs) for poverty alleviation. The funds are given directly or indirectly to the MFIs at varying costs. Determining the right cost of financing is an important issue in microfinance as the most suitable cost of financing is likely to result in achieving the objective of poverty alleviation both in the short term and long term. Some microfinance providers prefer low cost for various reasons, which are discussed in detail in this article and others advocate high lending cost. These two viewpoints have their own reasoning and set of arguments, which require analysis and debate. This article attempts to find out the most suitable approach of microfinance with reference to Pakistan. As the economic, financial, social and political conditions are unique and the behavior of borrowers is also different in every country, so it cannot be said that one approach of microfinance will prove to be the best for all countries and all societies. The approach of microfinance that stresses the importance of existence and continuous development of MFIs argues that poverty alleviation through microfinance is linked to the existence of MFIs and if these institutions get weakened the process of poverty alleviation will slow down and ultimately stop when these institutions will cease to exist. This requires strengthening the institutes and keeping individuals i.e. poor borrower as the second preference. In contrast to this approach is the viewpoint of helping the poor and keeping them at the top of the priority list. The second approach supports helping poor not only by giving them opportunities to borrow but to give them finances at a cost lower than the market. These two approaches of microfinance are called ‘Institutionists’ Approach and Welfarists’ Approach respectively. As the names imply the first approach supports the sustainability and growth of microfinance institutes and the second favors giving low cost financing to the poor i.e. subsidized financing and it does not consider institutional profits. The two approaches are discussed in detail to compare and contrast not only the approaches but also the benefits and problems of each approach.


This is now considered the ‘Old Paradigm’ as now most of the MFIs have agreed to the second approach for their better performance and long term existence. This approach is also not very popular in the world for the reason that microfinance fund providers do not approve of this approach and require the MFIs to charge high interest rates. The Welfarists’ approach sees microfinance as one of the most effective tool to help poor come out of poverty and have a sustainable life. The concept is directed towards a self-sustainable family and self-sustainable-society. The goal is poverty alleviation including women empowerment, as microfinance mostly emphasizes lending to women and involving them in economic activity, hence empowering them. This approach does not only lead to financially stronger families but also generates economic activity. However the prime objective of this approach is not to generate economic activity using microfinance; it is a byproduct and not the main product. The main objective remains helping the poor and to reduce poverty.  So in the light of this approach microfinance decisions should not be made to generate or increase economic activity but to help the poor and alleviate poverty. This may or may not generate economic activity and may or may not be a financially viable proposition in all cases but it should not be stopped because of the fact that a MFI is not a financially viable proposition for a certain period of time. The approach stresses the fact that if it is not considered an act of welfare then microfinance will be discontinued in many cases. If we look at it from the ‘Welfarists’ angle it becomes extremely important that those who do it i.e. either the state or non-state players must have a good intention i.e. to help the poor. This means morality becomes an integral part of microfinance in this approach. When microfinance is offered by a bank or financial institution, formed for the purpose of making profits then it only operates when it earns profits or foresees profits in the future and in case there are no chances of profits this activity will be stopped by such banks and financial institutions.

The approach calls for subsidizing this finance and ask some outsiders to bear the cost of funds and operations to give money to the poor at a minimum rate. In this approach mobilizing savings of the poor is not the main objective. Robinson (2001) writes that savings mobilization is not a common feature of this poverty approach. So the advocates of this approach certainly do not emphasize on making profit and are not largely concerned about the issue of sustainability. The point that a reduction in the fund base over a longer period would entail that lesser and lesser people will be benefitted is not an issue in this approach. Robinson (2001) writes, “Most institutions that provide subsidized credit fail and even successful institutions following the poverty lending approach, in aggregate; can meet only a small portion of the demand for microfinance”. Morduch (2000) calls it microfinance schism and gives a split of two approaches. In the case of Welfarists the emphasis is actually placed on the number of beneficiaries rather than the profits made by the MFIs. Welfarists are more concerned about the well-being of the people than financial stability or financial sustainability and believe in giving perpetual subsidies to maximize the impact of microfinance in poverty reduction. This approach is a humanistic approach where institutions become less important and human beings become more important. The responsibility of the society towards the poor at present is more important than the probable poor of the future, hence maximum benefits should be passed to the poor at present and better strategies and policies should be formulated to make subsidies more consistent. Woller (1999) writes, “Like Institutionists, Welfarists have assumed more impact than they actually have been able to document,” which is a statement that needs empirical evidences from various parts of the world. ‘Welfarists’ believe that the ‘Institutionists’ approach is a threat to the shared objective of poverty reduction. Another valid argument of Welfarists is that if microfinance is basically to help the poor than with ‘Institutionists’ approach it would never be a tool to help the poorest of poor i.e. the destitute. If this element of subsidy and donation is added to microfinance then it can reach to that section of the poor who are truly deprived. Robinson (2001) writes that the approach of the

‘Institutionists which suggests that financial sustainability and access to financial services are more important than poverty alleviation is very strongly opposed by Welfarists. Robinson has also written that some of the best microfinance providers are Bank of Rakyat Indonesia (BRI), BancoSol in Bolivia and Association of Social Advancement (ASA) in Bangladesh.

Welfarists react very strongly to the Institutionists’ approach of making self-sufficiency the goal of MFIs and they stick to their very basic objective of helping the poor and alleviating poverty. Because of their approach Welfarists are not ready to make any compromise on their goal and they are not ready to take steps to attain financial self-sufficiency.

The question that arises is whether organizations should be allowed to undertake microfinance as an economically viable activity and make profits out of it i.e. making profits by helping the poor. As and when a microfinance bank or financial institution for microfinance will become economically unviable it will stop its operations and the poverty reduction rate will start reducing in the community.

Looking at microfinance banks we find that large funds can only be created in the government sector or in the private sector; large fund base cannot be formed unless some proper corporate structure is given to these organizations. This corporate structure on one side is helpful to have a large fund base but on the other side increases the cost of operations and eliminates the human element from the organization i.e. to help the poor and so it becomes more mechanical. In Pakistan some NGOs have changed their status and converted into banks such as Agha Khan Rural Support Program – AKRSP into First Microfinance Bank and Kashaf Foundation into Kashaf Bank. These bank models are primitive and these banks operate in somewhat the same way as commercial banks.

Many experts believe that micro businesses profits margins are very high and so it is possible to pay very high interest rates on micro loans (Woller, Dundord, & Woodworth, 1999). It is something that seriously needs to be considered and brought into the limelight for discussion. It is said in the USAID report of 2005 that most of the microfinance organizations charge very high interest rates all over the world but in Pakistan the interest rate charges are very low and so the MFIs in Pakistan are not self-sustainable. It is generally accepted that all MFIs like other business organizations should be able to make enough profits to cover their cost of operations and cost of borrowing otherwise these organizations will not be self-sustainable. There are several questions that need to be asked regarding this approach, some of which are mentioned below:

  1. Why are funds given at high rates or at the same rates to MFIs and by MFIs to the poor borrower?
  2. Why are the operating costs high, even higher than other profit making organizations, when the default rate is almost negligible or in some cases much less than the commercial borrowers?
  3. Why is philanthropy not considered as one of the source of providing funds to MFIs?
  4. Why do not governments subsidize lending in case of microfinance?
  5. Why are benchmarks not set for operational expenses of MFIs?
  6. Does every poor person borrow microfinance for doing business?
  7. Is every poor borrower capable of doing business?
  8. What if there is loss?
  9. Are profit rates in different micro businesses known?
  10. What are the other dimensions of microfinance apart from micro loans?
  11. How are returns taken or calculated on other forms of microfinance i.e. projects of health, sanitation, insurance etc.

Marguerite Robinson in her book ‘The Microfinance Revolution’ has given the theory of subsidy free microfinance, as in long term subsidies cannot continue and are reduced or eliminated. Robinson calls it the “old paradigm” where poverty alleviation microfinance programs are highly subsidized and were not successfully run due to high losses. She contrasts it with what she calls the “new paradigm” where financial services are offered in a cost effective manner i.e. making financial institutions (MFIs) self sustainable. This new paradigm requires charging high rates to the poor as they can make good profit of the money borrowed. There is no difference of opinion on the issues of transparency, efficiency, maintaining the link between cost of credit and interest rate, mobilizing savings and providing incentives to the employees but the issue is why MFIs should be self sustainable? The society as a whole and the governments specifically should always contribute for the betterment of the poor and deprived of the society and this contribution should always be available. Robinson (2001) wrote that arguments given in favor of the old paradigm need to be analyzed and readdressed. The arguments are the following:

  1. Lower income people need credit for productive inputs
  2. Because their incomes are low, they cannot save enough for the inputs they need
  3. They also cannot afford to pay the costs of the credit they need
  4. Lower-income people are generally uneducated and do not trust banks; they either do not save, or prefer to save in nonfinancial forms
  5. If such people are to save in banks, they need to be taught financial discipline


The other side of the picture is the ‘Institutionists’ approach. This approach is very much tilted towards the building of sustainable institutions instead of depending on ‘individuals’, philanthropy or temporary funds. Institutions are long lasting and sustainable and in the long run can support the cause of poverty alleviation. Institutes are not run at the will or desires of individuals but with given norms, principles and rules and are governed by regulatory authorities and so it is difficult to misuse the funds available in these institutes. It is important to build institutes rather than stressing on the need of philanthropy. For an institution to be sustainable it is very important that the institution generates enough revenues that make up its costs i.e. borrowing cost, operational cost and capital expenditures.

Borrowing cost is associated with borrowing money from a lender. This comprises mainly of the interest paid on the amount borrowed and includes other related cost to process the loan. In most cases the funds provided by international and national agencies are at relatively lesser rates than the rates charged for other types of financing. Borrowing cost is to be generated by the organization every year either from charging high interest from the poor or by taking donations or further loans. Operating cost is the second head that needs to be paid by an MFI on regular basis. These costs depend upon the setup of the organization and include the salary of employees, utilities expenses, travelling cost, repairs and maintenance, depreciation etc. Capital expenditure are the cost to be incurred on the two approaches of microfinance i.e. ‘Welfarists’ Approach and Institutionists’ Approach and are based on two theories:

‘Economic Theory’ and ‘Psychological Theory’.


Economic theory of microfinance treats microfinance institutions as an infant industry. It is said that the gist of the economic argument is that success in any business venture, including MFIs, is determined by the entrepreneurs’ ability to deliver appropriate services profitably. However, studies conducted in different parts of the Third World show that there are no successful MFIs by this definition. At best, some MFIs cover their operating costs while some of the better known among them are able to cover a part of subsidized cost of capital employed. This situation suggests that the MFIs are not likely to become financially viable in the long run.

The infant industry argument in economics is based on the concept of protectionism i.e. policies or doctrines which “protect” businesses and workers within a country by restricting or regulating trade with foreign nations. The infant industry argument as first given by Alexander Hamilton in 1790, is that nascent industries because of their smaller size do not enjoy economies of scale and so have high costs as compared to their competitors and so they need to be given protection in the initial phase of their business until they achieve economies of scale and become competitive.  This justifies measures of protectionists in the scaffold of free trade theory in its classical sense. This infant industry argument is applied to microfinance industry to help it in the initial stages until it reaches the level where it can survive on its own and sustain itself. This means MFIs should be provided low or cost free funds, subsidies in operating costs, long term funds and other benefits to help them survive in the market for a certain period of time till they achieve economies of scale. Elahi (2004) suggests that critical evaluation is needed to judge the academic virtue of microfinance theory.  The Economic view is supported by the main theorist of capitalism; Adam Smith who stressed that prosperity depends upon the progressive creation of private wealth. Smith (1776) emphasizing the point that the main source of creation of private wealth is the self-interest says, “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their self-interest; we address ourselves not to their humanity but to their self-love and never talk to them of our own necessitates but of their advantages”.

Thomas Hobbes, who is a diehard materialist, gives his view of every economic activity as nothing but making profit and self-interest. He calls human beings as living machines and says that these machines move only by natural passions i.e. appetites and aversions. He further defines appetites as innate and social; the biggest social appetite he considers the desire for power. He considers the human beings are propelled only by self-interest, which may be the fear of extinction that leads to law and justice (Levy, 1954).

Coming back to the Infant Industry argument sprouting from the protectionist’s argument in mercantilism, which was developed to accommodate mercantilist feelings inside the Adam Smith’s structure of liberal economic theory, it is this argument which is invoked to develop microfinance in the Third World.  


Psychological theory of microfinance makes a distinction among professional money lending and microfinance and presents microfinance providers as, “social consciousness driven people”. The psychological component of the micro credit theory – known as social consciousness-driven capitalism – has been advanced by the most ardent promoter of micro finance, Dr. Muhammad Yunus. Yunus (2008) argues that a species of profit-making private venture that cares about the welfare of its customers can be conceived. In other words, it is possible to develop capitalist enterprises that maximize private profits subject to the fair interests of their customers. Analysis of this theory reveals that it is based on the understanding of capitalistic approach, an approach where profit is the ultimate objective and as said it has a somewhat selfish nature. Investors also have the profit motive and funds are available when the required rate is offered to them. This does not consider that element which provides funds for reasons other than making profit or getting high returns. In the present age where social responsibility is also associated with corporations, an additional objective of social returns is also added to profit making. Considering this, we can differentiate entrepreneurs into three categories. The first group consists of traditional capitalists who mainly maximize financial returns or profit, the second group is of philanthropic organizations e.g. traditional microcredit NGOs and public credit agencies that mainly maximize social returns and the third group consists of entrepreneurs who combine both rates in making their investment decision under the additional constraint that financial return cannot be negative. The third group consists of entrepreneurs who are to be treated as socially concerned people, and microfinance, which is to be treated as a social consciousness-driven capitalistic enterprise (Elahi & Danopoulos, 2004).

Yunus (2008) writes that these socially motivated people can bring a change in the society as they can do many activities of public welfare while making profit. He includes health care, education, training, financial services, energy ventures, old age homes, recycling enterprises or marketing of products made by poor. Yunus (2008) suggests that this system can replace the current ruthless capitalistic system where some are winners and more are losers. He suggests that this system does not demand charity from individuals, companies or public sector but it demands doing business with the poor for profit. In the words of Steven Covey this leads to a Win-Win situation where the entrepreneur does not have to sustain a financial loss to help the poor but rather brings him on board and makes him self-sustainable. Yunus (2008) explains the weakness of the theory of capitalism as apparent from the inconsistent views of Adam Smith, which are very much contradictory to each other.

Adam Smith who on one hand gave the main theory of capitalism also talks about the psychological aspect in his book ‘The Theory of Moral Sentiments’. The interesting point is that this book was published many years before the ‘Wealth of Nations’, so it may contain a view point which may be altered by Adam Smith himself. Smith (1759) thought that the real source of moral judgement lies in the conception of sympathy, as written by him:

“How selfish so ever, man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it. Of this kind is pity or compassion, the emotion, which we feel for the misery of others, when we either see it, or are made to conceive it in a very lively manner. That we often derive sorrow from the sorrow of others is a matter of fact too obvious to require any instances to prove it; for this sentiment, like all other original passions of human nature, is by no means confined to be virtuous and humane, though they perhaps may feel it with the most exquisite sensibility. The greatest ruffian, the most hardened violators of the laws of society, is not all together without it.”

Smith in his views about the psychological approach negated Thomas Hobbes who conceived human beings as living machines. Hobbes wrote, “The human heart is simply a spring; nerves are nothing but a complex system of strings; and joints are just wheel which give motion to the whole body.” According to Adam Smith there is a fundamental virtue in human nature. He used the word sympathy in describing the moral judgment of human beings. Smith says that the word sympathy includes two kinds of moral judgment i.e. one is the propriety of an action that determines right or wrong and the second is an action’s merits or demerits that determines praise or blame. The conflicting views of Adam Smith in his two books ‘The Wealth of Nations’ and ‘The Theory of Moral Sentiments’ are stated in the literature as ‘Das Adam Smith Problem’, this is an allegation that the two cannot be compatible.  


The combination of the two theories creates disbelief about the theory of microfinance. Capitalism is mainly driven by selfishness and so social consciousness or sympathy cannot be the motivating factor to do business in capitalistic economies. As microfinance is also motivated by same factors so in capitalistic economies it is not possible to successfully do micro financing without the profit incentive.

In addition to the psychological basis for microfinance, some other practical problems also exist. The current microfinance revolution is very much based on the accusation that banks are prejudiced to the poor, particularly women, and the poor, again particularly women, have potential and required capabilities to do a business, generate economic activity and earn for them and their families; the only problem is unavailability of finances. Yunus (2008) in his article on the basic premises of microfinance accuses conventional banks and financial institutions of this act. Banking policies of conventional banks are against lending to poor people and particularly to women for the obvious reason of high risk of default, as the poor are not in a position to give security or collaterals against any loans. This creates a fear of high chances of bad debts and defaults. The reality is entirely different; the rate of default in micro financing is much lesser than in conventional lending. This restriction of borrowing money from conventional banks stops the poor from utilizing their entrepreneurial skills and making extra income for them and their families. Elahi & Danopoulos (2004) writes, “This banking policy produces two socially undesirable consequences; first, it deprives many poor people of their right to make a living through self-employment and second, it forces them to borrow from informal lenders at exorbitant rates of interest. Together, these two consequences contribute to the perpetuation of poverty in Third World countries. More specifically, the formal financial sector in third world countries is a contributor to pervasive poverty problem.”

The critics of the microfinance theory of social consciousness driven capitalism raise some questions, which are pertinent and need to be addressed seriously such as, from where entrepreneurs driven by social consciousness will be found as those who pursue economic or financial enterprises have profit object and have no or very little social consideration and those who have social consideration do not have much funds. Elahi (2004) has emphasized that the proposition that economic enterprises will work with social consciousness is inconsistent with very foundation of capitalism and if capitalism does not work for the society then it is not an economic system of democracy. Those who will work for microfinance providers with the same return will be considered socially conscious and those who work for commercial concerns will not be, although both get the same.

In the same article Elahi (2004) also criticized the economic theory of microfinance i.e. the infant industry argument. The argument is mainly based on time i.e. those who are already in the business for some time are established and have the economies of scales and the new entrants cannot compete with them and so the new comers need time to establish. So the comparative advantage that the established enterprises have is not with the new comers but it is not the case with microfinance, rather in microfinance it is the opposite of this. The microfinance institutions have definite comparative advantage over conventional banks and financial institutions in rendering their services to the poor and so the microfinance industry is not consistent with the infant industry argument. Further, will there be a time where poverty will be completely eradicated from a country or a society or it will have perpetual existence. In the case it is perpetual the infant industry argument will always be applicable. A horrible consequence of this may be that there will be interests of microfinance institutions to have perpetual poverty as their very existence will depend on the continuation of poverty in a society.

Elahi (2004) continuing his criticism on the infant industry argument says that in international trade, where this argument is actually applied, the consideration is national development and so we need to see how microfinance contributes to the development of a country. The objective of microfinance as stated is to alleviate poverty and hence contribute in the national development but the proofs of national development due to microfinance are very scarce, particularly in the Third World.


Akhuwat has given a unique model, which is close to the Welfarists’ Approach. This model is in one way the extreme form of ‘Welfarists’ Approach as they recommend low financing cost or subsidized financing and Akhuwat has totally eliminated the cost of financing (this is not less than a miracle in the present state of affairs where extremely high interest rates are charged by most of the MFIs in the world). This is extreme welfare of the poor that they are given access to finances without any consideration. This results into adding the profits of micro businesses done by the borrowers of Akhuwat manifold as the cost of financing also goes to the borrowers as their profit. The fear of eroding the fund, which is most commonly expressed against Welfarists, is totally absent in this model as the repayment is about 99%.

In the Akhuwat model the focus is on the community, which is the most important element of any sustainable model i.e. the rich of the community helping the poor of the community for no material return; those from the community who do not have monetary resources volunteer as workers; the place selected for the activities is the mosque where the whole community combines, the poorest of the poor stands beside the richest of the society. Akhuwat has its own philosophy, the philosophy of self reliance, not in terms of an organization but in terms of a community and society. It has a theory of creating sustainability by utilizing some innate qualities of human beings, which are common in all.

Akhuwat has not given a name to it but the theory can be called “The Theory of Communal Viability”. This theory gives a unique way to create sustainability and growth i.e. by taking support of the community both financially and in the form of volunteer work directed to the welfare of community. The following are the contributing factors to sustainability as per the philosophy of Akhuwat i.e. long term reliance on the community:

  • Instead of commercial viability of an institution what can also be considered is communal viability in case of welfare institutions.
  • Sustainability is not only possible by charging high interests. Sustainability can also be achieved by making people realize that it is their duty to return what they borrow so that it can be used for others like them (in case of microfinance).
  • Philanthropy is not a temporary act.
  • Philanthropy is found at all times and in all parts of the world.
  • Poor borrowers are more reliable, honest and trustworthy.
  • Doing good to someone creates a desire in the person to do something good in return.
  • Volunteerism is one solution to high operational cost.

This does not only result in sustainability but also leads to growth. Growth of a welfare organization is not only linked to its self-generated profits but also to its self-generated image, which induces people to continuously support and increase their support at all times.

Akhuwat poses a challenge to the world experts who have negated the ‘Welfarists’ philosophy and it provides a model that is not only workable but also replicable. Another dimension that Akhuwat has added is that of financial support from the poor. This philosophy of making the poor borrowers donors of Akhuwat is also a unique application of Akhuwat’s Philosophy of community participation.

Akhuwat has more to give to this world than only microfinance; it gives ideas of alleviating poverty through unique financial institutions.

A model of a bank which is unique in nature is developed by Akhuwat i.e. Akhuwat bank. This concept is related to operating a bank in altogether a different way. The bank will be based on philanthropy of a different kind i.e. people will not be asked to donate money to the MFI but to lend money free of cost to the bank and the bank will provide all such services that a commercial bank does i.e. making deposits, withdrawals, transfer etc. This in fact will give the depositors a guarantee that their money is safe and can be drawn at any time without giving any prior notice. The contribution of the depositors to the cause of poverty alleviation will be the interest that they will forego on their deposits as they will only get back their principal amount. In this way their money will be circulated in the microfinance network and yet they do not have to sacrifice any of their principal amounts. This is likely to encourage many who do not have enough money to donate for any social cause but have money set aside for their future needs. This money will be available for a certain time period for circulation in the microfinance network and many poor people will be able to use it and come out of poverty. The details of this bank are worked out and its feasibility is prepared.


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The Importance of Cultural Relevance to the Success of Microfinance

Grace Clark

Akhuwat has achieved immense success so far. And there is every reason to suppose that this success will continue because Akhuwat has done three things that are important to the success of new endeavors.

  1. First, it has developed a lending system based on Islam which is embedded in the culture of the people of Pakistan.
  2. Second, building on that Islamic foundation, it has also developed a system that is as much dependent on social capital as it is on financial capital.
  3. Third, it has incorporated Islamic values of tolerance and acceptance to include all members of the community as potentially eligible for its programs.

A review of the literature on innovative policies tells us that new ideas will succeed best if they are embedded in the culture in which they are developed. (Floraand Heidenheimer, 1982), in her article on “Islamic Microfinance and Socially Responsible Investing” particularly, Chiara Segrado (2005) points out that “Microfinance is also a very flexible tool that can be adapted in every environment based on the local needs and economic and financial situation.” (p. 13) Researchers in Ghana (Hendricks, 2000), Morocco (Allaire et. Al., 2009), the Dominican Republic (Scholz, 2006), and Bangladesh (Rana, 2008) stress the importance of cultural relevance to the success of a microfinance project.

First, Akhuwat has been built on principles and concepts which are deeply embedded in the culture of much of Pakistan because it developed a system that is grounded in Islamic law.  Since over 90% of the people of Pakistan are Muslims, people are very familiar with the precepts of Islam.  Even minorities have a good understanding of some of the basic tenets of Islam and the values it upholds.  The most obvious Islamic value that Akhuwat has embraced is that it does not charge any interest, only a one-time administrative fee and insurance.   That is very important to poor people, because it means that they have a good chance of paying back the loan, rather than becoming enmeshed in a trap of ever-increasing interest that they can never hope to repay.  This most basic structure of the organization tells potential borrowers that the system really is designed to help them.  It tells them that other members of their community are willing to help them help themselves.

Second, the system is designed to help people earn their living though honest work.  In Islamic tradition, people are expected to work to support themselves and their families, if they are able to do so.  Lending money at no interest enables ordinary people to establish a business with which they can support themselves and pay back the loan.  It helps people to find work that is meaningful to them and provides a service which is valuable to the community.

It may be helpful at this point to distinguish between a loan to help someone who is able to work and zakat.  Zakat, which is also an important part of Islamic law, is different from a loan and has a different intended purpose.

According to most fiqhs of Islamic law, zakat is meant to be an absolute gift to someone who is not able to support himself, or who is not in a position to support himself fully.

Because it is an absolute gift, there can be no question of repayment.   Zakat is a pillar of Islam precisely because it supports the community as a whole by helping those persons who are least capable of helping themselves.  The Quran specifies eight types of people, primarily the old, the sick and disabled, widows and orphans, and some others.   Zakat is a blessing not only to the recipient but also to the giver.

In contrast, Akhuwat’s loans focus on those who can work to support themselves.  This is also important to the wellbeing of the whole community.

There are three other important ways in which Akhuwat builds on people’s feelings about Islam in a very constructive way.  Akhuwat’s own literature (2008), talks about how disbursing loans in mosques and churches helps impress upon the borrowers their moral obligations to repay the loans.  It also inspires borrowers to go on in the future to help others as they themselves have been helped.

Akhuwat uses much more than just religious locations, however.  Because Akhuwat is rooted in Islamic law, it has a system of great integrity and transparency that gives the borrowers confidence in the integrity, stability, and fairness of the system.

Additionally, that same Islamic emphasis on integrity and honesty is critical to success in another way also.  In my 40 years of experience with financial disbursement systems, both working in them and studying them all over the world, it is not the recipients of the financial assistance who are the biggest potential threat to the system through cheating or failing to meet their financial obligations. Rather, the biggest potential threat to the financial integrity of the system may come from a few of the administrators of the system who are the ones most likely to steal large amounts of money or somehow misuse the system to their own advantage. Akhuwat’s emphasis on Islamic integrity and ethics, along with the knowledge that the top management is not getting rich from the system, but giving of their own time and treasure to it, also helps to keep all of the people involved with the administration of the system at every level grounded in their moral obligations to be honest and transparent.  It helps keep the entire system honest and focused on the goal it set out to achieve, that of helping poor people to improve their own lives through small loans.

Another Islamic tradition that Akhuwat has based itself on is religious tolerance. Islam has a long and distinguished history of religious tolerance.  Throughout most of the 1400 plus year history of Islam, the community has generously accepted and protected non-Muslims as members of the community.  This is not only kind.  It also incorporates the knowledge, skills, and abilities of people who are not Muslims.  It also promotes community stability, which helps all the business in the community to flourish, Muslim and non-Muslim alike.

So, Akhuwat has been successful in great part because it has based its system on a system of beliefs and values that most of the people in this society understand and can relate to.

In addition, Akhuwat seems to be successful because it also relies on social capital as well as financial capital.  While there are many definitions of social capital, I shall define it for our purposes in this essay as intangible concepts that are necessary to make a small business a success and to help people to repay a loan.

One of the types of social capital most often cited in the microfinance literature is family networks.  When someone takes out a small loan, it is not just one person committing himself or herself to repaying the loan, but his or her whole family.  The greater the extent to which people in the family share a sense of reputation and a sense of solidarity and interdependence, the more likely they are to profit from the loan, both financially and socially, and to pay it back. Reputation, especially one’s family reputation, is very important in Pakistan, and the Akhuwat system builds on this important social capital to insure that people repay their loans.

Akhuwat has also focused on some other types of social capital that I believe are equally important.  People who give to Akhuwat give not only some of their money, but also their time, and their experience and business knowledge.  Years ago when I was conducting research on zakat in Pakistan, I was frustrated by the blithe assumption by many people, especially officials, that widowed women could become self-supporting as seamstresses simply by giving them a sewing machine.  There was no recognition that being a seamstress in a village is a small business, and that in addition to knowing how to sew and having a sewing machine, a seamstress needs to know how and where to buy raw materials, how to market her services, how to talk to customers, how to keep track of income and expenses, and how to collect what is owed to her.  Without these other skills, no seamstress will succeed in supporting herself, no matter how talented in sewing she may be.

A great part of what has made Akhuwat so successful is that the people giving to Akhuwat, who include many former borrowers, are giving not only money, but also the benefit of their experience in the same culture to help potential small businessmen and women learn these other skills so that they really can be successful.  They help people to plan their businesses.  They teach people how to keep books, how to market their products or services, how to buy the right amount of raw materials, and how to collect debts.

Akhuwat has also been successful because it has recognized that debt bondage is one of the most vicious aspects of Pakistani culture, and it has worked with debtors, especially those in brick kilns, to help begin a new life. As Akhuwat moves forward into the future, I hope it also begins to provide opportunities for other people involved in what are either illegal or marginally legal forms of modern slavery to buy their way out and back to a normal life.  Human trafficking is one of the saddest manifestations of the darker side of South Asian culture.  Part of what makes it possible is that the families of people who have been kidnapped, beaten, raped, and drugged often do not want their family member back even if they are somehow able to escape, because of the shame and loss of honor they fear they would experience.   Akhuwat could play an important role in helping to redeem those souls who find themselves in this sort of situation, so that they could begin a new life by restoring some honor and human dignity to them.

We have discussed that there are many things which have helped Akhuwat be successful, but I believe that at least part of their success is attributable to these three things.  First, the enterprise is rooted in Islamic beliefs and tradition; second, it makes use of social capital as well as the financial of the people contributing to it. Third, it is rooted in tolerance and acceptance to help all the members of the community to improve their lives, which makes the whole community stronger financially and socially.

There can be no doubt that Akhuwat has been very successful so far.  Congratulations on what you have already done, and may God’s blessings be on all of the people involved in Akhuwat as it goes forward to help many more people to become liberated from poverty.


Akhuwat. (2008). Akhuwat: Microfinance with a Difference (3rd ed.). Lahore: Mahmood Kamboh Press.

AllaireVirginie, Arvind, A., Laurence, A.-M., & Karuna, K. (2009). The Success of Moroccan Microfinance Institutions: More than Just a Culture. En Scientific Commonms.org.

Baktiar, R. M. Culture oriented Management Control Systems of Microfinance Institutions in Bangladesh. Dhaka.

Chiara, S. (2005). Islamic Microfinance and Socially Responsible Investments. Torino: The University of Torino.

Claudia, S. (2006). Social Capital and Microfinance in the Dominican Republic: Bringing Culture Back In.

Hendricks, L. (2000). Microfinance and Culture: A Case Study in Ghana. Ghana: Canadian International Development Agency.

Khalid Zaheer

 The fact that Akhuwat has taken the initiative to come to the aid of the poor by providing them with the desperately needed financial resources is admirable but not unique. It is admirable because in the poverty stricken society of ours such initiatives are a rare reason of hope for millions of enterprising men and women who, for want of funds, are unable to realise their God-given potential and make a living through their own efforts. The scarce financial resources of the society are made available to a small number of very affluent people who get the bulk of the funds of the society pooled by the banking system simply because they are already rich and influential. The commercial intermediaries and NGOs that are providing microcredit facilities to the poor are doing an admirable job in making the economic opportunities more equitably available to the deserving segments of the society. And Akhuwat is an important participant in contributing in that important service.

However, what makes the initiative of Akhuwat truly unique is its policy of charging no interest whatsoever from its borrowers, of enabling them to come to the aid of their fellow brothers and sisters in difficulty after they have started earning on their own, and of arranging the Masjid to be the centre of the noble activity of contacting the beneficiaries and distributing funds to them.

The fact that Akhuwat charges no interest whatsoever from the borrower and yet has been able to expand the volume of its operations many times more is an indication of the fact that the noble idea is indeed workable. Despite believing in the fact that riba(interest) was prohibited by the Almighty, many Muslims are unsure of the workability of running lending-based projects based on that idea. Akhuwat has taken a lead in showing to the rest of the world in general and Muslims in particular that there was nothing unworkable in what their God demanded from them.

What has emerged as a natural consequence of this bold policy of Akhuwat is the outstanding success it has been able to achieve in that the very people who were only yesterday starving for funds and were helped out by Akhuwat are now contributing funds from their own earnings to contribute towards helping other brothers and sisters who are in similar situations as they were in not long ago. I claim that it’s a natural consequence of Akhuwat’s policy of not charging interest because it is God’s rule that goodness begets goodness. What Akhuwat is experiencing is the practical manifestation of this principle as a bonus advantage (barakah) from God.

The third aspect of uniqueness of Akhuwat’s operations is the role it assigns to the Mosque (Masjid) in its operations. For Muslims, the Mosque occupies a central place in the social, political, and economic activities of the community. Most certainly Masjid is first and foremost a place for remembering and worshipping the Almighty. The Qur’an describes Mosques (Masajid) as houses which “Allah has desired that His name be remembered and exalted in them.” However, it is a historical fact and religious reality that the Masjid was the place where Muslims would assemble in the presence of the prophet, God’s mercy be on him, to talk about and decide their important social, economic, and political issues. Delegates from outside Madinah were received in the Masjid, Muslims used to proceed for their important expeditions from the house of God. This was because the Masjid was designed to be the centre of the collective life of Muslims.  Nikah ceremonies and many other similar activities were also performed there.

The religious tradition about Masjid continued during the time of the pious caliphs. Jumu’ah prayer was considered not only an occasion for remembering God collectively but for taking stalk of collective affairs of the community and making the leader of Muslims, the caliph, accountable before the community for his performance. The caliph and his appointed representatives were the only people who were considered eligible to lead the Jumu’ah prayers in particular and the other congregational prayers in general.

There is another reason why Akhuwat’s policy of making the Masjid the centre of their activities is an important step in the right direction. The Qur’an describes the twin obligations of Salat and Zakat as binding on Muslims. When the Qur’an describes in two words the practical approach a good Muslim must adopt, it mentions that he is the one who says his prayers regularly and pays Zakat. While prayers bind a believer with his God, Zakat relates him with his fellow humans. A good Muslim discharges his obligations towards both. We all know that prayers are ideally performed in the Masjid. It is also desirable that Zakat and other charitable acts like distributing funds to the poor be performed in the house of God too.

The fact that Akhuwat has been able to experience overwhelming success in meeting its goals is the natural outcome of the sincere implementation of its policy eliminating riba, genuinely helping out the poor, and giving the Masjid an important role in the implementation of its objectives.

The success of Akhuwat should not only be a good model to follow for other NGOs engaged in welfare projects but for the Muslim Governments too. The positive role of Masjid must be revived in the social, economic, and political aspects of the life of Muslims. That will not only enable the rulers to go about doing their business effectively by being more accountable to the people and, more importantly, through developing the feeling that they are accountable to God as well. The revival of the central role of Masjid will also bring about another significant, much-desired change: it will gradually kill religious sectarianism and extremism from the country. The sacred space of the Masjid has become a breeding ground for sectarianism and extremism because it is devoid of state supervision; it is completely in private hands, and apart from formal prayers there is little collective activity taking place in the most sacred place of the Muslim society.

If following the footsteps of Akhuwat, our society gives back to the Masjid its due role as the central place for important social, political, and economic activities, as indeed was the case during the golden era of Muslims, we will be able to reap many significant benefits for the society.

May God enable Akhuwat to grow in its operations many, many times more so that it is able to not only eliminate the scourge of poverty from the Pakistani society but is also able to guide it towards more positive activities for its overall material, moral, and spiritual uplift.

Investor Capture of Conventional Microfinance and

Lessons for Islamic Microfinance

Christopher Candland

Those who spend their wealth in the cause of God and do not follow their gifts with reminders of their generosity or with injury for them their reward is with their Lord.Sdestruction, but do good, for God loves those pend your wealth in the cause of God and make not your own hands contribute to who do good.

Al Quran Majid (2.195 and 2.262)

This chapter reviews the major findings of empirical research on microfinance and makes recommendations for proponents of Islamic microfinance.1

The major finding of research on conventional microfinance is that it has been far more effective at rewarding investors than in alleviating poverty. The research indicates that the ideological orientations of proponents, the endurance of popular myths about the morality of poverty, the authority of insider researchers, the profit-maximizing power of investors, and the use of social coercion – not success at poverty alleviation – drives the growth of conventional microfinance.

Islamic microfinance differs from conventional microfinance in that it requires that lenders not be enriched by their possession of capital.  If a microfinance enterprise is Islamic it does not profit from another’s labor.  There are no investors or paid managers.  Accordingly, an Islamic microfinance association avoids the major pitfall to conventional microfinance: capture by profit seekers and abandonment of an anti-poverty mission.  But there are pitfalls that Islamic microfinance must work to avoid.

Islamic microfinance must ensure that lending arrangements promote rather than undermine social cohesion and that lenders and borrowers build social cohesion not through enforced trust but through solidarity; that independent researchers not merely insiders, are permitted to conduct assessments; and that repayment terms are lengthy enough to enable productive investment rather than merely enable consumption smoothing.  Using these three criteria, a critical examination of the operation and impact of the Lahore-based Akhuwat, an Islamic microfinance association, indicates that Islamic microfinance can be more financially sustainable, more effective in poverty alleviation, and more broad-based than conventional microfinance.


We begin with definitional clarifications.  Microfinance is the provision of capital in small amounts to those who do not offer physical capital as a security for the return of borrowed capital.2 Conventional microfinance is the circulation of that capital in such a way that it earns a financial return to the lender.  Islamic microfinance is a form of non-conventional microfinance that is in keeping with the principles of Islam.

The foundation of Islamic finance is promotion of social justice.  The Quran asserts that wealth belongs to God, not to the person who happens to hold it.   Spending to please God [infaq] is an almost continuous theme of the QuranInfaq includes both zakat, an annual obligation on Muslims to give 2.5 percent of accumulated assets to designated deserving people, and sadaqah, an additional voluntary act of giving.  The three core principles of Islamic finance are avoidance of profit from lending of money [riba], avoidance of undue uncertainty [gharar], and avoidance of gambling or speculation [maysir].  While there is some debate among Islamic scholars as to whether a charge to borrowers for the operating expenses associated with administration and collection of loans constitutes riba, all agree that those who provide capital should not enjoy a profit from merely possessing and lending capital.  Thus, there are no investors in Islamic microfinance.  Merely labeling a financial operation “Islamic” or using Arabic terminology, such as mudarabah, does not make it compliant with the principles of Islam.3

Interest free microfinance is a novel concept to those who have only known conventional lending.  But interest free microfinance is familiar to hundreds of millions of people worldwide, such as members of Indonesia’s arisan or Pakistan’s komitee (rotating savings and credit societies) who provide credit to one another without interest charges to the borrower.  The core principle of the arisan and the komitee, like other rotating savings and credit societies, is that each member of the association contributes an equal portion of the capital that is then made available to the chosen recipient.  All members, including past recipients, continue to contribute their equal portion at mutually agreed upon intervals until each member has received his or her allotment of capital.  The amount of that capital is equivalent to the sum of each group member’s contribution.  The selection of the recipient can be determined by chance or according to the group’s perception of greatest need.  The collection and distribution of capital typically becomes a social and religious occasion.  In Indonesia’s arisan, participants take turns hosting other participants for a meal and recite from the Quran at the start and conclusion of the event.  These social and religious activities strengthen the bonds of trust in the savings and credit society.


What are the major research findings on conventional microfinance? Research on the operation and impact of conventional microfinance on the poor is divided.  Some research finds that conventional microfinance has improved the life of the poor. Other research finds that conventional microfinance has done little or nothing to improve the life of the poor. Some research finds that conventional microfinance has worsened the life of many by contributing to increased indebtedness and violence against borrowers at the hands of lenders, members of lending groups, and family members. (Goetz and Sen Gupta 1996; Karim 2011).

Two sets of observations help to makes sense of the ambivalence in the research on the effectiveness of conventional microfinance in combating poverty:

  1. Research that claims that conventional microfinance has improved the life of the poor tends to be focused on repayment rates and capitalization. Research that claims that conventional microfinance has not improved the life of the poor tends to focus on community and intra-household relations, including gender relations.
  2. Research that claims that conventional microfinance has improved the life of the poor tends to be written by researchers who are themselves employed or funded by conventional microfinance associations or their financial backers. Research that claims that conventional microfinance has not improved the life of the poor tends to be conducted by independent researchers who are not employed or funded by conventional microfinance associations or their financial backers.

Critical assessments of conventional microfinance make two broad assertions.  First, the portfolio performance of microfinance is not a good measure of its effectiveness at poverty alleviation. (Ashfaq Khan, 2008). The ability of a microfinance organization to attract borrowers and to secure repayment is not an indicator of the ability of that organization to lift people out of poverty.  Second, the original mission of microfinance was aborted in the early 1990s when international financial institutions began to promote and invest in conventional microfinance (Bateman 2010).

Findings by independent researchers who focus on control of the loan by the borrower and more equitable community and intra-household relations cluster into two groups: 

  1. Most microfinance associations do not enable the poor to escape poverty. (See Hulme and Mosley 1996; Morduch 1998; Zafar and Abid 1999, Hussein and Hussain 2003, Lohano and Jamal 2003)  Indeed, most microfinance associations serve the non-poor not the poor, both as defined by international measures and national criteria and relative to the range of incomes in the society involved in microfinance.

Reasonable people would not support a program that alleviates poverty by serving the non-poor.  In a macrosocial or structural perspective, poor people are trapped in poverty in part because they do not have access to the social networks that promote social cohesion.  Of course, there are notable and encouraging self-made exceptions to the rule.  But poor people can be excluded from social networks merely on the basis of being perceived as poor.

  1. Conventional microfinance can sustain or even rely on and promote social coercion. Women are often the subjects of such coercion.  There is no evidence that societies that are saturated with microfinance are victims of atomization, as one might expect from a “win-win” poverty alleviation scheme that promises both financial returns to lenders and alleviation of poverty for the borrowers.  Rather, there is evidence of intensification of social coercion.  There is evidence that conventional microfinance relies on social collateral to ensure repayment and leads to violence against borrowers, especially female borrowers. (See Goetz and Sen Gupta 1996; Rahman 1999; Fernando 2001; Fernando 2006; Karim 2011)

It is plausible that proponents of conventional microfinance have not had sufficient opportunity to recognize that conventional microfinance has been captured and is leading to perverse results.  Certainly it is difficult for large organizations to reorganize rapidly for a different set of strategic objectives, especially objectives as different as profit maximization is from poverty alleviation and building solidarity among the poor.  These underlying claims on human society might be very difficult for some to accept.

Conventional microfinance has captured the imagination of many development practitioners and scholars because it combines three ideas that are immensely appealing to some: (1) individuals are responsible for their own welfare; (2) involvement in the market liberates people from poverty; and (3) poor people should (because its good for their selfdignity and because they can) lift themselves out of poverty through their own efforts.  Corresponding to each of these ideas is a counter-positive claim that is equally appealing: (1) societies are not responsible for the welfare of individuals within them; (2) markets do not create poverty; and (3) voluntary initiatives to alleviate poverty are preferable to government regulations.  Recent research, summarized above, indicates that these ideas, however appealing, are not accurate.


What are the implications of these findings on conventional microfinance for proponents of Islamic microfinance?  Proponents of Islamic microfinance can be encouraged that Islamic microfinance avoids one of the deepest and most common pitfalls to conventional microfinance: the capture of the institution by profit-seekers at the expense of poverty alleviation.But proponents of Islamic microfinance must be vigilant to avoid other pitfalls.

  1. Even microfinance without investors or paid management can be captured by the non-poor and exclude those whose poverty could be relieved most effectively by access to capital.
  2. Return rates should be determined in consultation with borrowers, not fixed by lenders, and should be set to maximize the chances that borrowers and their dependents will escape and remain out of poverty. Islamic microfinance does not necessarily require a return of capital.  Indeed, conditional cash transfer programs, which have been associated with government and foreign assistance policy, could be effectively practiced by private philanthropies.  Repayment terms might be too short-term for borrowers to use for anything other than consumption smoothing.  Longer loan terms would limit the availability of new loans, but allow for more productive investments by borrowers.


Akhuwat is a microfinance organization established by a group of Pakistani civil servants.  Among them was Dr. Muhammad Amjad Saqib, a medical doctor and a writer, who heads Akhuwat.  The story told by members of that group, whom are now the organization’s trustees, is that they were having dinner together, listening to Dr. Saqib’s description of the Punjab Rural Support Programme’s (PRSP) microcredit program, which Dr. Saqib was then running.  Dr. Saqib had worked for the PRSP from 1998 to 2003.  He regarded the PRSP’s interest rates of more than 20 percent per annum to be exorbitant and counter to the principles of Islam.  Mr. Ranjha donated Rs. 10,000 to start an interest-free microcredit fund.  His wife had given him the money with the instruction to donate it to a good cause.5  Akhuwat began providing interest free loans to individuals in 2001.The fund was registered as a Society in 2003.6

Originally, Akhuwat used the same social collateral method as the Grameen Bank.  By 2006, Akhuwat began to phase out its rotating group-lending program in favor of individual lending.  Rotating group lending – lending to successive individuals within a group – ensures high return rates because each individual within the group is entitled to a loan only if the previous borrower has repaid her loan.  As groups are composed of people who live in the same neighborhood, those who are waiting for their opportunity to take a loan can take measures to ensure that the current borrower repays his or her loan.  Mohammad Yunus, the founder of the Grameen Bank, describes this collective monitoring and social pressure inherent in lending to a member of a group on condition that the previous borrower in the group has repaid his or her loan as “social collateral.” (Yunus in Krishna, Uphoff, and Esman 1997). Akhuwat has found that the principle of social collateral allows group leaders to exercise undue influence over group members.7  In 2010, Akhuwat began to shift into true group lending wherein all members of a group simultaneously have access to capital rather than individuals within groups taking turns.The group to which Akhuwat lends most commonly is the family.8

Some Islamic scholars hold that a charge to borrowers for operating costs of loans and collection is not interest [riba].9  At the outset, Akhuwat charged borrowers a membership fee of 5.5 % of loans over Rs. 4,000, which covered about half of Akhuwat’s operating costs.  Akhuwat abolished that fee in 2008.  Presently, the only charge to borrowers is a Rs. 100 (US$ 1.17) application fee, to ensure that applicants are serious about taking the loan if approved, and an optional insurance fee, of 1% of the loan, which, if purchased, pays for the outstanding loan and provides monthly benefits in the case of death or disability during the repayment period.

Akhuwat runs along four principles.  Dr. Saqib explained these principles to a group of 70 potential borrowers at the Shah Jamal Mosque in Lahore.  The first is that interest should be avoided, as it is inherently unjust to make money from lending money.  Akhuwat does not charge interest.  The second is that “indigenous” venue should be the base for outreach and lending activities.  Akhuwat meets in mosques.  The third principle is volunteerism.  Voluntary social service is a major force in Akhuwat effectiveness.  Even the paid staff is motivated by a calling to do social service.  Akhuwat also relies on volunteers, who are paid for expenses, largely transportation related, and may apply for loans, but who are not provided a salary.  The senior management is all volunteers.The fourth principle is reciprocity.  It is not required but strongly encouraged that all borrowers themselves become donors.  There was an enthusiastic response to this notion from the potential lenders assembled at the Shah Jamal Mosque.10

As of June 2011, Akhuwat has 55 branch offices, 400 employees, 90,000 current borrowers, lent more than Rs. 1,100 million (more than US $ 12.8 million), and a return rate of more than 99%.11  Former borrowers themselves have become donors.12  Akhuwat has demonstrated that Islamic microfinance is an effective technique for poverty alleviation.


The ideological appeal of conventional microfinance (i.e., that individuals are responsible for their own welfare, that markets liberate, and that the poor can enrich themselves through their own efforts) has prevented its proponents from seeing its limitations and pitfalls.  The ideological appeal of Islamic microfinance can have similar blinding effects on the proponents of Islamic microfinance.  It is not the adjectives that we use to describe arrangements for using capital but the actual use of capital by those who hold it that determines whether capital accumulates to the detriment of others or circulates for greater social good.

Giving to please God creates bounded solidarity, a variety of social capital that is based on a common identity not on social coercion.13  Faith can and should create enduring social cohesion.  In a group that is based on bounded solidarity, membership itself is a reward for inclusion.  As the benefits of faith are unlimited and inalienable, we can dismiss the assumption of scarcity of supply of satisfaction in relation to demand.  Therefore, “defectors” and “freeriders” do not threaten an association based on faith.  Giving to please God [infaq] is a legitimate and effective form of financing.


Waheed, A., Nadeem, A., & Ali, S. A., (2009). “Micro-Finance and Poverty Alleviation: A Case of Pakistan,” Comsats Institute of Information Technology International Business Research Conference, Lahore.

Bateman, M., (2010). Why Doesn’t Microfinance Work? The Destructive Rise of Local Neoliberalism, London.

Develtere, P., & Huybrechts, (2001). “Evidence on the Social and Economic Impact of Grameen bank and BRAC on the Poor in Bangladesh,” Leuven: Higher Institute of Labour Studies.

Fernando, J., (2006)“Microcredit and Empowerment of Women: Blurring the Boundary Between Development and Capitalism,” and “Microcredit and Empowerment: Visibility without Power,” Micro-Credit: Perils and Prospects, New York: Routledge.

Fernando, J., (1997). “Nongovernmental Organizations, Micro-Credit, and Empowerment of Women,” The Role of NGOs: Charity and Empowerment, The Annals of the American Academy of Political and Social Science, Sage Periodical Press.

Akhuwat., (2008). Friends of Akhuwat, Akhuwat: Microfinance with a Difference, Mahmood Kamboh Press, Lahore.

Goetz, A. M., & Rina, S. G., (1996). “Who Takes the Credit? Gender, Power, and Control Over Loan Use in Rural Credit Programs in Bangladesh,” World Development.

Hulme, D., & Paul M., (1996). Finance against poverty, London.

Hussein, M., & Shazreh H., (2003). “The Impact of Microfinance on Poverty and Gender Equity: Approaches and Evidence from Pakistan,” Pakistan Microfinance Network, Islamabad.

Karim, L., (2011). Microcredit and its Discontents: Women in Debt in Bangladesh, University of Minnesota Press, Minneapolis.

Khan, A., (2008)“Tackling the Failure of Microfinance Efforts through Amalgamating Microfinance with Charity: Two Viable Alternatives in the Context of Pakistan,”  Australasian Accounting Business and Finance Journal.

Khan, A. A., (2008). “Islamic Microfinance Theory, Policy and Practice,” Islamic Relief Worldwide, Birmingham.

Lohano, H. R. & Haroon J., “Microfinancing: Fighting Against Poverty?” Social Policy and Development Centre, Karachi.

Morduch, J., (2000). “The Microfinance Schism,” World Development.

Morduch, J., & Barbara H., (2002)“Analysis of the Effects of Microfinance on Poverty Reduction,” New York University, New York.

Portes, A., & Julia S., (1993). “Embeddedness and Immigration: Notes on the Social Determinants of Economic Action,” The American Journal of Sociology.

Rahman, A., (1999). “Micro-credit Initiatives for Equitable and Sustainable Development: Who Pays?,” World Development.

Yunus, M., & Alan J., (1998). Banker to the Poor, University Press, Dhaka.

Yunus, M., (1997). “The Grameen Bank Story: Rural Credit in Bangladesh,” in Krishna, Anirudh, Norman Uphoff, and Milton Esman, eds., Reasons for Hope: Instructive Experiences in Rural Development, Kumarian Press, West Hartford.

Zafar, R., and Abid, S., (1999). “Impact Assessment as a Management and Policy Tool: The Social Economic Outcomes of Kashf’s Microfinance Series,” Kashf Foundation, Lahore.

Zaidi, “Akhuwat: Institutional Review”



1) This chapter was presented as a paper to the International Conference on Islamic Microfinance, Faisal Mosque Auditorium, Islamabad, June 13, 2011.

2) It would be wrong to define microfinance as the provision of loans (rather than capital) because it is not essential to the practice that capital is returned by the borrower to the lender.  Donation is a legitimate form of financing.  Additionally, microfinance cannot be defined as the provision of loans to those whom do not have physical capital to offer as a security for a loan.  Those who have such physical capital but do not offer it as a security still access microfinance.  Finally, it would also be wrong to define microfinance as provision of credit to a group.  Many microfinance operations lend to individuals or use members of a group only to ensure repayment of the loan.

3) Mudarabah refers to a relationship in which one party [the rabbul-mal] provides capital to another party [the mudarib] who will apply effort and expertise to invest that capital, with the understanding that the two parties will share the profit, or loss, at a ratio mutually agreed upon in advance.

4) Insiders have been the typical evaluators of conventional microfinance organizations.  My observation is that Akhuwat has opened itself to evaluation by those who have no connection to or interest in promotion of the organization.

5) Author’s conversation with Mr. Mohammad Saleem Ahmad Ranjha, December 18, 2010.

6)  Friends of Akhuwat, Akhuwat: Microfinance with a Difference,

(Lahore: Mahmood Kamboh Press, 2007) 5

7) Author’s conversation with Dr. Kamran Shams, December 20, 2010.

  • Friends of Akhuwat, Akhuwat: Ta’aruf, Falsafa, Usul, Tareeqakar, aur Kuch Aaraa, [Akhuwat: Introduction, Philosophy, Principles, Method, and Some Opinions], Lahore: Friends of Akhuwat, 2010, 35.
  • That is the position, for example, of Muhammad Taqi Usmani.  Others, including Javed Ghamdi and the Jamia Ashrafia, hold that charging for operating costs is a kind of riba.  Author’s conversation with Kamran Shams, December 20, 2010.

10) Author’s observation December 18, 2010.

11) Author’s conversation with Amjad Saqib, June 12, 2011.

12) Author’s interview with Fayyaz Baqir, Islamabad, December 2, 2010.

13) On bounded solidarity and enforceable trust, see Portes and Sennsennbrenner 1993: 1324-1335.

Sustainability and Growth inAkhuwat: A Myth or Reality

Agha Ali Jawad

Development surcharge for expansion from its customers/clients or borrowers. “Growth” is defined as a continuous increase in the client base of the MFI.  This paper also recognises the general perception that growth and sustainability are inter-linked.Institution (MFI) to recover all its costs and also a ustainability in this paper is defined as the ability of a microfinance program or a Microfinance

Many MFIs in Pakistan that claim to be fully sustainable have actually made it possible by accessing huge grant funds and concessional debt. Most MFIs in Pakistan are charging as much as 30% to 40% to recover their costs. Analyses show that many MFIs over time have increased the interest rates to achieve self sufficiency rather than reducing their costs.

Akhuwat, on the other hand has defined sustainability and growth in a different manner. Akhuwat considers the entire community as a client/customer in that the cost recovery and providing financial resources to run the micro finance programme is the responsibility of the society, not necessarily that of the poor clients/customers/ borrowers.

Akhuwat does not operate like a conventional institution; it does not operate to make a profit, nor does it charge any interest on its loans.  The little it did was that it used to charge a very small flat membership fee of just five per cent which has been abandoned in the current financial year.  Akhuwat is based on the principle of Qarze-e-Hasna, the provision of interest-free loans to those in need.  Akhuwat is founded on a belief in society and in the principle of philanthropy and derives inspiration from the Muslim spirit of mua’khat or brotherhood.

There is now a rapidly expanding Islamic finance sector but Islamic principles have yet to be applied in microfinance.  Many microfinance institutions argue that the micro credit clients earn a very high rate of return on their small enterprises and therefore this makes the interest on loans much less important than access to credit.  This argument is backed up by the fact that without collateral or sufficient financial infrastructure, the alternative in many areas is informal moneylenders often employing unscrupulous practices.  Yet Akhuwat’s very existence has placed the grounds for this debate in question.  In the case of Akhuwat it is not a choice between sustainability through compromise or simply operating on a short term basis, Akhuwat instead has chosen to make the seemingly impossible, possible; sustaining itself for the last ten years on the principle of low operational costs and a reliance on the goodwill of society in the form of donations. Recently, Akhuwat has started providing cash donation boxes to its clients and other stakeholders to collect small voluntary donations to institutionalise this concept.

In this way, Akhuwat has become recognized as a pioneering organization and an important case study in the microfinance sector.  This is in terms of exploring how the organization has offset the tendency for higher operational costs in microfinance and how it has been able to make these systems sustainable in the long term.

Since its establishment in 2001, Akhuwat’s funding has come solely from individual philanthropists in the form of donations and a part from membership fees.  The organisation has only recently started accepting donations from larger international funding sources also.  Given that the organisation does not receive interest on its loans and that other more conventional funding sources for organisations of this kind are limited, it is important to look into how this model has been sustained.  When it initially started, many viewed Akhuwat’s model of microfinance overly idealistic and unsustainable in the long term and yet ten years after its initial establishment, Akhuwat, not only continues to operate but has significantly grown.


This model has been partly achieved by keeping operational costs extremely low.  This is in part achieved through Akhuwat’s use of local mosques, shrines and churches for its operations.  These are used as centers for loan disbursement.  The organization holds fund raising conferences prior to Ramadan and religious sites are used as an avenue for community participation.  Disbursement takes place 2-3 times a month with 100-150 loans being disbursed at any single event, also often held in mosques or churches. This aspect adds a religious obligation on people to repay loans.  This method has not only saved on rental costs etc, but has also importantly opened the doors of religious sites for socioeconomic development.

This approach makes sense given Akhuwat’s close alignment to religious values.  Akhuwat’s model supports the view that it is unjust to earn an income from money itself and the assumption that an institution can predict the outcome of a business venture, implied through the normal system of fixed interest rates, which in Islamic beliefs only God can know.  The five per cent fee which Akhuwat used to charge clients was meant solely for transaction and operating costs and not for the cost of the money itself.  Many previously questioned whether such a strategy would be viable in the context of microfinance. This is because of the often unpredictable operating costs due to the spread of clients, and differing terms of agreement allowed for smaller businesses.

Another way that costs have been minimized is that the organizational setup has been kept very simple.  Akhuwat relies on volunteerism and its Executive Director Dr. Saqib and Board of Directors receives no remuneration.  Legal aid has also been provided to the needy by a team of law students on a voluntary basis. Some friends of Akhuwat have also assisted the ED in setting up systems in Akhuwat in an honorary capacity.  The organization does not own any vehicles with staff using local transport or their motorcycles, for which they are reimbursed.  The offices are small and simple, and very little furniture is used with ‘farshi’ seating arrangements.  The head office itself also acts as a branch being responsible for managing individual loans.  Group loans are also mainly administered from the houses of group presidents where all meetings are held.  The entire structure is focused on implementation and no waste is permitted.

Akhuwat’s sustainability has also been achieved through high loan recovery rates with most loans being repaid within eleven months.  All loan applicants undergo a social assessment with the requirement for guarantors able to vouch for the persons’ credentials and the applicant’s families brought into the process.  In fact some loans are given to the family as an economic unit bringing both men and women into the process in unison and as equals.  This is both innovative and logical given that many enterprises are family owned.  It also encourages repayment through the incentive of a joint responsibility.

Apart from these family enterprise loans, the organization otherwise focuses on disbursing loans to individuals rather than the more common method in microfinance of disbursement to groups. This is in order to be as inclusive as possible and prevent manipulation of the loan process.  The repayment process is very flexible and based on the applicants’ ability to repay, evaluated according to the business plan forwarded and in accordance with their knowledge, skills and experience.  Capacity building also takes place to enable the loan to be used as productively as possible and to facilitate repayment.

Akhuwat also, has the advantage of being a ‘local organization’ with the majority of staff coming from the area of operation.  This means that its programmes are not only driven from the grass-root level but that the employees are highly dedicated to their work.  It may also make the loan process more ‘personal reinforcing clients’ sense of affiliation to the organization.  Evidence of this is that Akhuwat has found some former loan clients are willing to lend to others in their areas through the organization. These clients may not be excessively wealthy but they still express a desire to contribute and donate to Akhuwat showing just how important they believe its services to be. In this way some branches are even becoming self-financed. Clients may also do “internships” with borrowers who are already running enterprises and happy that others should also be provided with the opportunities accorded to them.  Akhuwat is clearly an organization where its clients develop a strong affiliation to it with many becoming committed to its cause.

However, Akhuwat’s goal is not just to be sustainable as an organization in its own right, but to demonstrate the sustainability of its model, illustrating to others that the provision of interest free credit for the poor is possible through civil society support.  In this perspective, sustainability can only be proved through inspiring others through the dissemination of information on the organization. This needs to not only inform others but inspire them enough replicate its practices.


Akhuwat maintains a policy of complete transparency and continuously seeks to share information and best practices from its model.  This is so much so that Akhuwat’s model is now also part of the curriculum (in the form of a case study) at the University of Southern New Hampshire, USA.  Students at Lahore University of Management Sciences (LUMS) study the Akhuwat model also.  Many of Akhuwat’s volunteers are also university students which may go onto incorporate this model in their later careers.

Akhuwat is not in competition with other microfinance institutions, this would go entirely against the organization’s objectives and rather, Akhuwat coordinates activities with other NGOs and Social Welfare Organizations.  Akhuwat continuously seeks local partners and like-minded people to start a branch in their own cities. In case a partner organization is found, Akhuwat provides training to the local staff, and assists in setting up the branch. Leaving the operations to the partner organization, Akhuwat acts as a monitoring organization. A team from Akhuwat head office regularly visits the branches for monitoring and training purposes.

In consideration of its very flat structure, the question arises of how far can Akhuwat continue to grow?  This is in terms of geographical expansion and client base whilst retaining the same minimal operation expenses.  Dr. Saqib envisions Akhuwat as an apex organization using its credit pool as equity to assist partner organizations in running operations. (Figure 7.5) It has been suggested that Akhuwat may in the future form its own microfinance bank.  This is an amazing achievement given the organization’s modest beginnings and that Akhuwat has not compromised on its core values of having no interest rate on loans, a significant source of operational funding for any microfinance institution.

Akhuwat breaks all the rules of modern finance and yet it would appear to be not just sustainable but growing.  The fact that this growth continues on the level it does ten years after the organisation’s establishment discredits any inference that the sustainability of this model is a myth. Clearly there are many lessons to be learned from Akhuwat in terms of what is possible and simple belief in the willingness of society to protect its poorest.


Since 2005, the Rural Support Programmes (RSPs) and particularly the National Rural Support Programme (NRSP) have been engaged in federating the settlement level Community Organizations (COs) into village level Village Support Organizations (VSOs/VOs/VDOs) and union council level Local Support Organizations (LSOs). The purpose of federating the COs is to create a structure of community institutions that reports to its foundation i.e. the COs and their household members, brings resources and forges local level linkages to provide a variety of services to the local population through their constituent COs/VSOs.  The LSOs are also trained to provide financial services to the unserved segment of the rural population i.e. the women, the poorest and the most vulnerable. NRSP and other RSPs have provided a seed capital known as the Community Investment Fund (CIF) to the mature LSOs who manage this fund as a revolving fund to extend small loans to the poor population using their own methodology, products and procedures. The LSOs possess many commonalities with regards to Akhuwat. These are low cost of operations, a cadre of volunteers providing a variety of services to the LSOs and local level donations.  The platform of LSOs provides a tremendous opportunity to Akhuwat to replicate its approach country wide.

Recently, Akhuwat has oriented a large number of staff of NRSP as a potential entity to replicate Akhuwat’s approach through its network of LSOs. NRSP has so far provided seed capital (CIF) to 71 LSOs amounting to Rs. 92.5 million who have been trained to manage the fund and run a micro credit programme on their own.  The Pakistan Poverty Alleviation Fund (PPAF) has recognized the CIF approach in the livelihood component of PPAF Phase III. Many government projects are also recognizing the CIF approach as a sustainable method of providing financial services to large population through the community institutions. Gelling RSP’s social mobilization approach with Akhuwat’s methodology and donors willingness to provide seed capital to the community institutions are the three factors that will open doors for ensuring the provision of microfinance at the grass-root for income generation and improving quality of life of people through empowering them on a sustainable basis. The sustainability and growth when achieved through the three elements i.e. social mobilization by RSPs, replication of Akhuwat’s methodology and commitment of donors would have a different meaning of sustainability and growth i.e. empowering all poor people.

Sustainability, Scalability and Impact of Akhuwat  by Faheem ul Islam

Poverty is pronounced deprivation in well-being, and comprises many dimensions. It includes low incomes and the inability to acquire the basic goods and services necessary for survival with  dignity. Poverty is an ethical concept, not a statistical one. Inherent in the term “poverty”, when applied to human beings, is the notion of a life situation that should not exist. It is not only lack of roti, kapra aur makan—food, cloth and shelter.  Amartya Sen, renowned economist, awarded the 1998 Nobel Prize Nobel for his contribution in welfare economics, aptly sums up many dimensions of poverty as lack of “capability”—capability to overcome violence, hunger, ignorance, illness, physical hardship, injustice and voicelessness.  The World Bank has argued that poverty often lies in the absence of opportunity, empowerment and security, and not just the absence of food on the table.

Three core values of human development are: 1) Sustenance: The ability to meet basic needs, including food, shelter, health and protection; 2) Self-Esteem: To be a person, a sense of worth and self-respect; 3) Freedom from servitude: To be able to choose is the concept of human freedom. Development is both a physical reality and a state of mind – three objectives of development are: 1) To increase the availability and widen the distribution of basic lifesustaining goods such as food, shelter, and protection; 2) To raise levels of living, including higher incomes, the provision of more jobs, better education, and greater attention to cultural and humanistic values; 3) To expand the range of economic and social choices available to individuals by freeing them from servitude and dependence not only in relation to other people and nation-state but also to the forces of ignorance and human misery. Sustaining a declining poverty trend in societies requires a concerted effort to improve the capabilities of the poor and vulnerable. It also requires well-designed programs that help to mitigate the vulnerabilities induced by economic downturns or natural disasters.

According to a recent report 22.3% of people in Pakistan are below poverty line (see Table 8.1) and another 20.5% remain vulnerable.  Accelerating economic growth is necessary but not sufficient to bring down poverty levels. As past experience in the case of Pakistan and other countries has repeatedly suggested, periods of high growth that have occurred at the expense of macroeconomic stability do not tend to produce the desired outcomes with regards to poverty reduction in a sustainable manner. The challenge is, as always, how to make growth more inclusive by spreading its benefits to large segments of the population.  The allocation of more resources for the provision of basic services such as education, health sanitation, and housing particularly for those belonging to lower income groups, and targeted programs for the benefit of the poor in the broader framework of social protection,  remain critical drivers of long run reductions in poverty.

Income distribution in Pakistan has also worsened during the period 1988-2010. National inequality estimates in terms of Gini coefficient show an increase of about 20% or 7 percentage points from 0.35 in 1987-88 to 0.42 in 2009-2010. The provincial Gini coefficients are the highest for Punjab, followed by Sindh, Khyber Pakhtunkhuwa and Baluchistan. The empirical assessment of relationship between inequality and economic growth reveals that average growth worsens income distribution and is unlikely to aid in reducing poverty without explicit income distribution policies. Powerful evidence of the fact that the nature of growth in Pakistan is “inequality-increasing” is supported by the fact that an increase in per capita income also raises inequality; with one percent increase in per capita income raising inequality by 0.081 percent. Inequality in income and assets is also a significant factor behind crime, social unrest and violent conflict.


Source: Economic Survey of Pakistan

The inability to access appropriate financial services — is a social problem attracting greater attention recently (see Table 8.2 for Financial Penetration in Pakistan). For many low-income households, financial exclusion compounds their poverty. Availability of financial service is a necessary, but not a sufficient condition for use (see Table 8.3). Even in presence of service providers, barriers such as high costs, information asymmetries, regulatory requirements or low financial literacy may result in low access.


Source: Economic Survey of Pakistan Microfinance is the provision of financial services to lowincome clients or solidarity lending groups including consumers and the self-employed, who traditionally lack access to banking and related services. More broadly, it is a movement whose object is “a world in which as many poor and near-poor households as possible have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance, and fund transfers”. Those who promote microfinance generally believe that such access will help poor people out of poverty.

According to Pakistan Microfinance Network, total market of microfinance in Pakistan is around 27 million. The sector closed the year 2010 serving approximately 2 million active borrowers with an outstanding loan portfolio of PKR 25.5 billion and nearly 3.3 million active savers with collective savings of PKR 11.9 billion. Microfinance outreach in Pakistan expanded 27 times from approximately 76,000 active borrowers at yearend 2000 to around 2 million active borrowers in 2011. However in the same period real average outstanding loan balance declined by more than 25%.


Microfinance Banks account for 23% of the active borrowers, Microfinance Institutions 25%, Rural Support Programs 42% and others 9%


Source: Pakistan Microfinance Network Recent reports reveal, Microfinance, which focuses on loans in poor areas largely shut out from traditional banking services, gained prominence globally when Muhammad Yunus won the Nobel Peace Prize in 2006 for his role in founding Bangladesh’s Grameen Bank. Yet the past two years have been marked by surging defaults in some countries. Microfinance markets in Nicaragua, Morocco and Pakistan have seen default levels climb to more than 10 percent, the threshold that marks a “serious repayment crisis,” according to a February report from Washington, D.C.-based policy and research firm Consultative Group to Assist the Poor. Delinquencies in Bosnia and Herzegovina stayed below that level only because of “aggressive loan write-offs,” the report said.

Main Causes of Borrower Dropout are given in Figure 8.2 & 8.3 and Table 8.4. Loan Product Design, based on: Loan Size; Loan Length; Repayment Schedule; Cost of Loan; Loan Design Compatibility with Local Culture / religious Taboos, are the major reason – Cost of Loan being most significant.


Source: Pakistan Microfinance Network


This is the context where Akhuwat pioneers interest-free (qarz-e-hasna) micro-finance in Pakistan, by creating a low cost micro-finance paradigm with minimal operational costs.  Akhuwat has successfully established a model that fully reinforces the assumption that client sustainability is as important as organizational sustainability. The organization’s mission is to alleviate poverty by empowering socially and economically marginalized segments of the society through interest-free micro-finance and in the process harnessing their entrepreneurial potential and enhancing their capacity through economic and social guidance. Akhuwat envisions a poverty free society built on the principles of compassion, brotherhood and equity.


Source: Pakistan Microfinance Network


Source: Pakistan Microfinance Network


The concept of Akhuwat germinated with a first interestfree loan of PKR 10,000 extended to a widow in 2001 who wanted to earn a decent living with integrity. She bought a sewing machine with the borrowed money to start a small home-based boutique. Return of the entire amount within the agreed time-frame led to the creation of a pool of money for the poor; which in turn became the basis for recovering funds for indefinite recycling.

This initiative led to the establishment of the first interestfree micro-finance organization in the country which soon gained credibility. Gradually people offered more donations to Akhuwat which in turn extended more loans to individuals on the basis of social collateral. This marked the beginning of a new chapter in micro-finance that looks beyond profitability and works exclusively for alleviating poverty from the society through development of a mutual support system.


  • Main objectives are:
  • To provide interest free microfinance services to poor families enabling them to become self-reliant.
  • To promote Akhuwat’s interest-free loans (qarz-ehasana) as a viable model and a broad-based solution for poverty alleviation.
  • To provide social guidance, capacity building and entrepreneurial training.
  • To institutionalize the spirit of brotherhood, compassion, and volunteerism.
  • To transform Akhuwat borrowers into donors.
  • To make Akhuwat a sustainable, growth-oriented and replicable organization.


Within a short span of time, Akhuwat has successfully opened 54 branches all over Pakistan with over 26,500 active clients and over 86,000 total beneficiary families. In Lahore alone, 15 branches are operating to their full capacities.Its presence in over 30 cities of Pakistan speaks highly of its sustainable growth model and viable operations.

Akhuwat has disbursed more than PKR. 1 billion over a period of nine years, with a phenomenal recovery rate of 99.8%, staying true to its mission of helping the underprivileged with interest-free system.


Akhuwat offers diversified loan products to meet the needs of its clients. These include: Family Enterprise Loans, Liberation Loans, Education Loans, Marriage Loans, Emergency Loans, Silver Loans, Housing Loans etc.


  • Family Enterprise Loan:

These loans are given for establishing a new business or expanding an existing one. Family Enterprise loan is the most common type of loan offered by Akhuwat. It comprises 91% of Akhuwat’s loan portfolio. The Family Enterprise loan varies in the bracket of Rs.10, 000 to Rs. 30,000; however, most common amount for the first loan is Rs.15, 000. The individual has to come up with a viable business plan to become eligible for the loan. The Enterprise loan is also known as the Family Enterprise loan because during the period of appraisal and lending the entire family is involved in the process with the view to make it a family venture instead of an individual effort.

  • Liberation Loan:

It is used for repayment of loans taken from money lender on exorbitantly high interest rates. This type of loan is given to those who have borrowed money from moneylenders at very high interest rates. Akhuwat believes that lending by the money lender is exploitation of the poor and needy and is resulting in increasing the poverty instead of making dent into it. Akhuwat pays the principle amount in one go for the client and then the client has to pay back the amount in interest free installments to Akhuwat. Range of this loan is upto Rs. 40,000. • Education Loan:

It is utilized for paying dues (fees) or purchase of books and material for poor students. It provides education expenses in an easy way. Range of education loan is upto Rs. 25,000.

  • Marriage Loan:

Marriage loan is given for dowry of bride (daughter) or marriage ceremony arrangements. This loan helps in meeting the marriage expenses of a girl of a poor family. Range of this loan is upto Rs. 25,000. Boys are not entitled for such loans.

  • Emergency Loan:

This type of loan is given to meet emergency situations such as school admission fee, treatment, purchase of medicine, etc. These loans are given to prevent the poor from major fallbacks. The amount loaned to the poorest of the poor is generally Rs. 5,000 and this has to be repaid within one year.

  • Silver Loan:

This is given to increase the size of the existing business. Akhuwat recently launched this new product. This medium size loan of Rs. 50,000 is given to those who have successfully completed three or more cycles of borrowing from Akhuwat and are interested to further expand their business.

  • Housing Loan:

For renovation of house, construction of room, roof, or walls, etc. Range of this loan varies between Rs. 25,000 to 70,000 and has to be repaid within two years time limit. Akhuwat started this product in collaboration with Al-Noor Umar Welfare Trust, another nonprofit organization founded by Mr. Khalil Mian, former Chairman of Pakistan Credit Rating Agency (PACRA).

Loan Products Portfolio:  Enterprise 91% Liberation 5% Housing 1% Education 1% Marriage 1% Emergency 1% Total 100%.

Akhuwat loans are interest-free and there is no service charge or loan processing fee. It only charges a nominal application and insurance fee. These fees are optional and in total less than 1.5% of the loan amount. Maximum loan limit that Akhuwat offers is PKR 30,000 but the average loan size is around PKR 12,000.

Family Enterprise Loans: Family loan (91% of existing portfolio) is the most common type of loan that Akhuwat offers to its clients for setting up or expanding a business. Income from this business is jointly shared by the whole family.

The loans given by Akhuwat are co-signed by male and female head of the family. Akhuwat believes in strengthening family unit as some studies show that separate loans to male and female in a family may result in tensions in the family and hence may cause disintegration of this important institution.


Akhuwat’s expansion depends on continuing donations to finance growth in the loan portfolio.

There is as yet no evidence that these donations will stop, although substantial effort has to be put into fund raising, there cannot be any reason why a program which draws on brotherhood, generosity and goodwill should be any less ‘sustainable’ than one which depends on purely financial incentives.


All Akhuwat transactions take place at the local mosque or church where loans are processed, distributed and collected. Having a mosque or church as the disbursement centre provides an avenue for transparency, community participation and awareness and also creates a sense of good-will amongst people. Most importantly, this cuts organizational costs and creates a sense of accountability.


The organizational structure of Akhuwat mainly consists of the Operations department and Human Resource department. IT and other issues are handled by the Programme Managers. This system works for Akhuwat as it is still a growing organization with a work force of more than 300 employees. Apart from the Programme Managers, the Executive Director is supported by a Finance Manager, Credit Operation Manager and an Internal Auditor.

All the Board members work on honorary basis since the beginning, as they felt drawing their salary out of donations would be inappropriate. The top management has no financial interest and work purely out of benevolence. There are many other volunteers working for Akhuwat who help in fund raising and other matters. Students of different universities work as volunteers for Akhuwat. According to Dr. Amjad Saqib, “Akhuwat is a blend of volunteerism and necessary compensation”.


Apart from the fact that the Board of Directors get no remuneration, the organizational setup has been kept very simple. The organization does not own any vehicle and the staff are expected to go about on local transport or their motorcycles, for which they are reimbursed. The offices are small and simple, with very little furniture and ‘farshi’ seating arrangements.

The Head Office is responsible for managing, planning, organizing different activities and projects of the organization. Head Office also allocates funds for credit needs. The Credit Operation Manager leads a team of five Area Managers, each responsible for their respective allocated branches. Each branch is run by a Branch Manager, who leads a team of 4-6 Unit Managers, who are responsible for the field operations of Akhuwat. Some branches have a steering committee, comprised of 8-10 prominent individuals living in that area and two representatives from Akhuwat, generally the Area and the Branch Managers. The job of the committee is to oversee all the functions of the branch and also to mobilize funds in their respective areas.


Program Introduction: Individual loans are marketed through awareness campaign in poor localities, market places and through previous borrowers. An introduction to the program is also given in nearby mosque or church when people have congregated there for prayers. This has not only tremendously saved the operational costs but has also opened the doors of the religious places for socio-economic development.  It also attaches a moral responsibility to return the loan on time.

Individual Selection:  The loan process starts with the submission of applications by persons interested in getting financial assistance. The Unit Manager (Loan Officer) then evaluates that whether the applicant deserves the loan or not i.e. lives below the poverty line, has a reliable social capital, is not involved in any illegal business and possesses entrepreneurial abilities.

Preparation of Business Plans: Through the preparation of business plans the business idea of the intended loanee is evaluated to see if it is viable and whether it can generate income beyond the household expenses of the individual so that the loan could be repaid easily. The applicant’s family is also interviewed to make sure that they know about the loan and support the business idea.

Credit Appraisal:  After initial appraisal by the Unit Manager, the application is forwarded to the Branch Manager who appraises the technical section of the appraisal process. Then the case is referred to the Loan Approval Committee. The committee, comprising of Unit, Branch and Area Mangers reviews the credit case. If the committee approves the case loan disbursement is done. The whole process takes almost 3 weeks.


Disbursement in mosques takes place twice a month and the borrower has to be accompanied by one of his guarantors at the time. The other people present at the disbursement include community members, the imam of the mosque and Akhuwat staff from the branch and head office.


Akhuwat staff also provides technical training to its clients. They make the latest knowledge and market information available to the clients so that they become more efficient.  Clients who lack expertise are taught and trained in the vocations of their interest. They may do “intern-ships” with borrowers who are already running some specific enterprises and are desirous of imparting skills to others.

Akhuwat coordinates activities with other NGOs and Social Welfare Organizations so that social services can reach their own clients. Akhuwat focuses especially on education and health because these are basic necessities and the right of every individual and have benefits beyond the individual himself.

Legal aid has also been provided to the needy by a team of volunteer law students through one of the Board member who is a lawyer and Principal at a local Law College.


Impact of microcredit is to be seen in terms of poverty alleviation, access to financial services, decreasing vulnerabilities and/or empowerment of marginalized. Akhuwat clients move from status of clients to position of sponsors.


High inflation acts to reduce the effective value of a small microfinance loan for the clients. See Figures 8.4, 8.5 and 8.6 for impact of high prevailing inflation on effective size of an average microfinance loan in Pakistan.


Source: Pakistan Microfinance Network


Source: Pakistan Microfinance Network


Source: Pakistan Microfinance Network

Deteriorating Macroeconomic Situation compound the situation. High inflation (especially increase in food prices), high indirect taxes, reduction in subsidies on fuel and food, reduced government spending on social services – will increase poverty and income inequality. Natural disasters, perpetual conflicts, law-and-order issues further aggravate situation. Rising Food Inflation also has major impact on poverty. Share of food expenditure to total expenditure is between 50% to 70% for poor (Asian Development Bank). To the extent that some households produce (and consume) their own food in Pakistan, they will tend to be relatively shielded from increases in food prices.

Islamic Microfinance Saleem Ullah1

Issues in the current practices of microfinance his study aims to highlight the significance of Islamic Microfinance as well as discusses some such as too much spotlight on financial inclusion rather than poverty alleviation, provision of high cost financing and cash financing which creates different problems i.e. adverse selection and moral hazards that further aggravate the living standards of the poor people; compelling them to opt for suicide like acts. Therefore, in order to tackle all such flaws of the existing model, a new concept, based on Islamic Microfinance has been proposed which will help in reducing poverty and improve the living standards of its clientele. This will further draw attention of the governments, civil society, and other people who have a social heart to further investigate this area of concern and find further solutions for the alleviation of poverty.


Microfinance is aimed at providing capital/financial resources to the poor/weaker segments of the society to undertake different business activities and thus create self employment opportunities. Despite this overwhelming focus on creation of self employment opportunities, there has been none or limited focus of Microfinance Institutions (MFIs) on assessing the viability of the enterprises to be initiated by their clients through microfinance. A number of micro enterprises so initiated do not succeed/survive due to, among other reasons, limited capacity of the micro entrepreneurs to assess the viability of the enterprise. Even if the enterprise is feasible and produces products and services having strong demand in the market, none or limited facilitation is available for marketing and selling the produce. For instance the farmers obtaining financing from MFIs end-up selling their produce to arties (middlemen) at lower than market prices due to lack of market information or access. Similarly the women producing quality handicrafts can hardly fetch reasonable price for their products and are exploited by resourceful and well informed middlemen. This not only makes it difficult for the poor/small borrowers to achieve significant improvement in their income level and living standards but also weakens the portfolio quality of MFIs. Further, with financing provided in cash, and money being fungible it is usually difficult for the MFI to ensure end use of the funds so disbursed; a significant proportion of the borrowers use the funds in nonproductive avenues and become more indebted and poorer. The MFIs at times resort to acquiring and selling the personal assets of the borrowers like cattle to recover their loans and thus add to the miseries of the poor by making him/her poorer.


Microfinance is a powerful instrument for tackling poverty worldwide and tremendous progress has been witnessed. The inception of Microfinance was based on the goal to eradicate poverty but later on, it was used for different purposes which are known as “mission drift” in the literature (Banana Skin, 2011). In the present era it is widely used for financial inclusion rather than poverty alleviation (Johnson, 2009). This can be clearly observed from the title of CGAP’s 2006 summary of the state of the art of microfinance after ten years “Access for All” (Helms 2006), and this was followed in 2008 by the World Bank’s publication of “Finance for All” (World Bank 2008) giving emphasis on a discourse of “financial inclusion”. While there are also numerous studies which proved that financial inclusion should also be the part of poverty eradication movement and can be utilized as a tool to tackle poverty, it is evident from the fact that the services offered by those specialized commercial banks to the neglected segments of the society are very costly due to the involvement of risk (Kran Siddiqi 2008), causing them to charge high interest rates which become more of an exploitation of the poor people.

Further, it is evident from a number of studies that which show that the effects of direct access to financial services for the poor are less substantial than the indirect effects via economic growth. Frequently, quoted study, Beck et al (Beck, Demirguc-Kunt et al. 2007) find that 60% of the effect on the poorest 20% arises from this indirect effect compared to 40% of the direct effect. Indeed the ‘Banking the Poor’ study (World Bank 2008) also suggested that access is promoted by formal jobs rather than any other route so, adding further, refine this concept of misuse of microfinance. Moreover, some studies argued that direct access is important to ensure that inequality does not increase (Jalilian and Kirkpatrick 2005; Honohan 2007).

Despite the prominence and investment in MFIs over the last two decades and notwithstanding the headline figures of campaigns such as The Microcredit Summit (DaleyHarris 2009) and extensive publicity around some MFI success stories – overall outreach has been limited. Furthermore, Honohan (2004) argued that the differences between microfinance and mainstream retail finance have been overdrawn and are apparent rather than significant, and that microfinance appears to be forced to an outreach of less than 1 per cent in most countries, that he termed as ‘threshold effect’ . Besides, while a number of microfinance institutions all over the world have been successfully transformed organizationally and legally into formal sector institutions and in some cases achieved private investment (Rhyne 2005; Forster and Reille 2008). The model of building specialized institutions to serve poorer people has clearly taken a substantial amount of time and been expensive for the outreach and scale they have so far achieved.

It is also argued by some researchers that not all those who take on debt can raise their incomes, develop their asset base or reduce vulnerability that can be expected rather than be surprised about and of the increased realism given recent global events (Johnson 2009). With this lack of irresistible factors, the emphasis has been put on the methodological pitfalls of many past studies (Morduch 1999) rather than the logic of the expectations involved, and has resulted in the rising tide of randomized control trial approaches to finally ‘prove’ the case. However, findings from recent randomized studies appear to complement the view of the complexity and the heterogeneity of impact pathways and outcomes (Banerjee, Duflo et al. 2009; Karlan and Zinman 2009).


The exclusive focus of MFIs to provide financial resources with only limited efforts to build technical, vocational, managerial and marketing skills of the borrower is largely responsible for marginal impact of Microfinance on poverty levels even in countries like Bangladesh where microfinance sector is well developed and its outreach is extensive. Thus mere provision of funds to the poor and largely un-educated and unskilled borrowers would not be sufficient to enable them to improve their income level and break the vicious poverty cycles.

Islamic microfinance is based on engaging the poor in productive economic activities like agriculture, horticulture, handicrafts etc. and can contribute significantly in poverty alleviation by building their capacity to produce quality products, providing quality inputs/raw material at competitive prices (in kind financing) and enabling them to sell the produce to the MFI, again at competitive prices. The Islamic microfinance model being proposed in this paper is based on the premise that the MFI would offer in kind facilities through shariah compliant modes of salam, istasna, murabaha, ijarah Musharaka etc. Further, the facilities will be provided only for the sectors/business line (s) for which the MFI is managing the total value chain (directly or indirectly) right from procurement of raw material/agri-inputs to the marketing and sale of the goods so produced. The value chain here would primarily mean the procurement of inputs/raw materials and their provision to the MF clients, manufacturing/ production of the intended finished/semi-finished goods/products  including  agricultural   produce  by  the  clients, purchase/collection of the produce from the client, storage/warehousing of the produce, marketing and ultimate sale of the produce etc by the MFI. The MFI, before extending/marketing its facilities/products, will make an indepth and professional assessment of the business line/sector it would like to specialize in. As the MFI is in a better position to make an objective and professional assessment of the commercial and economic viability of the sector/business line to be developed, the probability of success should be better provided the business line is conceived and managed professionally.

The MFIs’ clients will sell their product to the MFI at a predetermined price or market price depending on the nature of the contract between the MFI and the client. The MFI will store, market and sell the product either locally or internationally. This will ensure productive use of the resources being provided to the poor people, address the issues usually faced by MF borrowers in marketing and selling of their produce, significantly improve the probability of recovery (minimize the credit risk) and give a boost to economic activities at grassroots. The Arties in agriculture sector have been providing similar services, particularly credit sale of agri-inputs to the farmers, and are considered to be highly successful; one of the key reasons of their success, besides the easy access, is their ability to provide agri-inputs and purchase the agri-produce. This though enables them (the Arties) to easily recover their dues; however the terms of such trade between the farmer and Arty are usually exploitative particularly for the small farmers. The Islamic microfinance model would not only provide the necessary convenience to MFIs in recovery of their dues but would also enable the clients (farmers etc) to fetch better prices both for the inputs and their produce.

As Islamic finance is based on ‘Equity, Justice and Transparency’. The poor borrowers/entrepreneurs are likely to get better deals from Islamic MFIs both in terms of pricing and quality of services. The MFIs will also be arranging training and capacity building programs for their clients to enable them to produce quality products to be procured by the MFIs. This will be a win situation both for the micro entrepreneurs/farmers and the MFIs besides improving the overall Human Resource capacity in the country, which is critically important for poverty alleviation, the core objective of the MF initiative. The donor agencies are giving generous grants for capacity building of MFIs. The current capacity building efforts are however aimed at building capacity of credit officers. As the Islamic microfinance is closely linked and associated with the real economy, the capacity building initiatives will be focusing on building entrepreneurial and technical and vocational skills of the MFIs’ clients and staff. This capacity creation particularly at the clients’ level will be instrumental in improving the probability of success of the micro enterprises being financed by MFIs, enhancing the income levels of the clients and improving the quality of MFIs’ financing portfolio. The basic philosophy of this model is that the MFI will conceive the business line and will add new lines/sectors only after conceiving and developing the value chain.


The MFI can be registered as an NGO under the societies act in their respective province and undertake the above activities as NGO-MFIs like the existing MFIs. The NGO status gives immense flexibility to operate in a least regulatory sector/environment besides having bright prospects of raising grants etc from donor agencies, it will however have implications on the MFI’s ability to raise commercial financing in addition to making their graduation from NGO to a non-profit or for profit companies legally more difficult and lengthier.

1) The MFI could also be registered with Securities and Exchange Commission of Pakistan (SECP) as a nonprofit company under Section 42 of companies’ ordinance 1984. This would improve investors’ confidence as the disclosure requirements and SECP’s regulatory and supervisory capacity is considered to be much better than the provincial cooperative departments that regulate the NGOs/cooperatives etc.

3)  Another option may be the registration of the MFI as a Mudaraba Management company which then could float specific/multipurpose Mudaraba to raise public funds to finance the project.


The MFI will have following major sources of funds/financing:

  1. The sponsors’ contribution/equity.
  2. Equity contribution from private investors having social hearts to be mobilized through private placements. Financing from Islamic Banks through Murabaha, Salam, Musharaka etc.
  3. Donor grants/technical assistance.
  4. Donations for capacity building of clients and interventions for their social uplift including health and education.


With most of the poor population living in rural areas and engaged in agricultural activities, the one very obvious and largest business line/chain is the Agriculture and farm sector. Agriculture constitutes 21% of country’s GDP and provides livelihood to more than 65% of the country’s population living in rural areas. A very large majority of the farmers are small having up to 5 acres of land; this segment of the farming community is largely dependent on arties or MFIs to meet their financial services needs.

The agri-focused MFI will have its outlets for supplying agriinputs to the poor and subsistence farmers, modern storage facilities to store the agri-produce, and the sales and marketing function to sell the produce at competitive rates both in local and international markets. It will also be procuring agri-inputs in bulk, which would enable it to procure quality inputs at competitive rates, which would be beneficial both for the MFI and the farmers. It will also address the issue of low quality seeds and adulterated pesticides usually faced by the small farmers. The modern storage and warehousing facilities to be built by the MFIs will augment the much needed storage capacity and reduce the wastage of agri-produce, particularly fruits and vegetables.

The MFI will have its agri-officers (having agricultural background/qualification and elementary understanding of banking, accounting and finance) who would introduce and market the product in the rural areas just like the existing MFIs. The Agri-Professionals having in-depth knowledge and understanding of the agri production processes and basic knowledge of banking, finance, marketing etc, will be in a better position to assess the agri-input needs of the farmers and advising them on farming techniques, farm technology etc. While the marketing and product introductions etc will necessarily be made using the Group methodology, the products may be extended to farmers using Group or Individual methodology depending on the business model of the MFI.


The Agri-focused MFI will extend only in kind financing (agri-inputs) through Islamic modes like and Morabaha, Salam or even Musharaka. Under Morabaha, the farmers will be provided agri-inputs on deferred credit to be paid back from the sale proceeds of the agri-produce within a specified period (normally the cultivation period of the crop for which the in kind financing would be made). As the MFI will be having its own trade outlets and storage and marketing facilities etc, the borrower shall be obligated to sell the produce to the MFI at the mutually agreed price. The MFI shall however, ensure that this obligation to sell the agri-produce to the MFI is not used to the disadvantage of the farmer; it should be rather aimed at facilitating the farmer in selling the produce and fetching better prices for the produce. The MFI would thus procure, store, market and sell the produce in bulk, both in domestic and international market. The farmers could also be provided agri-inputs under ‘Salam contract’ whereby the farmer would enter into a contract with the MFI to sell a particular quantity of the agri-produce at a mutually agreed price to be paid in advance (in kind payments) for delivery in future. Under the Salam contract, a part of the total payment (say up to 25%) could also be made in cash to enable the farmer to pay for the labor, electricity, diesel etc for which he/she (the farmer) would need hard cash. The MFI may have onward Salam contracts with the buyers of the produce to hedge against the price risk etc. Here again the capacity of the MFI to take and manage the price risk and store, market and sell the produce will be much better than the small farmer, which would be beneficial both for the MFI and the farmer.

Another mechanism to engage the small farmers and improve their income levels could be used whereby the MFI would take the agricultural land of a group of farmers of a village(s) on lease to cultivate crops on modern lines (on the pattern of corporate farming) and employing the farmers on fixed wages to undertake the cultivation. This will not only earn lease rentals for the poor farmers but would also enable them to have wages besides insulating them from risk of crop failures. It will also be instrumental in improving the crop yields, which presently are very low compared to the regional and world averages.


The MFI shall also arrange programs to educate the farmers on latest farming techniques, farm preparation and care, use of pesticides, farm mechanization etc. The Agri-officers of the MFI will keep a close liaison with the farmers and make periodic visits (preferably monthly visits) to take updates on the crop being cultivated and also to give technical advice etc. This would not only improve the probability of better crop yields but would also improve the prospects for recovery of the MFIs as well as the income levels of the farmers.


The MFI could also help the farmers in land preparation; pesticide sprays and cultivation of crop etc. With the MFI dealing with substantial number of farmers in each village, the cost is expected to be much lower due to economies of scale. Similarly to facilitate the farmers in the disposal/sale of the agri/farm produce to the MFI, arrangements may be made to collect the produce directly from the farm. This would significantly reduce the transportation cost for the farmer and ensure timely procurement/collection of the produce by the MFI.


In a nut shell it can be concluded that it is a universal truth that Microfinance is a very powerful tool for poverty alleviation but due to misconceptions this sector is largely dominated by those people who are more interested in increasing their businesses and achieving their business targets rather eliminating poverty. This leads to a high cost of financing to the financially weak segments of the society. Further, this segment was mishandled by diverting its mission to financial inclusion rather than poverty alleviation. The proposed model of Islamic Microfinance will not only complement the efforts for alleviation of poverty but also generate real economic activities that will result in improving the overall socio-economic situations of the developing countries. Further, it will give a wakeup call to the policy makers and others developmental institutions to concentrate on poverty alleviation rather than just expanding high cost financial inclusion as well as provide a foundation for further research in the field of Islamic Microfinance and its utility for socio economic development in the poor Muslim countries of the world.


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1 Disclaimer: The views expressed in this paper are those of the author which may not necessarily represent views of the State Bank of Pakistan. All errors/omissions are the responsibility of the author.

Potential of Waqf for Poverty

Alleviation; The Way Forward For Akhuwat

Dr. Zeeshan Ahmed

The conditions of Muslim society till the recent times. n the past, Waqf has played a critical role in poverty alleviation and enhancing the socio-economic Waqf was the basic and integral unit in the economic systems of the Islamic civilizations providing people with institutions, public as well as consumer goods. Between late 19th century and early 20th century, the system of Waqf has faced a constant deterioration mainly because of compliance and inefficiencies in the administration. Considering the role Waqf played in the economies in the past, there is a strong motivation to revive this system as it existed during the golden period of Islamic Caliphate. Learning from past failures, there is a great potential to develop Cash Waqf model to assist the growth of Pakistani economy especially after the recent calamity of floods in the country.

The paper starts off by looking at the history of Waqf. The role that this system has played in poverty alleviation and enhancing the socio-economic conditions of Muslim society till the recent times will be highlighted. To support this claim, particular features of Islamic Waqf in the past and present times will be highlighted with particular examples of Waqf institutions in the Islamic history. The purpose of this activity is not to derogate or point a finger at the alternatives. Rather, this study is undertaken to identify the most practical and efficient Waqf model.

In the latter half, the paper will focus on the shortcomings of Waqf institution and will identify the reasons, which has led to its failure in all parts of the world specifically Pakistan. Keeping in mind the past failures and future constraints, a model for Cash Waqf institution would be developed, and recommendations would be made for achieving this aim effectively. This part of the paper will be applied science, where Waqf, as it was maintained in the times of Prophet (S.A.W.) and his Companions, would be used as a benchmark, and an attempt would be made to implant its features in the current Pakistani framework.

In the name of Allah, the Benevolent, the Most Merciful. Praise be to Allah and peace be upon His messenger, and his family and the companions.


This paper looks into the potential of Waqf for socioeconomic development and poverty alleviation. The definition of Waqf that has been used is a general one, and is not biased towards any one school of legal reasoning. The most lenient laws of Waqf have been used throughout for coming up with an appropriate model of Waqf. The motivation for writing this paper is to show the potential of Waqf for achieving aforementioned social and economic objectives         and      recommend     a          workable          model for microfinance. To achieve this purpose we first investigate its historical role.

In this paper, we start off by defining Waqf and presenting its evidence from the sources of Islamic law. Then, we will study the history at length, showing the robust nature of this system. We will also try to explain how it enhanced the socio-economic framework in the society and helped fight with poverty. Moreover, we will briefly discuss the different fiqhi aspects of Waqf in established Madhabs of Islamic jurisprudence, and how strong a system this is. Then, the paper looks into why Waqf, that has been so central to the Islamic societies of the past, is unable to emerge as a viable and significant institution in post colonial Islamic communities specially Pakistan, and what practical constraints does it face. In light of these findings, we will draft some recommendations, and prepare a Cash Waqf model specific to the needs of Pakistan. Since Waqf is a very broad area, the focus of our paper will be to develop a Cash Waqf model for reasons discussed later in the paper. For this, successful Cash Waqf models elsewhere in the world will be studied to provide a benchmark.  


  1. a) References from sources of Islamic law 

Although the application of Waqf and the plethora of issues surrounding it are explicitly contemporary in nature, the roots of the concept of Waqf are derived from qatti sources like Quran, Sunnah, and Ijma of the scholars of Ahl Sunnah wa’al Jamma. This vividly highlights the significance of Waqf as a spiritual duty, connected to the spirit of Islam, and not just a mere social duty or a tool for economic development.

“Ye will not attain unto piety until ye spend of that which ye love. And whatsoever ye spend, Allah is aware thereof”. (Qur’an 3:92).

When the above-mentioned verse was revealed, the concept of donating for the sake of Allah emerged among the companions of the Holy Prophet (S.A.W.) as a desire of Allah, Himself. The whole concept of Waqf, though not mentioned anywhere directly in the Quran, emerges from this very spirit.

This concept was further developed through the following hadith, saying of the Holy Prophet (S.A.W.), taken from the most authentic existing source of hadith text:

Ibn ‘Umar told that when ‘Umar got some land in Khaibar he went to the Prophet and said, “Messenger of God, I have acquired land in Khaibar which I consider to be more valuable than any I have ever acquired, so what do you command me to do with it?” He replied, “If you wish you may make the property an inalienable possession and give its produce as sadaqa.” So ‘Umar gave it as sadaqa declaring that the property must not be sold, given away, or inherited, and he gave its produce as sadaqa to be devoted to the poor, relatives, the emancipation of slaves, God’s path, travelers and guests, no sin being committed by the one who administers it if he eats something from it in a reasonable manner or gives something to someone else to eat, provided he is not storing up goods (for himself). Ibn Sirin said, “Provided he is not acquiring capital for himself.” (Bukhari and Muslim).

This hadith has three versions due to differences in the chain of narrations (Appendix 1). (Oseni 4)

This act of Hazrat Umar (raziallahuta’alaanhu) stands as the precedent for the Muslims of the formal concept of Waqf, and reflects the mechanisms of its implementation (Oseni 5). It stands a valid proof of not just the approval, but also the personal ‘advice’ of the Holy Prophet (S.A.W.) for such a use of property.

The concept of eternal charity has also been stressed in other ahadith of the Holy Prophet (S.A.W.), where he has described it as a means to attain sadqa-e-jaria. The Prophet (S.A.W.) said, “When a man dies, his good deeds come to an end except three: ongoing charity, beneficial knowledge and a righteous son who will pray for him.” (Narrated by Muslim, 3084).

The ‘ongoing charity’ refers to something which can be constantly productive for providing benefit in terms of thawab through forsaking it for Allah. This concept was also exhibited through other examples during the lifetime of the Holy Prophet (S.A.W.). For example, the creation of the first Mosque in Quba was essentially a demonstration of Waqf. Similarly, the creation of Ruma well by Hazrat Usman (raziallahuta’alaanhu), that took place during the life time of the Prophet (S.A.W.S), is another demonstration of the concept.

Although, all the schools of thought hold different opinions on the legal domain surrounding the concept of Waqf, they all agree to its validity, and as per the Islamic jurisprudence, ijma, or consensus, of the community stands as a qatti source to establish something.

  1. b) Definition of Waqf

Waqf literally means ‘detention’ (Mannan 191). However, in the given context, Waqf is a system used for sacrificing one’s belongings for the sake of charitable purposes. It is a trust that can be created over financial assets, such as cash, and also real assets, such as land (Chaudhry & Baig 2). In essence, Islam has recognized two types of awqaf – Waqf ahli, family endowment, and Waqf khairi, an endowment for religious or charitable purposes (Gaudiosi, 1233). This paper will focus only on the latter form, Waqf khairi.

An endowment for religious or charitable purposes is detained in the implied ownership of God (Mannan 191), and the Waqif (founder) no longer remains the owner of the Waqf object. However, the stipulations made by the Waqif regarding the endowment as to how it should be utilized, and for what specific purposes can it be utilized, need to be taken under consideration.

Mutawalli is the manager of the Waqf. The duties of a Mutawalli include preservation of the Waqf object, collection of income, and its distribution amongst the beneficiaries (Gaudiosi 1238). However, as in the case of a ‘trustee’, the Mutawalli does not have any right of ownership (Mannan 191). The stipulations made by the Waqif may include the appointment of the Mutawalli, the selection of the beneficiaries of the Waqf, and also the distribution of the Waqf income, i.e. where should it be used (Gaudiosi 1236).

Moreover, the Waqif must be a person of a sound mind, must be of age, and a free man (Gaudiosi 1235). The Waqif may appoint himself as the Mutawalli. The Waqif also holds the right to dismiss the Mutawalli (Gaudiosi 1236). The founder of the Waqf, however, cannot stipulate anything that goes against any of the tenets of Islam (Gaudiosi 1237).

To understand Waqf, one needs to know the three basic principles regarding Waqf: irrevocability, perpetuity and inalienability. The first principle, irrevocability of Waqf, means that the Waqif cannot reclaim the property that he has given in Waqf (Gaudiosi 1235). It no longer belongs to him, and he only has the rights over its administration. If he tries to reclaim it under extreme conditions, such as bankruptcy, then it is up to the court to decide whether the Waqif can get his property back or not (Muhammad and Iman 35). The second principle, perpetuity of Waqf, implies that the object of Waqf would be continued to be used for the specific purpose the particular Waqf has been made for. If that specific purpose ceases to exist, then the trust would still be used for similar charitable purposes (Gaudiosi 1235). In essence, it means that a Waqf cannot be made for a limited number of years. The third principle, inalienability of Waqf property, means that it could not be sold off or disposed of. Only if the property gets ruined, can it be sold off and the income from the sale is then to be used to buy another property (Gaudiosi 1235). Basically, this Waqf property cannot have any alienation, other than what it has been specified to be used for.

Moreover, Waqf has to be made of immovable property (Mannan 192). Waqf was not considered as valid if made of movables, unless the movables were attached to the immovable property, such as the cattle to the land. However, under the Waqf Law in Pakistan, Waqf can be made of movables such as cash.

The objects of Waqf may include mosques, schools, institutions, inns for the travelers, construction of basic infrastructure so on and so forth (Mannan 196).  However, objects that are against Islam are not valid waqf items, such as a church (Mannan 197).

As far as the beneficiaries are concerned, they can enjoy that share of the usufruct of the Waqf that has been stipulated by the Waqif. The beneficiaries can have a part in the usufruct of Waqf, but not on its substance (Gaudiosi 1239). For instance, if a building is made the Waqf object, where its rooms are rented out to passengers, then part of the building cannot be sold off to provide the beneficiaries their stipulated share, if the rental income is insufficient.

Another type of Waqf is the Cash Waqf, which takes either of the two forms: cash is lent for free to the beneficiaries or cash is invested and the net return given to the beneficiaries (Dogarawa 12).

  1. c) Waqf in Islamic History: Role in Poverty Alleviation and Socio-economic Enhancement

In medieval times, Waqf was used to sustain long run growth, building of infrastructures, fighting poverty, generating revenue, helping travellers and other such activities. It existed from the time of Prophet (S.A.W.), and it was used to provide the community with hospitals, bridges, schools, universities, guest houses, libraries, cemeteries, public goods, and other such amenities, specific examples of which will be given later in this section. In the article, Poverty Alleviation through Zakat and Waqf, it is explained that Waqf was so developed in the Ottoman period that a person lived his entire life dependent on this system. He was born in a Waqf house, slept in a Waqf cradle, ate from Waqf properties, received his salary from Waqf administration, his corpse was placed in a Waqf coffin, and he was buried in a Waqf cemetery (Dogarawa 10). From this example, we can concur how developed this system was. It was a life cycle sustained by Waqf.

In Muslim history, the first recorded instant of Waqf was the mosque of Quba built in Medina upon Holy Prophet (S.A.W.)’s arrival (Appendix 2). This came to be known as religious Waqf; meanwhile endowment for all other pious and charitable reasons was called philanthropic Waqf. An instance of this during the time of Beloved Prophet (S.A.W.) was when he advised the people to buy the well of Rumah in Medina and make it an object of Waqf to counter the water shortage that their bothers in that area suffered from (Dogarawa 12). Hazrat Usman Ghani bought one half of the well and let the people benefit from one half of its revenue. Later he bought the other half as well and let the people of Medina to use it freely (Gill 130).

Moreover, Waqf was also used to help people in Jihad (Holy War of Muslims) which was known as Fi Sabilillah (Gill 125). This was mainly used to finance the war equipment and supplies for the soldiers. There are also various instances of Cash Waqf found in Muslim history, where in some cases cash was lent free of cost to the beneficiaries, and in others, it was invested and the revenue generated from it was used to help the beneficiaries (Dogarawa 11).

In presence of such a system, there was often no need for ministries and departments to provide these goods and services to the people. Zubaida, the wife of a Caliph, gave all her money as Waqf to build a road from Baghdad to Medina (Sadeq 140). In 1753, the ruler of Egypt, Abd Ur Rahman Katkhuda, developed a Waqf fund for the students living in Al-Azhar. The students were given ration, daily food, and mats to sleep on. Moreover, the Waqf provided salaries to the cooks of Al-Azhar, and granted one dirham to each pilgrim who completed Hajj, returned to Cairo, and stayed in Al-Azhar (Walz 100). Later in 1774, the construction of a large mosque in the city of Cairo was started off by Mamluk Shaykh Al-Balad Muhammad Bay Abu Al-Dhahab. Later on, many urban properties in this region were included in the Waqf to help the people. This Waqf developed into one of the most sophisticated religious complexes, since the days of Sultans. Each Shaykh reader and student received a daily stipend, and an annual allotment of grain. All of these were given a handsome stipend and moreover the salaries of all the people working there were funded by Waqfiyya income (Crecelius 63).

In addition to that, all the repairs and maintenance of this complex, which included the water for toilets, ablution basins and water fountains, was financed through this Waqf.  After the death of the ruler, the surplus income of this Waqf was given to slaves and after their extinction, two third of the income from surplus was given to the blind residents of Al-Azhar (Crecelius 67). To help the students and teachers there, Muhammad Bey also included his private library in the Waqf, and there was no fee charged for using it (Crecelius 69). Hence this particular example illustrates how an institution, such as university, can be made using Waqf and the poor and needy supported from the income generated from it.

Furthermore, Waqf was an important policy instrument in earlier times, especially to provide public services. In 1552, Waqf of Haseki Sultan was formed which included a mosque, a complex with fifty five rooms for pilgrims to stay, and Imaret, or a soup kitchen, which provided bread and butter to all the poor people of Jerusalem (Peri 168). It is documented that Waqf of Haseki Sultan was used to provide bread and soup to pilgrims, and deserving people every morning and evening. In this way, Waqf played an instrumental role in poverty alleviation in Jerusalem at that time.

Similarly, in 1530’s, Cash Awqaf became very popular. The validity of this form of Waqf will not be discussed in this paper. In the past and also in this era, jurists have questioned the validity of Cash Waqf, claiming that it violates the principle of perpetuity. However, various Ijtihad by Ulema have validated this form of Waqf, based on the need of the society, Zaroorat and Maslaha (Mandaville 293) (Appendix 3). As a result, several Cash Awqaf models have been developed in Indonesia and Malaysia to help people by lending money and providing all services provided by other Awqaf. How cash Awqaf were used to help people will be discussed in one of the later sections of this paper.

Moreover, an inspiring example of Mir Ali Sher Nav’ai converting his private property into Waqf can also be found in several books of Muslim history. After fulfilling his personal expenses, he spent all his income on public services. It was estimated that he formed Waqf of 300 buildings and the complexes he built in Herat (Subtelny 40). The complex consisted of a mosque, Madrassa, hostel, hospital and bath. All the expenses of the hostel, like food and salaries, were funded by the Waqf. Moreover, the maintenance of other complexes was the responsibility of Mutawalli, who used the Waqf funds (Subtelny 46). Every year woolen cloaks, garments, clothes and shoes were distributed to the poor people.

In Mughal India, Mughals and their officials (imperial authority) built Awqaf for certain mosques and tombs (Kozlowski 366). In the late Mamluk period, endowments included agricultural land, cultivated land, and plantation of fruit trees, roads, irrigation canals and pools in villages. In urban areas Waqf included buildings, warehouses, baths and mosques (Layish 301). Just like in other areas, Waqf of Awlad -An Nas in Aleppo, provided people with various services in rural and urban areas, and enhanced the local economy through agricultural land growth and construction of buildings, warehouses and other such structures.

In 1923, three quarters of arable land in Turkey belonged to Waqf. More than half the land in Algeria, and one-thirds of land in Tunisia was owned by Waqf (Mitias 122). In 1552, a woman formed a Waqf of twenty-six whole villages, eleven flour mills, shopping complexes and bath houses. The revenue from these sources was used to maintain the soup kitchen and help the poor. Moreover, Waqf was used to provide social services specially hospitals, education and municipal services at no direct cost (Mitias 123). It also provided the society with infrastructural facilities, such as street lights, roads, and bridges (Mitias 124).

In the contemporary period, Waqf is widely used to finance universities and educational institutions. In Bangladesh, more than 8000 educational institutions are financed by Waqf (Sadeq 140). Even the world-renowned Oxford University, in Oxford, England, is based on the Waqf model (Sadeq 139). Moreover several orphanages, which provide shelter and food to the poor children, are run by Waqf funds. Mosques, medical facilities, clinics and health centers are run by Waqf as well.

Hence, it is quite evident that the framework of Waqf is a tried and tested formula to help the poor, provide general welfare to the public, and to bolster the economic growth of the society. Entire Muslim communities have been run on Waqf, and the greatest motivation to those people was the immense thawab and reward promised by Allah (S.W.T.) as a result of this voluntary perpetual charity.


The Ulema of the different schools of thought differ as to the legal aspect and implementation of Waqf, due to certain valid illats and the urf of the society. Before delving any further in these disagreements, it is necessary to state that the conflicts arising amongst the different scholars were merely a source of developing the whole concept, and Islamic Jurisprudence radically supports the concept of valid multiplicity in religion.

The basic difference in opinion lies in the legal ownership of the Waqf, which is the root of other conflicts, such as the management and dedication of Waqf. According to Imam Abu Hanifa, Imam Malik and Imam Shafi’ the legal ownership would lie with the founder. Hanbalis, however, believe the ownership would lie with the beneficiaries, since they are the uncontested owners of the usufruct of the Waqf property. Prominent scholars of the Hanafi School, such as Imam Abu Yousuf, argue that the ownership lies solely with Allah (S.W.T.), and not with any particular human being.

This view has been endorsed by many in prominent figures of the Maliki and Sahfi’ School as well, and thus has become the dominant view in this matter (Layish 4).

The second major difference of opinion lies in the time period of the Waqf. All the schools, except the Malikis, agree that the deed of Waqf is irrevocable and lasts forever. According to the three schools, any time limit set makes the essence of Waqf evaporate from that particular act of sadaqah. Theoretically, perpetuity is considered to be synonymous with Waqf by most of the scholars (Souaiaia 1). Thus, the disagreement over this basic matter by the Malikis became a major source of conflict over several related issues. For example Malikis, unlike the other schools, believe that the ownership of the property transfers back to the real owner when the tenure has expired. Thus, the principle of irrevocability is also violated. Moreover some of the Maliki scholars concur that the property can be sold if the founder becomes economically depressed (Layish, 6). This view is in clear violation of the dominant view that gives the court the right to decide on such matters, and that too after it has established that the circumstances are extreme. If the extreme severity of the circumstances hasn’t been established in the first place, then the founder of the Waqf cannot reclaim his property at all.

Another major point of difference is in the laws of succession. Malikis are of the view that the bayt-ul-maal is to be the residuary heir of the Waqf. However, scholars of the other schools advocate the concept of Radd, which is ‘the reversion of the residue to the qur’anic heirs, Dhawi alfar’i(i), when their prescribed portions do not exhaust the estate’. Spouses are the only exception to the rule in this case. (Layish, 2).

Likewise, there are also differences amongst the different schools of thought in conditions for the validity of Waqf. For instance, for the followers of Imam Hanbal and Imam Shafi’ the mere announcement of possession suffices for Waqf, whereas for the followers of Imam Malik, the delivery of possession is equally important, and it completes the validity (Souaiaia 2-3). These were just a few examples of the prominent differences amongst the scholars of the four Sunni Schools of thought. There are several other points of divergence amongst the views of the different schools, but an in-depth discussion of those differences is beyond the scope of this paper, and therefore has been avoided.


Trust laws are a derivation of English concept of equity (Penner 1). Trustee is the person who organizes the trust. He is in charge of all the property and possesses all the legal rights (Penner 21). The person who forms the trust is the creator. The trustee has two responsibilities, namely administrative and dispositive. The Administrative responsibility requires the trustee to maintain the value of the trust, whereas the dispositive responsibility requires him to dispose of the property, and confer the benefit on the beneficiaries, according to the terms of the trust. Sometimes a rule against perpetuities is created to avoid the settlers from making perpetual trusts (Penner 63). Delving into the details of such a rule is beyond the scope of this paper therefore it hasn’t been elaborated upon. Just like Waqf, trust cannot be created for any purpose; it has to be created for a purpose which benefits the individuals or the society (Penner 225). The property is transferred to the trustee, who then employs it further. Trusts can be created for charitable purposes like advancement of religion, education, poverty relief, and public benefit (Penner 430435).

The structure of Waqf and trust is so close, that in one of the articles, the author has used endowment and Waqf interchangeably (Yalawae and Tahir 1). Some authors like Gaudiosi define Waqf in terms of trust itself (Gaudiosi 5). Both, in Waqf and trust, the property is locked, and the usufruct is used by the beneficiaries. Moreover, the trustee and Mutawalli, both, are responsible for the running of the organization. Trustee has the legal title, but not the full title to the property. He has to spend the trust wealth in accordance with the laws of trust. The property becomes the property of trust once it is donated (Gaudiosi 1246; Penner 21). Countries such as United States, where trusts are prevalent, have agreed to the fact that Waqf is the best way to transfer income from the rich to the poor (Yalawae and Tahir 10). Thus, Waqf and endowments are both used for the same purposes of poverty alleviation and socioeconomic benefit.

Hence, it can be seen that Waqf is as efficient a system as trust for poverty alleviation and the benefit of the society. The main difference lies in law of perpetuity. Waqf is strictly perpetual, whereas trust is not. Perpetuity can be an added advantage, since the purpose of charity is never exhausted, and since the principle of static perpetuity discussed below is relaxed, it has given a new dimension to the Waqf system. The second difference is that the property donated to Waqf belongs to the creator, whereas in trust it belongs to the trust, but as far as this paper is concerned, its implication will not be discussed.


The previous sections explained how Waqf is a very vibrant system which has been widely used for poverty alleviation and general welfare of the public. Its benefits are such that it can be claimed that it is no less than any other endowment framework used in any other religion and culture. Yet in this day and age, Waqf does not exist in many Muslim countries, which makes it all the more important to study why such a strong system has been wiped out of the economy. In this section of the paper, the past failures of Waqf, and their reasons will be studied. Moreover future constraints, with respect to Pakistan, will be discussed.

There are several reasons for the failure of Waqf, the most prominent amongst which are the reforms introduced by Muslim countries at the end of nineteenth century; the state taking on the responsibility for providing for the well-being of the society, the decline of religious awareness about the reward this perpetual charity carries, and an increased concern for property and its rights in the secular states (Layish 285). As time passed, Waqf was not used to help the deserving people, but to confer the benefits on basis of favoritism. The inability of the government to keep a check on the administration of the Waqf caused the inefficiencies to creep into the implementation of the Waqf model. The expenses could not be controlled, thus the Waqf went into a debt (Peri 175). Due to this, Waqf became a strain on the economy, rather than a means of poverty alleviation and socio-economic welfare, and thus lost support.

Another major reason for the failure of Awqaf was that people other than the Mutawalli were granted rights to determine who would benefit from the revenues. This led to massive confusion and conflict, and eventually resulted in the beneficiary selection process turning into utter chaos (Peri 171). It was this chaos, due to the imperfect implementation of the Waqf model that further contributed to Waqf losing out its support.

Moreover, the right to benefit from the institution of Waqf was being transferred, inherited, and sold, which made the accountability of the number of people entitled to receive benefit impossible. Thus the administration lost control over the system and the beneficiaries (Peri 177). In the Ottoman Empire, the Mutawalli, Umar, of the Waqf system was accused of undue usurpation of Waqf revenues. It was claimed that he did not pay the salaries, nor did he maintain the mosques effectively. The mats were old; toilets were in bad conditions and the lamps were broken (Crecelius and Ali 267). Hence, the lack of checks on Mutawalli led to failure of Waqf in Ottoman Empire.

However, the main blow to the Awqaf in Uttar Pradesh came from the Zamindari Abolition Act of 1952. This act confiscated the land of all Awqaf and Khanqas, as a result of which the government bodies and other private institutions invaded upon them. Another reason was the increase in uncontrolled expenditure compared to the income. It is stated that the income increased by Rs. 586, 371 compared to Rs. 1,936, 458.69 of increase in expenditure (Zafri 1451). Moreover, the Mutawallis, which were appointed, lacked proper training, honesty, piety, skills and expertise. The Waqf board, on the other hand, lacked sufficient powers and legal authority (Karim 12).

Furthermore, the rigidity of Waqf has often led to inefficiencies and wastage of resources. For instance, if a Waqf was created to help flood victims of a particular flood in a particular area, continuing to support the victims after they have become self-sufficient has led to inefficiency (Kuran 861). Moreover, the population has increased at a faster rate compared to real assets, so the overall donations to this institution have fallen drastically (Karim 12). The weak judiciary and legal system of these countries has led to reduced protection of these Awqaf, and thus a faulty implementation of the model (Dogarawa 12). With no checks and balances in place, people are getting away with feeding off this system, even where they do not meet the criteria of it. Moreover, intervention by the state has led to the inefficiencies because state did not optimize the resources of Waqf (Dogarawa 20). All these factors have added up to lead to the failure of Awqaf in various Muslim countries.

In the future, Pakistan might face further constraints in developing the Waqf system. Misunderstandings between religious groups are increasing all over the world, and Pakistan is no exception. Some types of Awqaf, such as Cash Waqf may be valid in one Madhab, while invalid in another. These disagreements can possible lead to major conflicts, and eventually the inability of coming up with a practical Waqf model for Pakistan.

Secondly, the lack of ability of the state to monitor the institutions effectively and the weak accountability measures will pose a major problem, as that would allow the Mutawalli and other key figures in the Waqf system, to get away despite their dishonesty. The lack of awareness of Waqf amongst the public can be a further constraint. People will not donate unless they acknowledge and appreciate the power, viability, and benefits of this system.


In Pakistan, the potential for developing a Cash Waqf institution is huge. The inflation rates have been rising at a rate of about 12%, with the growth rates falling drastically to about 2-3% because of the recent floods affecting every province of Pakistan. As a result, the ability of people to donate their lands entirely has fallen greatly, hence in our paper we aim to develop a Cash Waqf model so that everyone can donate accordingly.


PUNJAB, 1960 – 1986 (in Mio.PRs), (Malik, 92)

In Pakistan, Waqf receipts have fallen to quite a significant extent, as shown in Figure 10.1. Also initially receipts were far more than the expenditure, but since 1980’s, the gap between them started falling. The use of Waqf in developing education system and hospitals is meager because of limited resources of Waqf; hence the potential for this system to develop in this country is large (Malik 95).

At a basic level, differences have arisen whether Cash Waqf model is allowed in Shariah or not. But keeping the Maslaha and Mursala argument in mind, the Ulema need to carry out Ijtihad and adopt the lenient rulings which benefit the society, and simultaneously do not contradict the Shariah at all. Cash Waqf model has been observed in the Ottoman Welfare system and the jurists of the four Madhabs have accepted the validity of Cash Waqf to quite an extent. Taking the lenient rulings, it can be conferred that there is scope for Cash Waqf within the bounds of Shariah (Mandaville 306).

Moreover, people are often not aware of what exactly a Waqf system is. Their ignorance of the system has led to misinformation being spread and misunderstandings arising. In order to resolve this, students should be taught Waqf in schools and universities as part of their Islamic studies curriculum. Complementary to that, a wide-scale marketing and awareness campaign needs to be launched by the Awqaf department of the country in order to alter the popular perception, which is often based on misinformation. In addition to that, people should be told of the virtues of donation, especially Waqf, in Friday sermons, Islamic conferences and other religious sermons.

To overcome the issue of static perpetuity explained earlier, one does not need to adhere to the principle of perpetuity so closely. Rather, in this case, the Waqf can support the victims of the same flood in some other area, or the victims of another flood, or the victims of some other natural disaster. Also, in the real world, these rigidities pertaining to static perpetuity are not prevalent since the Waqif does not usually, with only a few exceptions, stipulate such rigid restrictions (Kuran 864). Moreover, to mitigate this static perpetuity, some changes were previously allowed to be made in the Waqf deed and the ambiguities in the language of the Waqf deed were used to justify the working of Waqf for a specific purpose. Certain words could be interpreted in various ways while remaining within Shariah bounds (Mitias 127). And in this case, advantage can be taken of that leeway to make the model less rigid, and more dynamic.

Moreover, for the proper administration of Awqaf in Pakistan, the state should form a ministry which looks into the running of Awqaf. Here it is critical that the ministry has a balanced role in the system, i.e. it does not end up over-interfering and distorting the entire system as it has happened in the past (Dogarawa 9). After that, for the management of Awqaf, auctions can be carried out so that the development of institution is handed over to the bidder who is most willing to take care of it. And after development, the ministry of the state should monitor the performance of the Waqf based on specific performance criteria, for example, the number of beneficiaries or the annual income of Waqf versus its expenditure (Dogarawa 24).

As for the administrators of the Waqf itself, the Mutawalli should be honest, pious, and skilled with good interpersonal skills. He should have a certain aptitude, and must be selected by the people on merit basis. Moreover, the Waqf board itself should have very skilled members, such as engineers, doctors, architects, and computer software developers so that the projects under Waqf are run efficiently (Jafri 3). The problem of transfer of Waqf certificates by the beneficiaries could be resolved by requiring the beneficiary to produce the valid Waqf certificate bearing his/her name (Peri 184).

Another essential element is that in Cash Waqf, money should never be lent on a fixed rate of interest to generate income. Though this model is being followed in certain parts of Malaysia, there has been an Ijma (Consensus) amongst Muslim scholars that interest is not allowed in Shariah at all (Appendix 3).


Coming to the development of a Cash Waqf model for Pakistan, our model is built at the micro level. At the macro level, the corruption, nepotism and bribery is existent; all other indicators as well as conditions at macro level are considered to be exogenous.

Step 1: It is to form a Waqf board for this specific Waqf which will consist of an expert in microfinance, a religious scholar, an architect, a financier, engineer, and on top of them the director.


Initially the areas in which the Waqf system is going to operate are

  • Construction of houses specific to flood relief, as well as generally for deserving people.
  • Food and clothing for flood effectives and poor people.


Since in the past, Waqf has failed because of uncontrolled expenses, the Cash Waqf model will start in these three areas only, and later expand into roads, bridges, schools, universities and other complicated institutions.


 Step 2: Appoint a Mutawalli who is honest, educated and dedicated. He is going to be under the direct supervision of the director, since an inefficient Mutawalli has been one of the main reasons for failure of Waqf system. Also, observing the general trend with regards to the proportion of donations in different areas, the staff is going to be recruited. Amongst the staff will be the architects, labors, administrative staff, and financiers. Nothing needs to be outsourced at this point in time.

Step 3: Then the Waqf will be registered as per the laws of Waqf. A website is going to be created for the Waqf for Ecertificates and publicity. Before launching the Waqf, a publicity campaign will be launched, and billboards, as well as electronic media, are going to be used to advertise the institution. Lack of awareness is major reason for lack of trust for such institutions amongst the general public and consequently the limited donations. So a dedicated effort will be made to build trust by creating awareness. Furthermore, all the administrative issues of starting the Waqf are going to be taken care of at this stage. A vision should be drafted and made available to the public electronically as well as in print so that they know what the system is all about. Moreover, they should be informed of the key people involved in the system: the board of directors and the Mutawalli. Furthermore, they should be informed of the procedure of choosing the Mutawalli, as well as his credentials, and also of the areas in which the Waqf operates. Lastly, it should be ensured that a proper system is in place which makes all the financial statements available to the public on an annual basis, so that the people are aware of the investments, profits and expenditures of the institution.

Step 4: A database is going to be immediately be created where the information of the Waqif will be recorded. There are some general things recorded in Cash Waqf (Appendix 5). This system will record.

  • Waqf deed (Appendix 6).
  • The Project in which the Waqif is donating.
  • Name, address, and phone number of Waqif.
  • The area in which donation is recorded, and the amount of donation.

Step 5: People will now donate either through E-Waqf or by buying Waqf certificates (Jalil 6). For E-Waqf, they will need to make an account, log in, and enter their credit card number along with all the data in Step 4. For cash certificates, all the information is going to be recorded by the Mutawalli himself. No minimum amount is going to be set for any of the donations, and all donors will become part of the Waqf family to give them sense of attachment. Other forms of donations, such as sadaqah, zakat and fitrana will also be accepted. After the publicity, donations will be collected by approaching the elite in the country, placing collection boxes in schools, malls, hospitals, and by going to Islamic banks and encouraging them to Waqf money in this organization. Initially the collection centers will be in Karachi, Lahore, Islamabad and Multan for accountability purposes.

Step 6: This is the most technical part, where the funds are actually distributed amongst different areas. If the Waqif does not stipulate any specific usage, the funds can either used given in microfinance, invested elsewhere or used for direct construction purposes.

For construction stipulation, the money given by the Waqif will be directly used for construction. The generic plan for houses is going to be made by the architect who will draft a cost-effective plan for the houses. The workers will be constantly supervised during the construction of houses by the architects. The houses will be made in the flood affected area if stipulated by the Waqif; otherwise the Mutawalli will decide where the houses need to be constructed based on need of the people. Initially flood affected areas in which our Waqf will work is Muzafargarh in Sothern Punjab, and Peshawar in Khyber Pakhtunkhwa. For general poverty alleviation, the area between Lahore and Multan will be targeted in the beginning. As operations expand, the areas in which Waqf operates will be broadened.


If the funds are inefficient, then other forms of charity will be utilized here, as well as the income generated from investing the principal Waqf money, unless it has been stipulated by the Waqif that it has to be used specifically. Just to make sure that the beneficiary does not make undue use of the house given to him/her, they will not be allowed to trade the property, they will only take benefit of its usufruct and the institution will reserve the right to keep the papers of the houses with them. The beneficiary will have to produce his identity card, provide his name, address, annual income and other personal data to get the help.

For money given specifically for microfinance, the selection of borrowers will be done on the basis of their productivity. Small businesses or individuals will present their plans, financial requirement, expected rate of return, and expected time in which they will pay back. Based on the expected return, money will be given for microfinance. The screening is going to be strict in order to avoid the adverse selection problem. Normally, these people have no collaterals to give, but some asset will be taken as security such as car, piece of land, stocks, or even something trivial. The financier is going to constantly monitor the businesses and their growth.  Constant monitoring will lead to the development of a sense of accountability in them, and they would use the resources efficiently, avoiding the moral hazard problem.

After the period is over, the principal money borrowed, plus a percentage of profit, is returned to the Waqf foundation. The principal is again given out as loan in microfinance, and the profit is either used to fulfill any shortages in giving further loans or for paying for the running expenses of the Waqf. If the Waqif has stipulated that the profits will be used for microfinance only, then they need to be given as microfinance loans. On the other hand, if they have given the money as Waqf for microfinance, but have not specified what needs to be done with the profits, then it is at the discretion of the Mutawalli to use them most efficiently.


The money which is specifically given out for providing food and shelter to the people is invested in Islamic banks for example in Mudarba model, or any other high rate of return, comparatively low risk Shariah compliant activity. The principal amount will remain intact and the profits of this investment will be used to fulfill this aim of Waqf. The deserving people will be issued certificates which they will need to produce to get food and clothes to avoid the time wastage of registration each time they need the supplies. The time for which their certificates are valid will be decided by the Mutawalli based on the needs of the beneficiaries.


To avoid any illegal usage, the certificates will not be tradable in any form and to make sure this works the beneficiaries, while registering, will provide their identity card or their guardian’s identity card. The certificate will bear the identity card number, which will be scanned and confirmed each time the beneficiary comes in to get the supplies. For orphans and other people who can produce no identity, their thumb prints will be taken on the certificate they will be issued, which may be counter checked sometimes for efficiency and maintaining check and balance. All this will be done to avoid the mistakes of the earlier system, as discussed earlier, where some beneficiaries were trading their certificates.

The money given other than Waqf will be used anywhere considered suitable by the Mutawalli even to pay the wages of employees.


The money given as Waqf, but not stipulated for any specific purpose, will also be used in any of the three activities. The surplus will be used again for the above three activities, investing in Shariah compliant activity or for the running expenditure of the Waqf institution.



In the past, Waqf has been used very effectively for the benefit of the society and to provide goods and services. There was no concept of the Department in the Ministry to provide public goods; Waqf was sufficient to provide the society with the required infrastructure, hospitals, roads, bridges and poverty alleviation as well. This is the system existent from the time of Holy Prophet (S.A.W.) and his Companions, which is marked the golden period of Islam. In its early days, while the principles were being adhered to, the system expanded into a vast and complex one that catered to millions of beneficiaries. But with time, inefficiencies kept creeping in. The negligence and dishonesty of the personnel, lack of accountability, excessive intervention by the state, and several other factors, that have been discussed earlier, led to the failure of the Waqf system in the recent past. Taking all these factors into consideration, and looking at the challenges faced by modern-day Pakistan, some recommendations for the development of Waqf institutions was made. Moreover, a detailed and practical Cash Waqf model for Pakistan was presented, where each step of the process was elaborated upon. Initially, the Waqf organization will work on a limited scale, and its progress would be constantly monitored and evaluated to ensure quality assurance. Once the organization has established itself, received positive feedback in the evaluations, and earned the confidence and trust of the donors, the activities of the organization would be expanded, while maintaining the same level of quality assurance.


The three variations of the Hadīth are:

  1. ‘Umar acquired some land in Khaybar. He came to the Prophet and said: “I have received land like which I never had any property before.  What is your command about it?”  “He (the Prophet) said: “If you wish you may detain it and give in charity its usufruct”.

‘Umar endowed it for the poor and the needy, for his relatives, for the manumission of slaves, in the way of Allah, for the guests and for the travellers, subject to the condition that the property would not be transferred by sale or gift, nor would it be inherited.  There was no harm if the person managing it ate from it in the approved way or fed his friend but it (the usufruct) would, in no case, be hoarded.

  1. ‘Umar acquired some property in Khaybar. He came to the Prophet and informed him about it. He said: “If you like you may give it in charity”. He, therefore, endowed it for being spent on the poor, the indigent, the relatives, and the guests.
  2. ‘Umar had endowed during the period of the Prophet some property which was an orchard, and was known as Samagh. ‘Umar said, “O Messenger of Allah! I have acquired property, which in my view, is excellent. I intend to give it in charity”. The Prophet said: “Give it in charity on condition that it would neither be sold, nor gifted, nor inherited, only its fruits would be utilized”. ‘Umar endowed it on the same conditions. The endowment was in the way of Allah and was for the manumission of slaves, and for the benefit of the indigent, the guests, the travellers and the relatives.  There was no harm if the person managing it ate from it in the approved manner or fed his friend with it provided it was not hoarded (Khan 27-28).

Appendix 2 

Quba mosque was the first mosque built in Medina, city of Saudi Arabia, when Prophet (SAWS) arrived in Medina, after Hijrat.

Appendix 3

Maslaha and Zaroorat are rulings based on the need of the society which do not contradict the Shariah at all. It refers to unrestricted public interest in the sense of its not having been regulated by the Law giver insofar as no textual authority can be found on its validity or otherwise. For Imam Ghazali, Maslaha are considerations which secure a benefit or prevent harm but which are, harmonious with the objectives of the Shariah (Kamali 267).

Appendix 4

The Quranic Ayahs mentioning the prohibitive nature of interest are Surah Baqra, Verses 278-279

Appendix 5 

Register of a typical Cash Waqf from 18 Century contains the following information (Toraman and Tuncsiper 7)

  • The name of the Waqf and the purpose for which it was established.
  • The name of the mahalla; district, in which the endowment was registered.
  • The name of the trustee and gender.
  • The time period covered by the census.
  • Original capital of the Waqf.
  • Later additions to the capital of the Waqf either by individuals or by other Awqaf.
  • The balance of the new capital thus formed.
  • The return obtained from the investment of the endowed capital at the end of the year.
  • The purpose for which the annual return was designated.
  • The names of the borrowers.
  • The amount of capital they borrowed.
  • The mahallay where the borrowers lived.
  • The religious denomination of the borrowers.

Appendix 6

Waqf deed is created by the Waqif which states all the rules and the purpose of donation and income. Complete Waqf deed is available in the book “Takaful Kee Shari Haysiat” by Maulana Asmatullah Sahab, pages 1-11.


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A G Ghaffari is the Director at University of Management and Technology (UMT), Lahore. He completed his education from Forman Christian College, Lahore and has almost 16 years of dedicated teaching experience at Institute of Leadership and Management (ILM) and UMT.

Agha Ali Javad is presently working with the National Rural Support Programme (NRSP) as General Manager and supervises the implementation of a multi sector poverty reduction programme comprising of social mobilisation, human resource development, community physical infrastructure, networking and microfinance.  Having worked with the USAID and Save the Children before, Agha Ali Javad has played a key role in the design of NRSP’s microfinance programme and enabling a part of it to transform into a licensed microfinance bank.  A financial analyst by profession, Agha Ali Javad is keen to refine the existing microfinance products and/or link the network of community organisations fostered by NRSP to Islamic microfinance and upscale the implementation of such programmes through the network of Rural Support Programmes.

Ather Azim Khan is Professor of Finance at the University of Central Punjab (UCP). He currently serves as Director of Volunteer in Service program at UCP. He was the Dean for Faculty of Commerce, UCP and a member of the Curriculum Committee of Higher Education Commission (HEC), Pakistan. He is a Fellow Cost and Management Accountant and holds a M. Phil. Degree in Finance. He is currently completing his PhD in the area of Islamic Microfinance. His area of research is Microfinance and Poverty Alleviation.

Dr. Christopher Candland is the Associate Professor of Political Science and Director of the South Asia Studies Program at Wellesley College, USA. Candland’s research focuses on the politics of labor, education, and health in South and Southeast Asia. Candland earned his B.A. from Haverford College, where he studied philosophy, religion, and fine arts. Candland is a PhD from Columbia University and has published more than one dozen book chapters and several articles in peer-reviewed journals. His present research is on Islam and reproductive health in Indonesia and educational reform in Pakistan. Candland has worked for the United Nations on disarmament, for the U.S. House of Representatives on trade and labor standards, and for the U.S. Department of State on international labor affairs.

Dr. Faheem ul Islam, is Associate Professor, Suleman Dawood School of Business at the Lahore University of Management Sciences. He has published papers in the Journal of Asian Business and Temasek Journal. He has also written working Papers at the University of Cambridge, UK. Dr Faheem ul Islam has presented papers at several conferences. He has also been involved in several consultancy and corporate training assignments including capacity building of Malay enterprises in Singapore, Brunei Government development, corporate training of Sentosa Development Corporation in Singapore, capacity building of Finnish enterprises for internationalization, human development and designing sustainable projects for SDPI in Pakistan. Prior to joining LUMS, he has worked with WAPDA, University of Engineering and Technology in

Lahore, National University of Science and Technology, Royal Brunei Airlines and Royal Sporting House in Singapore. Dr Faheem ul Islam is also a HEC approved PhD supervisor in the area of Management Strategy.

Dr. Grace Clark is the former Executive Director of the United States Educational Foundation (USEFP) in Pakistan. She has also served as the International Director at the Centre on Global Aging, National Catholic School of Social Services, Washington, D.C. Dr. Clark is a member of the Council of Social Sciences, Pakistan and is an adviser to the International Affairs Society at the Forman Christian College. She holds a PhD degree and her area of interests include Social Policy and Social Work.

Dr. Khalid Zaheer is the Dean of the Faculty of Arts and Social Sciences of University of Central Punjab (UCP). Prior to joining UCP, he was the Director Education, Al-Mawrid, an NGO established to promote research and education on Islam. He was an Associate Professor of Islamic Studies and Ethics at Lahore University of Management Sciences (LUMS). He has a teaching experience of more than 20 years. Before joining LUMS, he taught at Institute of Business Administration (IBA) and Punjab University for 12 years as a permanent faculty member. Dr Zaheer’s PhD dissertation was a critique on Interest-Free Banking. His areas of interest are Islamic Banking, in particular its departures from true Islamic principles, and application of Islamic teachings in the contemporary business and social environment. He regularly contributes articles to the monthly Renaissance, a leading religious English journal of the country. Dr. Zaheer has appeared in many television programs and has also given sermons at mosques, both in Pakistan as well as in the UK.

Malcolm Harper was educated at Oxford, Harvard and Nairobi. He first worked in marketing in England, and then taught at the University of Nairobi. He was Professor of Enterprise Development at Cranfield School of Management, and since 1995 he has worked independently, mainly in India. He has published extensively on enterprise development, micro-finance and livelihoods. He was Chairman of Basix Finance in India for ten years, and is Chairman of M-CRIL, the international microfinance and social rating company. He is chair, trustee and board member of a number of institutions in the United Kingdom, the Netherlands and India, and has worked on poverty issues in Bangladesh and Pakistan, and in North, East, Southern and West Africa, Latin America and the Caribbean, the Middle East and Gulf area, South and South East Asia and China, and in the United Kingdom.

Mobin-ul-Haq has been associated with the education sector since 1995. Soon after completing his MBA from Lahore University of Management Sciences (LUMS) he started his career in the field of consultancy and training. He has been serving University of Management and Technology (UMT) as an Assistant Professor for the last ten years. During this tenure he has taught courses in many different subject domains. He loves to teach strategy related courses. Being a trainer he is an ardent believer of immense human potential and seeks to help people perform better. Currently is working as a chairman marketing department and as senior trainer at Center for Management Development (CMD), for which he is also a founding member.  He has given trainings to many national and multinational companies of Pakistan.

Dr. Naveed Yazdani is an educationist, professional consultant, speaker, trainer, specialist in Change Management, Organizational Development and

Organization Theory. Currently, he serves as the Director of School of Professional Advancement (SPA), University of Management & Technology (UMT). He is also Program Chair Master of HRM and Associate Professor of Management. He has more than 25 years of experience in the field of Management, Consultancy, Top level administration and management and Education. He received his MS Management from University of Management & Technology, Lahore, MBA from Lahore University of Management Sciences (LUMS) and MBBS from King Edward Medical College, Lahore. He also holds Rector’s Medal and Certificate of Merit in MS Management.

Combining innovation and analysis to teach practice management, he has presented and published more than 15 academic research papers at national and international conferences. He has been regular guest speaker in various prestigious organizations.

Saleem Ullah has more than 16 years of central banking experience, primarily in the areas of banking supervision and development finance.  Starting his career in State Bank of Pakistan (SBP) as Bank examiner in 1995 he served at different positions in banking examination and supervision departments. He served as Head Microfinance Division (MFD) SBP from 2001 to 2005. He also served as Head Strategic Management, SBP for about six months before assuming the charge of Director Agriculture Credit Department in 2006. Basically an MBA from a local University, he also studied at Harvard University, where he completed his Masters in Public Administration from Kennedy School of Government, in June 2007 as a mid-career student. Since assuming the charge of Director IBD in February 2010, he has taken a number of initiatives to improve Islamic banking awareness, build the industry’s capacity and strengthen the regulatory framework.

Dr. Zeeshan Ahmed currently serves as Assistant Professor and Director BSc Accounting & Finance, Suleman Dawood School of Business at the Lahore University of Management Sciences. He holds a Ph. D. in Finance and is a Certified Financial Analyst.


Organizing the conference “Exploring New Horizons in Microfinance – Akhuwat” was definitely an experience in exploring new horizons; of commitment and hard-work as depicted by the valorous team of conference volunteers and the hosts at the University of Central Punjab (UCP).

Since our first meeting, the Pro-Rector UCP, Dr. Syed Tahir Hijazi always greeted us at the campus with great warmth and enthusiasm for all the build-up activities for the conference. Prof. Azhar Ikram, the Dean Faculty of Commerce, graciously gave us time and opened doors within the Faculty of Commerce to facilitate preparations for the conference. Here, Prof. Ather Azim Khan, Director Research & Development Center, UCP particularly supported our activities throughout the endeavor by encouraging his students to volunteer and facilitating the implementation of the collaboration.  One of these bright resources was Mr. Muzaffar Shaikh, Principal Coordinator, RDC, UCP who was always on his toes to get things done efficiently and in the best possible manner. The Faculty of Commerce particularly and the University of Central Punjab since the past 8 years in general have always encouraged its students to help out with Akhuwat activities and the tradition was continued fabulously by Sadia Fatima, Abdul Haseeb, Syed Fahad Ali, Maryam Shoaib, Mamoona Farooq, Saira Rabab, Hamna Tariq, Syed Sajjad Raza, Yasir Mehmood, Mohammad Ahmed Asjad, Zinnia Kardar, Hammad Ahmed, Ali Hassanain, Imran John, Haris Javaid, Mishal Shaukat, Zohair Ashfaq and Zeeshan Butt.

In addition to the amazing spirit shown by volunteers from UCP, a group of volunteers was assembled from other universities particularly from Government College University and LUMS and I would like to particularly thank their tireless efforts: Sadaf Ali, Abubakr Khushnood, Ammar Haider, Rana Saifullah, Arself Masood, Umme Farwa, Sarah Afzal, Hafsa Hasan, Khurram Rasheed, Motaher Paracha, Maryam Saba, Jaweria Sethi and Taimur Aziz.

We would particularly like to acknowledge two talented young people without whom the whole effort would have been nothing but bland; Imran Sarwar and Ali Mohsin Gardezi who volunteered their professional services of content development and layout designing. Mr. Waseem Asghar was always a great help in facilitating the correspondence with the prospective speakers and guests. The coordination by Centre for Leadership Excellence team led by Professor Sarfraz Ahmad is also commendable and they facilitated the execution of numerous activities. The suggestions of Dr. Shahid A. Zia and Mr. Saleem Ranjha opened new vistas in the formulation of the event framework. And finally, there is one person without whom perhaps nothing could have been achieved; Professor Syed Hussain Haider. He tirelessly coordinated between University of Central Punjab, Akhuwat, Centre for

Leadership Excellence and all the stakeholders of the multievent Akhuwat Decade Campaign. His leadership from the front kept the volunteers motivated and so much more that he would never even mention.

Akhuwat would also like to appreciate the hundreds of delegates from civil society, academia, banks, trade associations, provincial & federal government, international financial institutions, foreign missions, international and national NGO’s etc etc who attended the conference and participated in the multifarious activities of the Akhuwat Decade Campaign.

And finally the people I worked with, the Akhuwat staff, each one of them proved to be the most professional, hospitable and efficient people to work with. Mr. Rehan Mehmood, Mr. Adeel Khalid, Mr. Farooq Hasan, Mr. Shahid Safdar, Mr. Anwar Yousaf, Mr. Tariq Razzaq and each and every person who is a part of Akhuwat needs to be applauded. Further, two people made the whole deal possible by helping us meet our deadlines, Mr. Munawwar and Mr. Razzaq and I’m very grateful for their efforts. Then there were some people, who were always there to listen to the hurdles in the process, the kind Dr. Kamran Shams, the meticulous Professor Humayun Ihsan and the generous Dr. Izhar ul Haq Hashmi. And finally I would like to pay my deepest gratitude to the Executive Director Akhuwat, Dr. Amjad Saqib who gave me this opportunity, guided me all along and gave me a glimpse into the life of a truly selfless person.

Aneeq Cheema Program Manager

Akhuwat Decade Campaign

Fatima Rasheed is currently working as a Research Associate at Akhuwat. Her research interests include religion and development, poverty alleviation and the politics of the environmental crisis. Before joining Akhuwat, she was working at Sustainable Development Policy Institute (SDPI), Islamabad where she was engaged on issues relating to climate change and poverty, food insecurity and green economy. Her published work has been on the themes of international climate negotiations and low carbon growth in Pakistan.  She has graduated from Lahore University of Management Sciences having majored in Social Sciences.

Aneeq Cheema served as an organizer for this conference in the overall capacity of Program Manager of the Akhuwat Decade Campaign. He is a graduate from Lahore University of Management Sciences (LUMS) where he studied Economics and Political science. Aneeq has significant exposure in volunteer management and social entrepreneurship from LUMS where he served as the President of LUMS Entrepreneurial Society, organizing national-scale business competitions and founding a social enterprise incubator. Before joining Akhuwat, he worked at the Center for Public Policy and Governance, FC. College in a research capacity focusing on issues in social entrepreneurship, demographic growth and its impact on governance in Pakistan.