1. Glob. Innov. Agric. Soc. Sci., 2014, 2(4): 190-194.
  2. ISSN (Online): 2311-3839; ISSN (Print): 2312-5225 
  3. DOI: 10.17957/JGIASS/2.4.518 http://www.jgiass.com

Analysis Of Interest Free Micro Credit Scheme Of Akhuwat

In District Mansehra, Kpk: Implication For Poverty Reduction And Rural Development In Pakistan


Muhammad Rafay Muzamil1,*, Tanvir Ali1, Babar Shahbaz1, Safder Abbas1, Mobushir Iqbal2 and Abid Q suleri3


1Institute of Agri. Extension & Rural development, University of Agri., Faisalabad 2Department of Agri. Extension & Communication, PMAS-Arid Agriculture University, Rawalpindi

3 Sustainable Development Policy Institute, Islamabad

*Corresponding author’s e-mail: rafaymuzamil@gmail.com


Microcredit is considered as a strategy for poverty reduction & rural development. Poor people may invest small loans in farm or non-farm activities for income generation to secure their livelihoods. Most of the micro-credit schemes in Pakistan are based on interest but there are few organizations; Akhuwat is one of them who claim that they offer interest-free loans. The present research project took the Akhuwat as case study. Akhuwat adopted the concept of “Qaraz-e-Hassna“ or simply interest free loan. The present study was conducted on the basis two guiding questions of research. The methodology for this research project was based on qualitative data collection however & quantitative data was also used on limited scale to elucidate the qualitative data. It was concluded that majority of the respondents got the loan for expansion in existing business. 80% of the respondents utilized the loan for intended purpose. Education, food and was ranked at 1st, 2nd and 3rd order respectively by the respondents impacted by Akhuwat loan scheme.

Keywords:  Micro credit, livelihood, Loans, Poverty





Micro finance can play positive role in the areas of selfincome, employment generation, asset building, productive investment, savings which ultimately raised the socioeconomic status of rural women and create the quality of leadership and adoption of technology (Mula and Sarker, 2013). Micro-credit facilitates the poor people in starting their small business hence reducing the poverty. It not only provide economic opportunity to the poor people but also has positive impact on their social life with better access to education and health facilities and ability to take part in decision making process (Smith, 2004).

Small size financial transactions for agricultural and non agricultural households in rural areas helps in reducing poverty .It not only uplifts the financial status of the poor people of rural areas but also leave positive impact through improved living standard with better access to education and health facilities to take part in decisions related to their wellbeing  (Meyer, 2012). Access to micro credit in rural areas permits poor people to handle their household cash flows, initiate new agricultural activities and set up small businesses. When poor rural people have saved & higher earnings they can afford expenses for healthcare and education & can invest in their farms or businesses in future, hence leading to overall development of rural areas on sustained basis (IFAD, 2009).  Rural financial services can affect the situation of food security. For example, the food and agriculture organization discus that farmers hesitate to adopt new practices and technologies and to make investments needed to increase food supplies due to poor functioning of financial markets (FAO, 2011).

Poverty can be reduced or minimized if micro finance institute have access to financial capital from internally and externally available sources, if they retain highly capable & professional staff and if micro finance institute are able to trigger their client to do their best efforts for the income generation activity to overcome poverty (Latifee, 2000). Micro credit is considered as an effective tool to fight against poverty by giving financial. Credit is provided with objective to stop exploitation of the poor caused by expensive informal credit. Small loans are given to needy people at relatively lower cost as compared to approachable informal loans. These loans may help the poor people in improving their financial status through their active participation in income generating activity to reduce poverty & accelerate rural growth (State Bank of Pakistan, 2005)

The strategy of micro credit is considered an alternative tool for rural development & poverty reduction. Small loans may have impact on the financial condition of people in rural areas. A considerable research work has been done related to interest based conventional micro credit schemes. Number of empirical studies reported about the problem of high interest rate (Khan, 2000; Ahmad, 2005; Shahnawaz, 2007; Safdar, 2007; Bashir et al, 2010). But there is a little evidence available about interest free small loans based on Islamic shariah.

Muzamil, Ali, Shahbaz, Abbas, Iqbal, Q suleri  

Given this context, this paper attempts to examine the role of interest free micro-credit scheme of Akhuwat (NGO) and its implications for rural development and poverty reduction by drawing interview survey in district Mansehra of khyber pakhtunkhwa. Both the loanees of Akhuwat and its officials were interviewed to ensure both perspectives were presented.


The guiding research questions are:

  1. How loanees utilize the micro credit provided by Akhuwat?
  2. What are respondent’s perceptions and expectations regarding Akhuwat credit scheme & its anticipated role in rural development and poverty reduction?


Review of Literature: Li et al. (2011) argued that households should actively engage in the small loan program and effectively invest the obtained loan in activities like farm production and self-employment for the purpose of income-generation. They founded that microcredit program is not benefit the poor people equally specially the extremely poor people, poor people should  be facilitated with other kind of assistance before they efficiently use credit, these supports include infrastructure improvement, health care, employment, education & training. Similarly Sharma (2001) stated that small growers had not proper resources to finance their production needs. They need the additional financial assistance for resolving their problem & to increase the income level. Most of the credit disbursed in small farmers comes from non-institutional sources. Mostly the influential farmers avail the facility of subsidized loan. Moreover the difficult procedure also restrict small farmer`s approach to formal credit.

Bashir et al., (2010) suggested that loaning procedures should be simplified and convenient. Proper technical guidance should be provided by the bank and agricultural extension staff and providing the inputs in time rather than cash. He reported that 72 % loanee farmers facing the problem of high interest rate, however Islamic financial system may also be an alternative strategy to get rid of the interest on loan. Ahmed (2010) reported that majority of the respondents 82% agreed to some extent that credit allocated the poverty reduction. He further described that 48.7% of the respondents agreed to some extent NGOs purpose for poverty reduction are fulfilled.

Ahmed et al. (2011) stated that qualification level of income earners in the family contribute positively to overcome the poverty situation among the ‘with credit’ households. The more income earner in family, higher will be income thus ultimately reduction in poverty. Similarly Ibrahim and Aliero (2012) described that level of earning, year of schooling and marital status have significant positive impact on growers approach to formal credit, while age and sex have insignificant positive impact on the grower`s access to loan. On the other side rate of interest and transaction costs have significant negative influence on the cultivators access to formal credit. They further recommended the adoption of both group lending mechanism and character lending, so that growers in the rural peripheries could be approached with formal credit. Likewise Mamun et al. (2011) revealed that amount of loan received has a positive relationship with total productive assets and number of gainfully employed members that ultimately take to increase in household assets. He concluded that, after participating in AIM s microcredit programs, people are more likely to have their own house and more land. AIM provides proper training to the unemployed members of loanee household.

Shahzad (2010) found that majority 53.4% of the respondents partially utilize their credit on agricultural activities while 46.6% of the respondents fully utilize their credit on production activities .Tufail (2010) revealed that large majority of 69.0% of the respondents were utilizing their credit for further development of economic activity whereas  21% of the respondents were used the credit for their personal use & only 8 % of the respondents utilized the credit for their  household articles & only 2 % of the respondents were saving the credit for bad time.

Nawaz (1991) found that there is need to conduct the regular agricultural surveys to estimate the genuine requirements of loan of the farmers specially the small farmers & weakness, problems & hurdles in the field of agricultural credit. Rafiq (1996) suggested that there is need to focus on young educated small families in supervised agricultural credit programme. Credit facility should be provided with a purpose of making farming as profitable business contrast with other business. Hence Khan et al., (2011) described that credit developed the every sector of economy positively include farming, industries in the country & created employment for the people.  He suggested that special quota of loan for small growers are necessary. Farmer schooling is required for the proper utilization of credit.  Monitoring cells should evaluate the utilization of loan availability in the project area is required for the loan supervision. There is need to set up the research wing in the banks for evaluation of credit related activities. Capital for loan time to time may be increased according prevailed condition and ground realities of population and increased inflation.

PRSP (1999) found that micro credit facility had tremendous effect on the economic activity of deprived section of the rural areas. There had been huge increase in the income of the farmers & therefore improvement in their living standards. As a result more & more people relying on micro-credit due to which their socio-economic status getting improved. However Ayesha (2012) investigated that about 28.3% of the respondents were observed change to great extent & 43.8% of them observed change to some extent in looking after their children after utilizing the credit. She further concluded that 40.6% of the respondents` s income was increased after obtaining the loan.


Analysis of interest free micro credit scheme of Akhuwat in district Mansehra, KPK

Akhuwat: The case study: Akhuwat as a non-governmental organization was established in 2001 in Pakistan with an aim of providing interest free small credit to the poor people for earning a respectable income. The organization started with a first loan of ten thousand rupees which was given to a widow. The name of the organization Akhuwat derived inspiration from the concept of ` Muakhwaat Madina` Muakhwaat is Arabic word means “brotherhood`. Akhuwat working modality is based on four core principles. Interest free loans to the poor people for acquiring sustainable livelihoods, the use of community religious places, for example mosques and churches for loan disbursements use the spirit of volunteerism for its operation & transforming borrowers into donors for future


Methodology framework: This was basically qualitative research however to elucidate the qualitative data quantitative data was also gathered on limited scale. Convenient & purposive sampling technique was used to gather the data. Qualitative data was gathered through personal observation and in depth interview from the official of Akhuwat and loanees. While structured questionnaire was used to gather the quantitative data.




Purpose served through credit: The respondents were asked about the actual utilization of micro credit provided by Akhuwat & their response was presented in the table given below

The data presented in above table reflects that half of the respondents (50%) had taken the loan to expand the existing business followed by slightly above the one forth of majority (28%) of respondents had taken the loan to buy agricultural inputs like seed, fertilizer & pesticide. Whereas respondents slightly below the one-fourth (22%) had utilized taken the loan to start the new business. Not a single one respondent had applied the loan for the purpose of livestock, education of children, disease, marriage & food. It was due to reason that only the family type loan of Akhuwat is offered in the study area that’s amount is only for the income generation activity not for the social & household needs.


A vegetable seller said:  I opened the shop of vegetable in my `Betaak`. (Guest room) With this investment i designed the wooden made boxes to place the vegetables in them. Now I am at least in a position that my Childs not need to sleep hungry. We can make the meal at least with the vegetables that are being sold on the shop. My system is running & facilitating me temporarily relief but I am hand to mouth. It is even difficulty to return back the installments of loan timely.


A female loanee described the story: I applied the loan for the purpose to establish the karayana (grocery) shop for my younger son. The amount of 10 thousand is less but its provide some relief in such circumstances when no one is ready to help me out. I don`t know how it will be possible to overcome the crisis. I wish to see the happy time in my life. I hope to Allah almighty he will resolve out my all the

issues Inshallah (with the desire of Allah)


A snacks seller stated: With the consent of my mother I applied for the loan of 10 thousand & invested this amount to  expand  my  business  along  the  existing.  I prepared the

Table 1: Distribution of respondents according to the purpose served through credit

Purpose of  Akhuwat`s Loan           Frequency Percentage
To expand the business                              25 50
To start a new business                              11 22
To buy agricultural inputs                          14 28
Livestock                                                     –
Education of children                                  –
Disease                                                        –
Marriage                                                      –
Food                                                            –
Total                                                           50 100

Table 2: Distribution of credit according to the extent of utilization of Akhuwat`s loan

Utilization (Extent) of Loan              Frequency Percentage
Fully                                                            40 80
Partially                                                        8 16
Not at all                                                      2 4
Total                                                            50 100


samosas (snacks) with the help of my mother & sell them at my tandoor (local bread making oven). Thank to Allah almighty it is good experience, now daily I place 30 rupees at one side to repay the installment of my loan. The loan of 10 thousand only gives the initial start up but it cannot be said that it can reduce the poverty situation is like that if some want to open the shop in bazaar to start the business 10 to 15 thousand advance security is demanded.


A farmer said:  There is no income in winter season I got the loan from the Akhuwat of 15 thousand rupees to buy the seed & fertilizer for tomato & other vegetable.

The above data showed that the loan was utilized for small business i.e. grocery, vegetable selling and buying

agricultural inputs


The extent to which the Akhuwat`s loan was utilized: The respondents were asked about the either they utilized the credit for the intended purpose fully or spend some of the portion on the other areas & their responses were splited under three given categories.

The above data reflects that majority 80% of the respondents had utilized the credit fully followed by 16% of the respondents had utilized the credit partially. A few respondents (4%) hadn`t utilized the credit of Akhuwat for the specific purpose for which they borrowed. A vegetable seller said

Due to extensive rainfall my crops has devastated. There no business in market. It is very difficult to fulfill the requirements of daily food items. I did not used the Akhuwat loan for the intended purpose but spend the money

to build the house


A bicycle dealer stated: My father got the 2nd marriage &divorced my mother when I was in 6th class. My mother`s right hand got injured due to accident. I & my elder sister live with our grandfather while my mother lives with her brother along my younger sister. To support my family in start sold the vegetables, tobacco even was employed as


Muzamil, Ali, Shahbaz, Abbas, Iqbal, Q suleri  

Table 3: Distribution of the respondents according to their response

Credit Improvement in Strongly Disagree

Freq.               %


Freq.          %


Freq.          %

Agree Freq. Strongly agree Total
% Freq.           % Freq. %


Education 6 12
Health standard 9 18 10 20
Means of transportation 12 24 23 46
Food 4 8 7 14
Clothing 10 20 12 24
Agri. inputs 16 32 3 6
Land holding 21 42 9 18
Residential status 21 42 6 12
Livestock 21 42 3 6
Business 10 20 1 2


Table 4: Impact of Akhuwat`s loan scheme on different


Indicators Education Rank




S.D 1.119
Health standard 141 4 2.82 1.155
Means of transportation 107 8 2.14 0.880
Food 170 2 3.40 1.069
Clothing 137 5 2.74 1.208
Agricultural inputs 130 6 2.60 1.277
Land holding 102 10 2.04 1.029
Residential status 115 7 2.3 1.307
Livestock 105 9 2.10 0.974
Business 160 3 3.20 1.245


conductor in bus. I supported my both the sisters for their education & look after them like my own Childs. I utilized the Akhuwat loan for filing the case against the in laws of my younger sister regarding the matter of divorce & didn`t used the loan for intended purpose.

The qualitative data showed that respondents who hadn`t utilized or partially utilized the loan due to reason that they spend the money in fulfilling the social & household needs.


Impact of Akhuwat`s loan on overall improvement status of respondents on different indicators: The respondents were asked about the improvement in set of indicators & they had given the five options to select for each indicator according to its status & their responses were presented in table below


Ranking of impact of Akhuwat`s loan scheme on different indicators: In order to reveal the relative ranking of different indicators of livelihood, their weighted score were determined by multiplying the score value allotted to each category of the scale with the frequency count. Means were calculated as the sum of values divided by number observations. Liker scale was used (1= strongly disagree; 2 = Disagree; 3 = Neutral; 4 = Agree   5 = strongly agree) for accessing the impact of Akhuwat`s loan on different indicators of livelihood.

The data in the table showed the impact of Akhuwat`s small loan on different indicators of livelihood. Respondents ranked the education at 1storder mostly impacted by the Akhuwat loan scheme with (score=181 and mean=3.62), followed by food at 2nd order by the respondents that was impacted by Akhuwat loan with (score=170 and

17            34            17            34            10            20            50            100 13     26            17            34            1              2              50            100 11                 22            4              8              –               –               50            100 7       14            29            58            3              6              50            100 11                 22            15            30            2              4              50            100 19     38            9              18            3              6              50            100 18                 36            1              2              1              2              50            100 12     24            9              18            2              4              50            100 26                 52            –               –               –               –               50            100 11     22            25            50            3              6              50            100

mean=3.40) while business was ranked at 3rd order by the respondents impacted by the Akuwat`s loan with (score=160 and mean=3.20). Health standards ranked at 4th order with (score=141 and mean=2.82) lies between disagree & neutral but tended toward the neutral. Clothing was ranked at 5th order with (score= 137 and mean=2.74) lies between disagree and neutral but inclined toward the neutral. Agricultural inputs ranked at 6th order with (score=130 and mean=2.60) lies between disagree and neutral but inclined toward the neutral. Residential status was ranked at 7th order with (score=115 and mean=2.3) lies between disagree and neutral but tended to disagree. Means of transportation was ranked at 8th order with (score=107 and mean=2.14) lies between disagree & neutral but inclined mostly to disagree. Livestock was ranked at 9th order with (score=105 and mean=2.10) lies between disagree and neutral but almost inclined to disagree. Landholding was ranked at 10th order with (score=102 and mean=2.04) fell on the option of disagree.



Data gathered from the both qualitative and quantitative method confirmed that maximum loanee of the Akhuwat invested their loan in expanding the existing business. Majority 80% of the respondents had utilized the credit fully followed by 16% of the respondents had utilized the credit partially. A few respondents (4%) hadn`t utilized the credit of Akhuwat for the specific purpose for which they borrowed. It was revealed through qualitative data that those respondents who hadn`t utilized or partially utilized the loan due to reason that they spend the money in fulfilling the social & household needs. Respondents ranked the education at 1st order mostly impacted by the Akhuwat loan scheme with (score=181 and mean=3.62), followed by food at 2nd order by the respondents that was impacted by Akhuwat loan with (score=170 and mean=3.40) while business was ranked at 3rd order by the respondents impacted by the Akhuwat’s loan with (score=160 and mean=3.20).



This study was conducted within the framework of research project funded by Sustainable Development Policy Institute/National Center for Competence Research: Research Partnerships for Mitigation Syndromes of Global


193 Analysis of interest free micro credit scheme of Akhuwat in district Mansehra, KPK


Change. I am highly thankful to both organizations for facilitating me financially in conducting my research work. I am also thankful to the officials of Akhuwat who facilitated me to collect the data




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