Financial inclusion is getting increasingly popular across the globe as a development policy agenda, particularly among the developing countries. Programmes for increasing financial inclusion are gaining momentum by the day. The concept gained early currency in early 2000s. It is now getting support from global development agencies as a priority development agenda because it helps financially marginalized communities become economically active, reduce gender and earning gaps, alleviate poverty, handle economic emergencies and devise social security plans on a wider scale with cost effective mechanisms. Financial inclusion initially referred to the delivery of financial services to low-income segments of society at an affordable cost. However, during the past decade, the concept has evolved into four dimensions: easy access to finance for all households and enterprises, sound institutions guided by prudential regulation and supervision, financial and institutional sustainability of financial institutions, and competition between service providers to bring alternatives to customers. Poverty and income inequality marginalize people from the mainstream financial services. Provision of financial services for the poor and low-income segments is particularly helpful to speed up inclusion. Conventional financial institutions finance clients who can produce physical collateral. If and when a client defaults on repayment, the losses can be covered from the physical collateral. If a surplus remains, it is returned to the client. The poor, who cannot produce physical collateral, are thus marginalized from the mainstream financial services. Consequently, mainstream financing institutions result in financial exclusion of the poor and low-income communities. Most mainstream financing experts believe that financing the poor is risky in many ways. First, they are unable to produce collateral against their debts. Second, there is a high chance of default because they have lots of unsatisfied needs which tend to lead them towards non-productive use of loans. Third, disbursement and collection of credit is more expensive than in case of well-off clients. This is called the poverty penalty. The idea of financial inclusion as a poverty alleviation tool is based on the concept of poverty being a lack of financial capital. Once, the major reason for poverty is realized, the provision of financial services to the poor, particularly at micro level, becomes a logical solution, even imperative. Globally, 31 per cent of the adult population is excluded from financial services. Most of the excluded people live in China, India, Pakistan, Indonesia, Nigeria, Mexico and Bangladesh. These countries comprise 47 per cent of the total excluded population. Incompatibility of existing financial services and products with religious faith is one of the important reasons causing financial exclusion in Muslim countries. Poverty restricts human choices, including financial choices, and causes financial exclusion among the many other types and channels of exclusion. Conceptualization of ‘Zakat’ as an instrument of financial inclusion is based on the idea that poverty results in a lack of financial support and financial services to the poor In Pakistan, a vast majority of the financially excluded people, is living below the national poverty line (about 30 per cent of the total population, which is more than 60 million). The country has initiated diverse programmes to alleviate poverty and ensure sustainable inclusive financial services, particularly for the low-income and financially marginalized communities. However, we can only target 47 per cent of the adult population, served by all financial, non-banking financial and informal institutions. Poverty restricts human choices (including financial choices) and thus causes financial exclusion among the many other types and channels of exclusion. Conceptualization of ‘Zakat’ as an instrument of financial inclusion is based on the idea, that poverty results in lack of financial support and financial services to the poor. Compulsory giving such as Zakat and non-compulsory giving such as awqaf, sadqaat and qard-i- hasna might be a great idea to ensure financial inclusion, alleviate absolute poverty and ensure fair distribution of income. A study conducted by the World Bank shows that Zakat has a potential in Muslim countries to alleviate absolute poverty and hence can become a strong instrument of financial inclusion. The study reveals that 20 out of 39 Muslim countries, including Pakistan, have potential to alleviate absolute poverty in Muslim countries. This study highlights the importance of zakat as a social tool to alleviate poverty and speed up financial inclusion as a shariah-compliant solution. The development of social institutions and provision of interest free loans to support the under privileged for a social cause might be useful interventions to provide non-commercial solutions to the economic problems of the poor population. Coordinated efforts among the various social and financial institutions will further accelerate financial inclusion on one hand and will promote sustainability and efficiency on the other hand. The writer is a teacher at the Institute of Management Sciences, Peshawar. He can be contacted at Zahoor.khan@imsciences.edu.pk