Akhuwat: Making Microfinance Work By Kamal Munir

In recent years, microfinance has come under the spotlight for the wrong reason. The darling of international donor agencies for at least two decades, this market-led approach to poverty alleviation is now accused of causing havoc with borrowers’ lives. The reporting of numerous suicides by microfinance borrowers in the Indian state of Andhra Pradesh last year lends credence to these worries. The suicides were reportedly caused by indefensible amounts of pressure applied by microfinance institutions (in particular SKS, where founder/CEO Vikram Akula was recently forced out) to recover their loans from the poor.

My own research in Pakistan confirms this. Most borrowers (all women) that I spoke to in semi-rural areas around Lahore mentioned various humiliation rituals that microfinance organizations have devised to shame them into returning their money. Because of cultural reasons, women are particularly vulnerable to public shaming, and loan officers often resort to this. To avoid losing their honour in small, close-knit communities, women are often forced to borrow from their family members, feudal lords, and even the local moneylender, until there are no more people left from whom they can borrow. This is the point at which many break down.

There are two sources of pressure between borrowers and microfinance institutions (MFIs). For borrowers, the pressure comes from the fact that most MFIs charge exorbitant interest rates, ranging between 30 to 50 percent, and sometimes more. These rates are justified by MFIs on the grounds that the operational costs involved in disbursing, monitoring, and recovering thousands of microloans are exceptionally high. On the institutions’ side there is a strong desire to scale-up quickly and thus attract the attention of large lenders (such as the World Bank) or international investors. In scaling up, loan officers are under tremendous pressure to reach their quotas, often at the expense of due diligence. In other words, loans are given out to borrowers who realistically could never pay them back.

There does appear to be hope, though. One organization is bucking this trend with a more sensible—and just—business model. Akhuwat began in 2001 as an experiment. Its charismatic leader, Dr. Amjad Saqib—a civil servant in a previous life and keen to follow Islamic principles—decided to forego charging interest from borrowers entirely. This decision means several things: he must keep operational costs extremely low and Akhuwat must rely on donations from more prosperous members of society. The fundamental premise of Akhuwat is to establish partnerships between more-affluent and less-privileged citizens. Importantly, donations are also solicited from borrowers who make very modest donations (often 2 cents a day), but who welcome the opportunity to be “givers.”

Akhuwat runs a tight ship. I have visited several offices of Akhuwat, including the head office. In contrast to many other MFIs, where CEOs and CFOs have their own offices in plush buildings, everyone at Akhuwat sits on the floor in a single room. For disbursement of loans and information sessions, Akhuwat uses religious spaces, including mosques and churches. And unlike other MFIs, Akhuwat employees volunteer 20 percent of their time.

Akhuwat’s reliance on local donors means that unlike other donor-dependent MFIs, it is not under pressure to scale up quickly. This means it can do more due diligence and closer monitoring. The absence of interest also means the organization is genuinely seen to help clients rather than fleece them—a common perception of many other MFIs.

Akhuwat’s model is groundbreaking because it challenges deeply entrenched assumptions about economic behaviour—assumptions the entire microfinance edifice rests upon. For example, economists would have us believe that in a case where a single borrower takes out multiple loans, she would pay back the creditor charging the highest interest first. In fact, driven by the desire to keep Akhuwat on their side, many borrowers are returning instalments to Akhuwat first. Moreover, by giving back to the organization, borrowers are developing a strong sense of ownership and self-esteem (in the sense that they are not just borrowers but also donors).

Similarly, rather than financial penalties and threats of destroying social capital (mechanisms on which other MFIs rely), Akhuwat takes advantage of normative pressures connected with religion. Its use of mosques and churches reinforces this while breaking down religious barriers and taboos, such as women and non-Muslims entering mosques. Similarly, the organization invites Muslims into churches. And as Akhuwat tells borrowers they are doing a good deed, there is an expectation that borrowers will help others, and be honest in their dealings and businesses.

Akhuwat, then, represents the best in society: the willingness and enthusiasm of individuals to help others and sacrifice themselves; the moral obligation that comes with religion to help others but not the prejudices; avoidance of any strong-arm tactics; and helping others not just financially but by transforming their world views. In short, it is a model all social entrepreneurs should ignore at their peril.