4

Islamic Microfinance: Exploring

the Experience of Akhuwat
in Promoting Qard Hasan in Pakistan
Joana Silva Afonso and Ajaz Ahmed Khan

4.1 Introduction1
Islamic microfinance has received increasing recognition in recent years as
the number of institutions providing Shari’ah compliant microfinance has
grown. Some Islamic microfinance institutions (IMFIs) have gained
greater visibility and attracted the interest of practitioners, investors and
academics. It was not surprising, therefore, that the programme of the
fifth European Research Conference on Microfinance included a plenary
session on the topic.2 It gathered highly experienced and prominent fig-
ures within the sector, including Professor Malcolm Harper from Cranfield
Management School, Professor Habib Ahmed from the University of
Durham and Dr Mohammed Kroessin from Islamic Relief Worldwide.

J. Silva Afonso (*)
Portsmouth Business School, University of Portsmouth, Portsmouth, UK
e-mail: joana.afonso@port.ac.uk
A. A. Khan
CARE International, London, UK
e-mail: Khan@careinternational.org

© The Author(s) 2019 61

M. O’Connor, J. Silva Afonso (eds.), Emerging Challenges and Innovations
in Microfinance and Financial Inclusion, https://doi.org/10.1007/978-3-030-05261-4_4
62  J. Silva Afonso and A. A. Khan

Also present was Dr Amjad Saqib, Founder and Executive Director of

Akhuwat Islamic Microfinance (AIM), an IMFI from Pakistan that has
grown remarkably over the last decade and is now one of the largest IMFIs
in the world, with more than 940,000 active clients. AIM focuses exclu-
sively on providing qard hasan or ‘benevolent’ loans to low-­income bor-
rowers. In 2017, it became the largest microfinance provider in Pakistan
in terms of number of active clients. The invitation to the conference
derived not only from this recent performance but also from the recogni-
tion of the institution’s distinctive features, and its ambitious plans to
expand the model to other non-Muslim-majority countries.
This chapter aims to explore the advantages and challenges associated
with the interest-free microcredit model promoted by AIM, as well as to
provide a better understanding of Islamic microfinance. Qard hasan is
defined by Obaidullah (2011) as an indigenous Islamic microfinance model.
This type of microcredit methodology attracts attention based on the expec-
tation that it can increase and improve access to formal financial services for
Muslim populations who can seem to refrain from participating in tradi-
tional interest-based microfinance programmes (Harper, 2017, p. 189).
The most recent data from the Global Findex Survey on Financial
Inclusion shows that many Muslim-majority countries have relatively
lower rates of financial inclusion, challenging the accepted positive asso-
ciation between financial and economic development (Beck, Demirgüç-­
Kunt, & Levine, 2007). This is the case in Pakistan: the share of the adult
population who owned a formal bank account in 2017 (18%) or had
borrowed from a formal financial institution in the previous year (2.6%),
was far below the same indicators for the average of the lower middle-­
income countries, which were 56.1% and 9.8%, respectively (World
Bank, 2018).3
During the conference session, the speakers emphasised the ethical
essence associated with a qard hasan microcredit model. Dr Amjad Saqib
explained that AIM has an explicit social mission and considers the provi-
sion of benevolent loans as a means to an end—alleviating poverty
through promoting financial inclusion. The panellists raised a number of
key questions to the development of Islamic microfinance. These related
to the demand, the sustainability, the replicability and the impact of the
qard hasan model. This chapter will explore these questions further, using
 4  Islamic Microfinance: Exploring the Experience of Akhuwat…  63

AIM as an example. The information shared by Dr Amjad Saqib and

other speakers at the conference is complemented with literature on AIM
and Islamic microfinance more generally, and the results of an on-going
evaluation led by Lendwithcare, a microfinance crowdfunding platform
established by CARE International UK, which has been funding AIM
since 2013.4
The chapter starts with a brief introduction to Islamic microfinance.
Section 4.3 describes the development of AIM and the qard hasan model.
In Sect. 4.4, key questions are contextualised using the experience of
AIM. The chapter ends with the main conclusions and their implications
for the sector.

4.2 An Introduction to Islamic Microfinance

This section provides a brief introduction to the principles that govern
Islamic microfinance and some of the main financing methodologies
employed by IMFIs. Islamic microfinance differs from interest-based
microfinance because of the need to conform to certain religious princi-
ples. These are contained in the Qur’an and the Sunnah, or word and
living tradition of the Prophet Muhammad. While Islamic teachings do
sometimes provide quite specific guidance—for example, the longest
verse in the Qur’an deals with financial transactions and contracts—the
religious principles derive from the objective of promoting honesty,
transparency and, above all, fairness in economic activities and behaviour
between all parties, regardless of their relative power and status (Khan,
Kustin, & Khan, 2017).
There are four main Islamic finance principles that are of particular
importance. Firstly, riba, most commonly translated as interest or usury, is
forbidden. Lenders cannot expect to receive a predetermined, fixed sum,
regardless of the outcome of the enterprise in which the funds are invested.
A return on capital is allowed providing the lender participates in the pro-
ductive process and is exposed to risk. Secondly, gharar, which describes
any transaction that involves excessive uncertainty and risk, deceit or
fraud, is prohibited. Gharar refers to any transaction of items whose exis-
tence or description is uncertain due to lack of information or knowledge
64  J. Silva Afonso and A. A. Khan

of the ultimate outcome. For example, it is not permitted to sell some-

thing that one does not own, in the hope that it can be bought cheaper at
a later date—‘short-selling’ is therefore forbidden. Thirdly, Islam considers
certain activities as morally or socially harmful and prohibits investment
in these areas. The prohibited or haram areas include the production and
sale of alcohol, gambling and illegal drugs. Finally, financial transactions
should directly or indirectly be linked to a real, tangible, economic activity
or asset, as opposed to financial speculation or debt.
In addition to these general principles, Islamic teachings emphasise the
importance of honouring contracts and agreements. These should be
clear, by mutual agreement, and the responsibilities and benefits of all
concerned parties should be clearly detailed and for a known period and
price. Furthermore, there should be at least two witnesses present when a
contract is signed. To ensure ‘authenticity’ it is essential to seek approval
from qualified Islamic scholars as to whether the manner in which opera-
tions are structured and implemented are Shari’ah compliant and also to
conduct regular Shari’ah audits. In practice, this involves IMFIs request-
ing local religious authorities to provide confirmation that their opera-
tions conform to Shari’ah.
Although the Qur’an prohibits the use of interest and encourages legit-
imate commerce, trade and wealth creation, it does not promote any
specific type of contract. A number of Islamic financing techniques have
developed in accordance with Shari’ah and these have been adopted by
IMFIs. Broadly speaking, it is possible to distinguish between techniques
that promote partnerships, such as mudaraba and musharaka, and
arrangements that are essentially sales contracts, such as murabaha, ijarah
and bai salam. Islamic finance only permits one type of loan, namely
qard hasan.
Under mudaraba, an IMFI provides the capital required to fund a proj-
ect, while a micro-entrepreneur uses his or her skill to manage the project.
Profits are shared according to a predetermined ratio, usually determined
as a percentage of the profit. In the case of a loss, providing it was not due
to mismanagement or misconduct, the IMFI loses its capital while the
micro-entrepreneur loses the time and effort that he or she has expended
in the activity. Musharaka involves two or more parties contributing
towards financing a venture and sometimes managing the project as well,
 4  Islamic Microfinance: Exploring the Experience of Akhuwat…  65

and profits and losses are shared in accordance with each partners’ equity
participation. Partnership finance, which relies heavily on trust and confi-
dence, is largely absent from Islamic microfinance because most IMFIs
lack the time and capacity for robust monitoring and evaluation of clients’
activities, and in any case the small scale of such activities is likely to make
transactions uneconomic. At the same time, most micro-­entrepreneurs
are, for a variety of reasons, unable to keep accurate accounts. As a result,
it is difficult to calculate the exact level of profits or losses.
Murabaha is the most widely used instrument in Islamic microfinance,
largely because it is relatively straightforward to structure, understand
and implement for all parties. In a murabaha contract, an IMFI will pur-
chase and deliver an asset or other items requested by the micro-­
entrepreneur. It adds a ‘mark-up’ or profit margin to the sale price and the
micro-entrepreneur pays instalments to the IMFI over an agreed period
of time for this service. There is some scepticism towards this particular
method of financing, as the fixed mark-up appears similar to interest.
However, the mark-up is not compensation for time, rather it relates to
the efforts and expense of the IMFI in seeking out, negotiating, purchas-
ing and delivering the asset requested, at the best possible price.
Ijarah is similar to leasing and involves an IMFI purchasing an asset
that it then rents out at a price that enables it to recover its investment plus
a profit. More often than not, the micro-entrepreneur makes regular pay-
ments and becomes the owner of the asset once all instalments have been
made. Bai salam is a contract whereby the full price for an asset or com-
modity is agreed and paid up front in cash by the IMFI at the time the
agreement is made. The item is delivered at a specific time in the future.
The essential purpose is to ease cash liquidity shortages, most commonly
for smallholder farmers, by enabling them to receive advance payment.
Qard hasan is a cash loan that is repaid without interest, mark-up or
share in the venture for which the loan is used. Qard hasan has a particular
resonance for Muslims, as such loans are encouraged by Islamic ­teachings
as an effective way of helping poor people. Indeed, they are preferred to
the provision of outright charity. Qard hasan is considered a ‘benevolent
loan’ and this is generally interpreted to mean that a borrower cannot be
forced to make a repayment—in the event that a borrower is unable to
repay, the lender must accept the transaction as a charitable act. Sometimes
66  J. Silva Afonso and A. A. Khan

a small administrative charge is permitted for qard hasan loans. Importantly

though, this charge cannot be made proportional to the amount or term
of the loan. This distinction is what differentiates it from riba. Qard hasan
is generally more appropriate and appealing in most cases, as many poor
people prefer to receive cash to use at their own discretion, rather than
being tied to a particular commodity, as is the case with murabaha.
However, IMFIs that rely exclusively on this methodology will not be able
to cover their operational costs without other sources of income, typically
from charitable sources such as zakat, sadaqah and waqf.5
The prohibition on riba and gharar also impacts on savings and insur-
ance products. Since riba forbids offering a predetermined rate of return,
the relatively small proportion of IMFIs that do offer savings accounts
reward savers a share of the institution’s profits. Some IMFIs also offer
takaful which is a Shari’ah compliant alternative to conventional insur-
ance. In takaful, which translates as ‘guaranteeing each other’, all partici-
pants contribute to a mutual fund and this pool of contributions creates
a takaful account. The IMFI will manage this account and charge an
agreed fee to cover the operating costs. Any claims are paid out from the
account and any unused funds are returned to the participants at the end
of the agreed period.
Although partnership finance and qard hasan represent the traditional
forms of Shari’ah compliant finance, most IMFIs concentrate on sales
contracts, offering mainly murabaha and to a lesser extent ijarah. In a
recent book (Harper & Khan, 2017) that examined 15 different Islamic
microfinance programmes in 11 countries in Asia, Africa and the Middle
East, AIM was the only institution which exclusively employed qard
hasan methodology.

4.3 AIM and the Qard Hasan Model

4.3.1 The Institution

Akhuwat was founded in 2001 by a group of philanthropists with the

mission of alleviating poverty. Its operating philosophy is guided by five
principles. Firstly, and in line with Islamic teachings as outlined in the
previous section, it provides interest-free loans to the ‘economically active
 4  Islamic Microfinance: Exploring the Experience of Akhuwat…  67

poor’, mostly to help establish and develop their businesses. The organ-
isation views interest as a barrier to ‘widespread proliferation of capital,
and a violation of all moral and ethical codes’. It believes that ‘burdening
the poor with exorbitant interest rates’ undermines efforts towards pov-
erty alleviation. Secondly, it holds its meeting and loan disbursements
in  local religious places—mostly mosques, but sometimes temples and
churches. The organisation believes that using the existing indigenous
infrastructure for operations allows it to minimise costs and also promote
greater transparency and accountability, as well as create a sense of good-
will amongst the local community. Thirdly, it encourages clients to
become donors through the ‘Member Donor Program’. It decided to
instigate this initiative when clients asked how they could contribute to
the organisation’s development. The donations are entirely voluntary
and, it is hoped, helps instil the value of helping others in need. Fourthly,
it promotes a spirit of volunteerism. It considers that there should be a
social contract between the privileged and the underprivileged, a sense of
duty between those who have resources towards those who do not. AIM
trains and employs volunteers on a regular basis. Finally, it is a
­non-­discriminatory organisation and works with all, regardless of ‘their
caste, colour, creed, gender, politics or faith’.
In its first decade of operations, the institution gradually increased its
scale and outreach, as many other IMFIs have done (Khan, Ishaq, Afonso,
& Akram, 2017). However, AIM has expanded operations markedly dur-
ing the past five years (Table 4.1). Impressive recent growth is partially a
result of increasing financial support from regional governments in Pakistan
that have sought to promote financial inclusion and entrepreneurship

Table 4.1  AIM main activity indicators

Gross loan portfolio Active borrowers PAR30
(USD) Annual variation (%) (No.) Annual variation (%) (%)
2014 24,849,495 60.3 235,517 44.2 0.48
2015 46,887,198 88.7 405,939 72.4 0.29
2016 76,632,330 63.4 567,761 39.9 0.33
2017 123,903,151 61.7 855,232 50.6 0.26
2018 129,371,850 4.41 941,782 10.1 0.24
Source: Adapted from Khan, Ishaq, Afonso, and Akram (2017), Haider (2017) and
personal communication with Project Manager, Akhuwat, on 1 July 2018. Data as of 30
June each year
68  J. Silva Afonso and A. A. Khan

among low-income populations. The partnership with provincial authori-

ties has provided AIM with significant funding for both loans and opera-
tional costs, complementing other national and international donations
gathered by the institution (Khan, Ishaq, Afonso, & Akram, 2017).
The growth of the credit portfolio has been accompanied by an equally
remarkable geographical expansion. As of the end of June 2018, AIM oper-
ated through 794 local branches throughout the country, even including
the remote regions of Gilgit-Baltistan in the north of the country and the
Federally Administered Tribal Areas (FATA) that border Afghanistan. These
are areas where many microfinance institutions are reluctant to operate
because of poor infrastructure and insecurity. AIM branches are small and
simple in order to minimise operational costs (Khan, Ishaq, Afonso, &
Akram, 2017), but the institution’s human resources are significant: as of
mid-2018 the microfinance institution employed around 4200 staff.6
In the last two years, AIM has become the largest Pakistani microfi-
nance institution by far, in terms of number of active borrowers. However,
the MFI ranks below Pakistani interest-based microfinance banks such as
the Khushhali Microfinance Bank, Tameer Microfinance Bank and the
National Rural Support Programme Bank, in terms of the market share
as measured by the gross loan portfolio (Haider, 2017). This reflects a
much lower average loan size than other microfinance providers and
strongly signals that AIM is targeting relatively poorer and more vulner-
able segments of the population.
Until 2017, the institution worked as a non-governmental organisa-
tion (NGO) which, beyond the provision of interest-free loans to low-­
income entrepreneurs, offered other types of credit, including housing,
education, emergencies and debt payment. It also offered non-financial
services linked to education, health, and a clothes recycling programme
that exclusively hired employees from the transgender community, one of
the most marginalised groups in the country.
Regulatory changes in the microfinance sector in 2016 led to a separa-
tion of the institution’s microcredit operation, which is now implemented
by Akhuwat Islamic Microfinance, a non-bank financial institution regu-
lated by the Securities and Exchange Commission of Pakistan. The non-­
financial activities remain under the sphere of Akhuwat, which is a
registered non-governmental institution.
 4  Islamic Microfinance: Exploring the Experience of Akhuwat…  69

4.3.2 The Qard Hasan Microcredit Model

During the conference session, the AIM manager put forward three main
reasons to explain adopting benevolent interest-free loans as their micro-
credit model. Dr Amjad Saqib stated that the two main motivations
behind the creation of Akhuwat were the implementation of a Shari’ah-­
compliant microcredit methodology; and the rectification of a feature of
most conventional microfinance programmes that was deemed unfair—
namely charging higher interest rates to poorer clients compared to rela-
tively better-off borrowers. Professor Malcolm Harper added a third
reason, arguing that other Islamic financial instruments, including the
partnership and sales contracts described in Sect. 4.2, are not suited to
the financial needs of relatively poorer people who often require cash for
working capital or for making a series of relatively small purchases.
It is important to stress here the ambiguity associated with the con-
cepts of poverty and poor, which are often interpreted differently by
microfinance actors. Robinson (2001) talks about the economically
active poor, and this was an expression employed by Dr Amjad Saqib in
his intervention. Qard hasan loans are offered to low-income entrepre-
neurs, but engagement in a self-employed activity is a pre-requisite to
access the loan. Thus, it should be expected that, like most other produc-
tive credit programmes, AIM’s microcredit programme does not reach
some of the poorest segments of the population.
AIM’s microcredit model is based on the traditional group lending
methodology. Borrowers form solidarity groups of three to six members
living in the same neighbourhood and undertaking their own independent
businesses. The applications of all the members of the group are assessed
simultaneously, although the applications regard individual loans (Khan,
Ishaq, Afonso, & Akram, 2017). The microcredit product is called a Family
Enterprise Loan, which discloses one of its distinctive features—the process
expects the involvement of the household by supporting both the loan
application and the business. In practice, this translates into the inclusion
of another member of the household (often the spouse) as co-signatory of
the loan contract (Khan, Ishaq, Afonso, & Akram, 2017).
AIM demands that loan candidates should not have any other active
loans at the point of application. Once they finish repaying their first
microcredit loan, they may apply for a second larger loan. The initial
70  J. Silva Afonso and A. A. Khan

application process takes, on average, three to four weeks and includes

visits by the loan officer to the homes or businesses of each of the group
members. The final step in the application process is a compulsory group
meeting, usually held in a mosque or branch office, in which the branch
manager verifies that all conditions have been met and all members are
made aware of their responsibilities regarding the loan.
After approval, the disbursement of loans is scheduled for the following
public session, which again usually takes place at the local mosque—on a
small number of occasions when the majority of the borrowers are Christians
or Hindus then churches or temples are also used. At this event, borrowers
and their guarantors must be present to sign the loan contract (Khan,
Ishaq, Afonso, & Akram, 2017). During this public ceremony, which sev-
eral hundred people typically attend, AIM’s branch managers or other
senior staff emphasise the fact that qard hasan loans are promoted in accor-
dance with Islamic teachings and they discourage all present from engaging
in interest-based transactions and encourage prompt repayment so that
others might be able to benefit from the same funds in the future. In this
way, the moral obligation to repay the loan is reinforced both by the public
nature of the event (the presence of witnesses being one of the requisites of
Shari’ah), and by the attachment of ‘religious sanctity to the oath of return-
ing it on time’ (Obaidullah, 2011, p. 420).
From this, it can be concluded that the uniqueness of the AIM model
is not limited to not charging interest on loans or penalties for late repay-
ments. It is also rooted in its family approach and in the use of religious
sites and language to strengthen the moral commitment of borrowers to
honour the loan contract and, at the same time, reduce the operational
costs of the institution.

4.4 A
 Working Hypothesis and Four Essential
Questions on Qard Hasan and Islamic
Microfinance
The main argument raised throughout the conference session referred to
the ethical nature of qard hasan loans, and their potential role in fulfilling
the social mission of microfinance institutions. This vision of the model
 4  Islamic Microfinance: Exploring the Experience of Akhuwat…  71

has several implications on the identified critical questions relating to

demand, sustainability, replicability and impact for the development and
growth of Islamic microfinance. It particularly influences the notions of
sustainability and replicability of microfinance programmes, leading dif-
ferent actors in the sector to think ‘outside the box’ of conventional
microfinance. This chapter will now explore the critical questions in each
of these four areas in turn.

4.4.1 Demand

Data on the microfinance sector published by the Pakistan Microfinance

Network (PMN) highlights the impressive performance of AIM in terms
of outreach. As mentioned previously, AIM’s growth over recent years has
been outstanding both in terms of number of active clients and geo-
graphical coverage. The overall penetration rate of the microfinance sec-
tor in the country has increased significantly from 11.8% in September
2014 to 25.4% in September 2017, even though Islamic microfinance
only comprises a relatively small proportion (16% by September 2017)
of the sector as a whole and is due in large part to the operations of AIM.7
Despite this positive evolution, estimates of the financially unserved
population in Pakistan, especially in rural areas, are relatively high. This
seems to be in line with the conclusions of the 2014 MIMOSA report,
which analyses microcredit markets worldwide in terms of market satura-
tion. Pakistan was classified as an under-served market, ranking 1 on a
scale of 1 to 5 (Javoy & Rozas, 2015). This is not surprising, considering
Pakistan’s financial inclusion figures mentioned earlier, and it can be per-
ceived as a mismatch between the current offer and the needs and con-
straints (including religious) of low-income Pakistanis.
In this analysis, an important and often neglected issue is the role of
informal finance. Although the Global Findex figures on borrowing from
informal sources seem to show a more modest use of informal loans in
Pakistan compared to its neighbours India and Bangladesh (World Bank,
2018), this might not reflect the whole story. Pakistanis are usually suspi-
cious and careful in revealing personal information, especially on such a
sensitive topic (Lieven, 2011). Thus, it should be expected that the
72  J. Silva Afonso and A. A. Khan

declared figures for informal finance are underestimated. Given that

informal finance can include both exploitative moneylenders and infor-
mal savings and credit groups (locally referred to as ‘committees’), it
would be useful to have a better understanding of the existing mecha-
nisms and their comparative relevance.
The unmet demand for qard hasan loans, and Islamic microfinance in
general, does not seem to be confined to Pakistan, as illustrated by the
case studies from 11 different countries included in Harper and Khan
(2017). In the conference session, Professor Malcolm Harper shared his
perception that the situation is geographically heterogeneous, giving the
example of the relatively more conservative Somalia where the preference
for Shari’ah compliant loans seems comparatively more significant than
in Bangladesh. The preference for Islamic financial products when similar
conventional products are available was also found in a randomised con-
trol trial implemented in Jordan. The Shari’ah-compliant product intro-
duced by the MFI was a murabaha loan, which was compared to a
conventional consumption loan destined to buy household assets
(El-Zoghbi, Karlan, Osman, & Shammout, 2016, p. 1).

4.4.2 Sustainability

Adopting a qard hasan microcredit model implies looking at the sustain-

ability of the institutions from a different perspective and challenging
traditional concepts that stipulate that costs should be covered by loan
charges and profits. Different speakers at the conference asserted that if
AIM still exists and continues to grow after continuously operating and
implementing the same basic model for the past 17 years, it ought to be
considered sustainable, regardless of its funding sources. Although this
perception does not fit with the traditional accounting definition of sus-
tainability, which is commonly used in the evaluation of the performance
of microfinance institutions, the question raised by the panel was, to
what extent does it have to fit? Considering the mixed results on social
impact obtained by conventional microcredit programmes, the pursuit of
different and innovative models should be encouraged, and its mis-
matches with conventional programmes accommodated to properly eval-
uate these models, both its advantages and weaknesses.
 4  Islamic Microfinance: Exploring the Experience of Akhuwat…  73

Khan, Ishaq, Afonso, & Akram (2017) offer insight into the funding
of AIM’s microcredit programme. In the fiscal year ending in June 2016,
the main funding sources of the institution were national and interna-
tional donations (including sadaqah or zakat), institutional funding from
regional governments (in particular the Government of Punjab) and
application fees (AIM charges a fixed and non-refundable fee of 200
Pakistani Rupees (just under US$2) for all loans). Some two years later,
the composition of the funding sources had not changed significantly.8
Although three additional international funders now support AIM
(British Asian Trust, United Nations Development Program and Louis
Berger), the amounts granted are relatively small and less than the main
international funder, Lendwithcare, which provided approximately
US$750,000 in 2017.
In addition to these funds, during 2015–2016 Akhuwat generated more
income from voluntary donations from its own active clients than from the
application fees charged during the same period (US$1.45 m compared to
US$1.13 m). In this year, as in the previous one, the income raised, even
not including the borrowers’ contributions, exceeded the total operational
expenses (cost coverage ratios of 109% and 131%). This was achieved due
to increased income and a strategy of low costs. Besides the maintenance of
a simple and low-cost logistical infrastructure (in terms of physical space
and equipment), average salaries for comparable positions are lower than
those in other microfinance institutions. They are, however, compensated
by career development opportunities, since AIM has a policy of promoting
from within; and the ‘faith’ factor, with many staff being committed
Muslims who value working for the organisation as it acts on Islamic teach-
ings of helping the poor while simultaneously not engaging in interest-
based transactions. Both factors seem to be key to achieving low rates of
staff turnover. The authors, thus, conclude that the provision of qard hasan
loans can be compatible with achieving sustainability.
Voluntary donations from clients are a distinctive feature of AIM’s
microcredit model, which Dr Amjad Saqib highlights. These donations
are encouraged by AIM from the beginning of the relationship with the
client. AIM believes that if an individual is able to take a loan without
interest, which it is hoped will help to improve his/her economic situa-
tion, when this person manages to get out of poverty at some future time,
74  J. Silva Afonso and A. A. Khan

he/she will have the moral obligation to assist others to do the same,
although there is no formal obligation to do so. Dr Amjad Saqib referred
to this as ‘Akhuwat’s social contract with its clients’ and more widely a
‘pact between the privileged and the underprivileged, a duty of those who
have resources towards those who do not’. From this perspective, AIM
should be seen not only as a microcredit programme, but also as a part-
nership with the community, in which the principles of solidarity and
sharing are central. AIM managers believe that if clients understand these
principles, they are inspired to contribute, even if their monetary contri-
tion is relatively small. Interestingly, in order to convey the message that
such donations are not a charge for its service but to promote solidarity
with other ‘deserving’ people, AIM has decided not to use the voluntary
donations from clients to cover operational costs, but rather as extra
loan capital.

4.4.3 Replicability

It might be assumed that the success of a qard hasan model is strongly

dependent on its religious component and can therefore only work when
implemented within Muslim-majority countries or communities. Dr
Amjad Saqib disagrees with this idea, remarking that the practice of interest-­
free loans has long been present in many societies, most often among fam-
ily and friends.9 The results of the Global Findex Survey seem to corroborate
this argument showing that, in 2017, borrowing from family and friends
was the main source of credit in low- and middle-­income countries (World
Bank, 2018). Dr Amjad Saqib argued that interest-free loans should be
perceived essentially as an ethical practice. Despite the fact that AIM con-
siders itself a faith-based institution, it does not consider itself as a prosely-
tising organisation. It works equally with Hindus and Christians, even
using their temples and churches to gather borrowers and disburse loans on
occasions (Khan, Ishaq, Afonso, & Akram, 2017).
Clearly, the ability of AIM to attract zakat and sadaqah donations from
economically better-off Muslims as well sadaqah donations from its own cli-
ents has been key to generating the necessary funds for its microcredit pro-
gramme, particularly prior to attracting institutional support. Furthermore,
 4  Islamic Microfinance: Exploring the Experience of Akhuwat…  75

the concept of qard hasan loans has a particular resonance for Muslims,10
whether they are private individuals or representing institutional donors,
such as the various provincial governments in Pakistan. Considering interest-
free loans as a purely ethical, rather than a faith-­based, practice opens the
door to a more positive and open view on the possibilities of replicating the
model in other, particularly non-Muslim, contexts. However, there is doubt
as to whether the interest-free model would be able to attract the same level
of financial or moral support in a non-Muslim environment.
Khan, Ishaq, Afonso, and Akram (2017) briefly mention the imple-
mentation in Pakistan of 16 independent local replications of the AIM
model. However, these institutions have struggled to attract donations
and increase their scale and outreach. In fact, there are few successful
examples of IMFIs that rely exclusively on qard hasan. Analysing the
experience of START, a microfinance institution created in 2002  in
Kosovo by Islamic Relief, Khan and Zeqiri (2017) observe how, unable to
attract donations in an environment where Islamic religious practice is
not strong, the organisation gradually moved away from solely using qard
hasan to mostly employing murabaha (with relatively higher charges for
clients), reserving qard hasan only for the poorest clients. It is clear that
Akhuwat’s success is only partly due to the qard hasan model striking a
chord with donors and clients. Equally, if not of more importance, there
has been the personal charisma and leadership qualities of Dr Amjad
Saqib, and the ability to recruit very able staff and instigate strong opera-
tional policies and procedures. During the session, Dr Amjad Saqib
referred to AIM’s plans to implement replications of the model in other
(non-Muslim majority) countries during 2018 and beyond.

4.4.4 Impact

The considerations and arguments put forward while developing the

three previous questions build up to the final question relating to the
impact of Islamic microfinance. What evidence exists regarding the
impact of qard hasan models and Islamic microfinance overall? How does
this research compare with impact studies of conventional interest-based
microfinance? Is there enough evidence on AIM to justify the ethical
perspective associated with the model and its implications?
76  J. Silva Afonso and A. A. Khan

The common perception of the conference speakers is that there is

certainly much to do in this regard. In fact, there is relatively little research
on the impact of Islamic microfinance programmes, and the studies
undertaken so far suffer from the same deficiencies that conventional
microfinance has long been accused of, namely that the studies have used
weak methodologies and data. There is no conclusive impact study using
randomised control trials, and rigorous quasi-experimental studies
are scarce.
Regarding the impact of AIM microfinance programme, which is the
most well-known example of the qard hasan model, until recently, the
most rigorous of the studies was the social performance investigation car-
ried out for the European Union: ‘Pakistan Financial Services Sector
Reform Programme in 2005–2006’. The research aimed to ‘quantify and
demonstrate some of the outcomes of microfinance institutions’ and
included six Pakistani MFIs, with different missions and programmes.
The quasi-experimental methodology implemented was based on a
difference-­in-difference approach, comparing the differences in the
incomes of clients and non-clients of the institutions in the locations
where the programme was implemented with control locations (Zaidi,
Jamal, Javeed, & Zaka, 2007, pp. ii–iii).
The researchers surveyed a sample of 220 active Akhuwat borrowers
and 120 non-borrowers. In the quantitative analysis, they did not find,
for most of the economic and social outcomes included, significant dif-
ferences between the clients and non-clients. They associated these non-­
results mainly with the short period of participation in the programme.
Interestingly, they also found that only 15% of the sample clients were
considered to be poor according to the official poverty line, which was a
common result with the other participating MFIs in the study. To com-
plement the information collected through the quantitative survey, the
study also included two focus group discussions with a smaller sample of
clients in different loan cycles, which overall provided a very positive
perception of the borrowers regarding the impact of the microcredit loan
received from Akhuwat (Zaidi et al., 2007).
It should be noted that this study was implemented in 2005 when
Akhuwat had 13 branches located in the Punjab province and only 7150
active borrowers, a very different reality compared with the present situa-
 4  Islamic Microfinance: Exploring the Experience of Akhuwat…  77

tion. Moreover, the research was based on cross-sectional data, therefore

being more sensitive to selection bias and less suitable to measure changes
in the lives of the clients over time.
The first longitudinal study conducted on the impact of AIM micro-
credit programme was implemented within a broader evaluation project
led by Lendwithcare. The project, in which the University of Portsmouth
participates as academic consultant, started towards the end of 2014 and
included the implementation of two waves of a household survey in 2015
and 2017. Although also based on a quasi-experimental methodology
using a difference-in-difference model, data was available for two periods
in time, which allowed for a comparison between the changes in the
selected outcomes for the sample of clients and non-clients before and
after the participation in the programme. The main findings of the study,
which are included in the final project report, are presented next
(Afonso, 2018).11
The household survey was applied to a sample of 500 new AIM clients
from four branches in the city of Lahore supported by Lendwithcare and
100 non-clients from the same neighbourhoods. The survey included a
purpose-designed questionnaire and the application of the Poverty
Probability Index (PPI).12
A first result from the application of the baseline survey in 2015 was
the (expected) relevance of the ‘faith’ factor in the reasons for applying for
a business loan at AIM. Of the new clients interviewed, 62% stated ‘com-
pliance with Islamic teachings’ as their main motivation to choose AIM,
with only 29% choosing the cheaper cost of the loans in comparison with
other financial providers. In the second wave of the survey, there is also
evidence to corroborate the identification of AIM clients with the prin-
ciples of the institution, specifically the solidarity and sense of responsi-
bility towards others in worse conditions. Of the clients interviewed in
both surveys, 93% had made either regular or occasional voluntary dona-
tions to the institution during the previous year when they were repaying
their first microcredit loan.
The study results were, overall, positive at both business and household
levels, with quantitative and qualitative indicators showing that, on aver-
age, business sales, profits, net income and poverty scores, among other
indicators, had improved for AIM new clients in comparison with the
78  J. Silva Afonso and A. A. Khan

baseline survey. The observed variations of these indicators were stronger

than those verified for the group of non-clients. These results reflected in
the majority (68%) of the clients considering their quality of life to be
better in 2017, and in the significant decrease of clients identifying access
to capital as the main constraint for their businesses (only 20% in 2017
compared with 76.5% at baseline).
It is, however, important to note that the research also highlighted the
heterogeneity among the clients. There were significant differences,
namely in the indicators related to income, consumption and poverty,
between female and male clients, with female borrowers earning lower
personal incomes and registering lower PPI scores, on average, relative to
male clients in the two waves of the survey. These differences are not sur-
prising considering other studies conducted in the sector in Pakistan
(Asim, 2009; Safavian & Haq, 2013; Zulfiqar, 2017). It should be noted
that the gender differences in income and expenditure were not signifi-
cant at the household level.
Statistically significant differences were also identified between the cli-
ents from the four branches involved in the study: the clients living in the
two central urban areas were more likely to earn higher incomes and be
less poor. The differences were also verified in the composition of the
branch samples in regard to gender and literacy levels, with a stronger
presence of female and illiterate clients in the poorer areas. Interestingly,
the comparison between the different client segments showed that the
variation of the PPI scores was stronger for these two sub-groups (female
compared with male clients and illiterate compared with clients with for-
mal education), which indicates a potential reduction of the respective
poverty gaps, although this needs to be corroborated with further analysis.
In comparison to non-clients, the research found that the access to loans
had a positive impact for those respondents who experienced stronger
improvements in their poverty scores, but had no significant impact for
respondents who experienced a deterioration or no variation of the indi-
vidual PPI scores.13 Not forgetting that the quasi-experimental methodol-
ogy employed presents some limitations, it should be noted that these
limitations are not sufficient to overlook a consistent finding of the study,
the heterogeneity among AIM clients and its consequences on the effects of
the qard hasan loans provided by the institution. This acknowledgement is
 4  Islamic Microfinance: Exploring the Experience of Akhuwat…  79

important in the assessment of the AIM model and should also be taken in
consideration when analysing the existing, and at this stage, not very suc-
cessful replications of the model within Pakistan as well as the potential
future replications of the qard hasan model in other contexts.

4.5 Conclusion
The preceding discussion points towards an under-served demand for
Shari’ah-compliant finance in Pakistan. In the context of relatively high
rates of financial exclusion, we can assume that this demand will likely be
shared by other countries with significant Muslim populations. AIM’s
experience also demonstrates that there is a strong desire among Muslim
donors to support qard hasan programmes as a preferred means of help-
ing low-income borrowers. This willingness is based, in part, on Islamic
teachings and extends to borrowers themselves who support the organisa-
tion’s philosophy of solidarity with ‘others in need’ and make voluntary
donations to support the programme. Although it does not adhere to the
same evaluation criteria as employed in conventional interest-based
microfinance, the Akhuwat qard hasan model has been ‘financially sus-
tainable’ so far. How likely is it that this model can be replicated elsewhere?
The discussion during the conference and in this chapter shows that
AIM’s experience appears to be unique, particularly regarding the capac-
ity of the institution to attract donations. Microcredit models based on
qard hasan have either struggled to increase scale and outreach, as has
been the case with the many local replications in Pakistan, or have shifted
their emphasis from providing benevolent loans to a greater focus on
other Islamic microfinance products that generate greater income for the
institution, as was the case with START in Kosovo.
While acknowledging AIM’s innovative approach to cover its operat-
ing costs, it is also important to take into consideration the various strate-
gies adopted by the institution to maintain low operational costs and
high loan repayment rates, and promote a strong sense of commitment
and loyalty from its staff. Some of these strategies, such as the use of
mosques and references to Islamic teachings, incorporate a faith element.
However, others, such as careful client selection and rigorous loan
80  J. Silva Afonso and A. A. Khan

appraisal, are simply examples of good microfinance practice. Furthermore,

AIM has benefited from the leadership qualities of Dr Amjad Saqib, his
personal charisma and the professional connections he has developed
throughout his career, particularly with the various regional governments
in Pakistan.
Exploring the relative importance of faith and other factors in the suc-
cess of AIM and other Islamic microfinance methodologies, requires fur-
ther research including the application of qualitative methodologies.
Indeed, compared to interest-based microfinance, Islamic microfinance is
a vastly under-researched area. The longitudinal investigation led by
Lendwithcare represents a step in the right direction, especially consider-
ing the intention of the project partners to continue the research and
implement a third wave of the household survey in 2019. This will pro-
vide an opportunity to further investigate the differences encountered in
the outcomes of the microcredit programme for distinct segments of
AIM clients. Analysing client heterogeneity can contribute to better
understanding the change mechanisms associated with benevolent loans,
and consequently, identify critical factors to the successful replication of
the model. More generally, promoting further research and programme
evaluations that focus on the qard hasan model will enhance transparency
and accountability of IMFIs, and contribute to overcoming the prevailing
scepticism towards the financial sustainability of this type of model and
Islamic microfinance. At the same time, it will contribute to the develop-
ment of evaluative thinking and related skills within the institutions.

Notes
1. The authors acknowledge the speakers at the conference plenary for their
contributions to the discussion, Muhammad Shakeel Ishaq and Shahzad
Akram from Akhuwat Islamic Microfinance, for providing information
on  the  organisation’s operations, and  Elise Aston for  her comments
and suggestions.
2. The fifth European Research Conference on Microfinance took place in
Portsmouth, UK, from 12 to 14 June 2017. The conference was hosted
by the University of Portsmouth, who co-organised the event with the
 4  Islamic Microfinance: Exploring the Experience of Akhuwat…  81

European Microfinance Platform (Luxembourg) and the Research

Centre for Microfinance (Belgium), known by its acronym CERMi.
3. It should be noted that despite this comparative worse performance, the
figures show a clear improvement regarding the data from the previous
waves of the survey in 2014 and 2010. Data from the Global Findex
Survey on Financial Inclusion is available at https://globalfindex.world-
bank.org/
4. The University of Portsmouth is one of the partners participating in the
Lendwithcare evaluation project. For more information about
Lendwithcare, please see https://www.lendwithcare.org
5. Zakat is an obligatory almsgiving for all Muslims who meet the neces-
sary criteria of wealth. While zakat funds can be used to cover the opera-
tional costs of organisations that assist the poor, they cannot be used to
fund loans. Sadaqah is a voluntary charitable donation and can be used
for both loan capital and to cover operational costs. Waqf is an endow-
ment (usually a building or plot of land) or a trust set up for charitable
purposes. It involves tying up a property or fund in perpetuity so that it
cannot be sold, donated or inherited by anyone. An IMFI can, for exam-
ple, use the rent from letting a property to finance its operations.
6. According to personal communication with Project Manager, Akhuwat,
22 June 2018. Altogether, Akhuwat employs approximately 7500 staff.
7. The information is available online in the quarterly editions of
MicroWatch (No. 33 and 45), a publication of the Pakistan Microfinance
Network (http://www.pmn.org.pk/publications/category/MicroWatch).
8. Personal communication with Project Manager, Akhuwat, 24 May 2018.
9. Khan, Kustin, and Khan (2017) also observe that interest-free loans are
not exclusively Islamic either. For example, gemach or ‘acts of kindness’
is a Jewish interest-free loan fund with easy repayment terms and similar
to qard hasan.
10. There are several verses in the Qur’an that encourage Muslims to provide
qard hasan loans to ‘those who need them’. For example, ‘Establish regu-
lar prayer and give regular charity and give Allah qard al hasan’ (Surah
73, Verse 20). Indeed, qard hasan loans are considered as if they were
made to Allah, rather than the borrowers, to encourage lenders to part
with their wealth.
11. The final report of the project is available at http://www.careevaluations.
org/wp-content/uploads/Impact-Assessment-Report-Pakistan-Joana-
Afonso.pdf
82  J. Silva Afonso and A. A. Khan

12. The Poverty Probability Index (PPI) is a poverty assessment tool initially
developed by Mark Schreiner for the Grameen Foundation, and cur-
rently managed by the Innovation for Poverty Action (IPA). PPI is based
on a country-specific questionnaire with 10 multiple-choice questions
on household characteristics and assets ownership. More information
available at https://www.povertyindex.org/
13. The analysis was based on the application of quantile regression methods
to assess the impact of different factors, including the access to the
microcredit loan, in the variation of the PPI scores. The access to the
microcredit loan was statistically significant (at 1% significance level) for
the group of respondents in quartile 3, meaning those who have experi-
enced stronger improvements in the PPI scores.

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