The Interest-Free Microfinance Option By Nimra Amjad

_{Published in: Triple Bottom Line}

_{Author: Nimra Amjad
Date: October, 2009}

Akhuwat was doing for conventional microfinance what Professor Muhammad Yunus had done for conventional banking in the late 1970s it was showing that things could be done differently, and that the ‘accepted wisdom’ could be challenged
Dr. Malcolm Harper.

It is estimated that 72 percent of the population of Muslim countries are not using formal financial services (Honohon 2007). Where such services or conventional financial products are available, they are viewed incompatible with the Islamic prohibition against interest.

Islamic microfinance, considered a niche market, is still in its infancy and business models are still being developed.

Islamic Microfinance

Pakistan has a separate regulatory and legal framework for microfinance services and The State Bank of Pakistan has formulated guidelines for those providing Islamic microfinance services complying with Shariah principles.

In Muslim-majority Pakistan, how can one combine the Islamic social principle of caring for the less fortunate with micro-finance power to provide financial access to the poor? Dr. Amjad Saqib and his friends set out to solve this dilemma: Akhuwat was born in 2001. The only other model (apart from the banks and government funded interest and non-interest based schemes) that existed in Pakistan was Islamic Relief, which used a murabaha-based financing system and worked in collaboration with HSBC Amanah. The other providers of financing to the poor included informal moneylenders. Most microfinance providers charged about twenty percent interest.

The Akhuwat Model for Microfinance

The name, Akhuwat, is derived from the age-old Muslim spirit of “mua-khaat” or brotherhood, historically referring to the financial support offered by the citizens of Madina when they shared their wealth with the “muhajirin”, the immigrants from Makkah. Dr. Saqib and the founders wanted to build an institution which would foster a sense of common ownership and community among borrowers, donors and whoever was managing the institution. Philan-thropy and volunteerism, it appeared to the founders of Akhuwat, was the answer.

It all started with an interest-free charitable loan (qarz-e-hasana) of Rs. 10,000 provided by one of Dr. Amjad’s friends to a widowed woman with guarantees from a group she formed with his help. The idea? To start a pool of charitable loan money for the poor – then recovering it so to recycle indefinitely.

Dr. Saqib, who managed the Punjab Rural Support Programme at the time, volunteered to manage the process of identifying borrowers, lending the money and ensuring recovery. Soon, friends of the founding members offered more donations and lent more money to more groups on a guarantee basis – weekly meetings were attended by the founders to ensure accountability and support to the borrowers.

As more donations came in and loans were given out to more groups, Akhuwat began to grow, was registered as a society and could not rely on volunteers alone. They decided to charge a 5 percent administration fee regardless of when repayment was due to hire paid employees. However, this did not apply to loans under an amount of Rs. 4000.

Individual loans (that were based on guarantees from the community for the borrower) as opposed to group loans (which replicated the Punjab Rural Support Programme model) were also introduced.

Joint, Couple Loans

This not only catered to those who could not or did not wish to take out a group loan and attracted new clients but also cut down time invested in weekly group meetings. Staying culturally sensitive and relevant, soon after its inception, Akhuwat began giving out household or family loans to husbands and wives: income jointly shared by the whole family, co-signed by the male and female heads of the family. This was done based on the results of some studies which showed that separate loans to male and female in a family may result in tension for the family.

Akhuwat seeks to relieve poverty and to help people to better themselves, rather than to grow for the sake of growth, or to create permanent dependence. Growing sustainably and staying relevant to the community is key.

All transactions take place at the local mosque or church where loans are promoted to the community after prayers, given out and collected. This attaches a moral responsibility to the repayment of the loan and evidence suggests that it plays a huge part in Akhuwat’s loan recovery rate of 99.50 percent. Having a mosque or church-centred structure also provides an avenue for community participation and awareness. And, this cuts organizational costs.

No Strings Attached

Akhuwat’s current policy is not to accept donations from financial institutions or organizations (which may come with “strings attached”) so that it may be accountable to stakeholders alone: the local community, borrowers, individual donors, its volunteers and staff.

On the same principle (and due to the interest-reliant nature of the fund), Akhuwat has not requested for funding from the Pakistan Poverty Alleviation Fund, established by the Government, with foreign assistance, to finance micro-finance institutions. Of course, the organization does not discriminate on the basis of gender, religion, political affiliation or ethnic background for employees or clients.

Responsive & Relevant

The loan products offered by Akhuwat are a response to the economic needs of the community. The Family Enterprise Loan is for households that can or have come up with a solid, viable business plan (usually Rs.15,000, average) and forms 91 percent of what Akhuwat gives out. The whole family is a signatory and involved in the appraisal and lending process.

A Liberation Loan is given to those who have borrowed money from moneylenders at very high interest rates. Akhuwat pays the principle amount in one go and the client pays the amount (up to Rs. 40,000) back to Akhuwat in interest free installments. The Education loan is for poor students to pay for books and material (up to Rs. 25,000).

The Marriage Loan is given to poor families in order for them to afford dowry and wedding expenses (up to Rs. 25,000) for their daughters (males are not eligible). An Emergency Loan of Rs. 5000 from Akhuwat may be used to pay for unexpected medical expenses or other major fallbacks.

Akhuwat started the housing loan in collaboration Al-Noor Umar Welfare Trust which pays for home renovation and construction expenses for the very poor and varies between Rs. 25,000 to 70,000. Then there is the Silver Loan of up to Rs. 50,000 which clients with excellent credit history with Akhuwat can use to expand their current enterprise.

The average Akhuwat loan is for about Rs.11,000 (less than 200 dollars). Akhuwat’s lending is restricted by the amount of funds it can raise from donors and usually first-time borrowers cannot borrow more than Rs. 10,000 and the organization seeks to relieve poverty and to help people to better themselves, rather than to grow for the sake of growth, or to create permanent dependence. Growing sustainably and staying relevant to the community is key.

Credit+: Capacity-Focus

Currently, the organization also offers what it calls a credit plus approach: social guidance and technical training for its credit beneficiaries. The purpose of this is to help borrowers further improve and develop their small enterprises and provide sustainable economic development to the community as well as stay abreast of latest knowledge, market research, etc. Clients are also provided technical training and “internships” with borrowers who are already running a successful enterprise. Legal aid is also sometimes provided by volunteer law students.

Terminating Traditional Challenges

Recruiting staff from the same communities as their borrowers and not hiring unnecessarily highly qualified professionals reduces costs and ensures that staff turnover is much lower than in other micro-finance institutions.

The operating systems are minimal: no interest charges are levied, and success depends mainly on inter-personal relationships. The organization has no vehicles. However, loan staff can take loans from Akhuwat to buy them and receive compensation for fuel. New hires are interns that go through an intensive three-months training in micro-finance. All permanent staff is provided with medical cover. Student volunteers form part of the workforce and the offices are small with very little furniture and floor seating.

Most of the original founders are now on the Board consisting of seventeen members who, like all of Akhuwat’s top management, work for non-monetary compensation. The Board provides internal governance, formulating and directing policies, mobilizing loans and marketing Akhuwat, reviewing operations and management and so on. Under the Head Office is the Credit Operation Manager who leads a team of five area managers, who are accountable for their respective branches. Each branch is run by a branch manager with 4 to 6 unit managers for field operations.

Today Akhuwat has a trained workforce of more than 85 employees and the support of more than 500 local donors. Akhuwat now operates through 20 branches and is being replicated in 15 cities of Pakistan. It is registered with the Government of the Punjab and Pakistan Center for Philanthropy (PCP) and the Pakistan Micro-finance Network (PMN). What happened to the first loan that was given out to the widow? She purchased two sewing machines and started a small boutique in her house and in six months she returned the loan. During this period she also ran her house and funded the wedding of one of her daughters. That, was the small beginning of what later became a pioneering revolution in micro-finance in Pakistan.

We see community organizations as major service providers and economic drivers rather than as recipients or distributors of charity, and coordinators of volunteers. Today they constitute what is referred to as the social economy– Julia Gillard,
Deputy Leader of the
Australian Labor Party.