A case study on the success of Akhuwat’s Islamic microfinance model
Jelmer David Ikin,
Master of Law & Diplomacy, 2013
There appears to be a missing link in mainstream microfinance models to provide products that are more suitable to their Muslim clients (Siddiqi 2008). For a concept like microfinance to be truly successful in alleviating poverty, its practices need to fit in with the social and cultural environment and “the very beliefs of the people it is trying to reach” (Segrado 2005). Surveys in Algeria, Jordan, and Syria, for example, reveal that up to 40% of respondents cite religious reasons for not accessing conventional microloans (Karim, Tarazi and Reille 2008).
This case study focuses on the feasibility of microfinance in countries heavily influenced by Islamic traditions. Akhuwat, an NGO and micro-finance organization in Pakistan, has somehow successfully managed to merge the conflicting interests between MFI’s and Islamic Sharia law in a country that is founded on Muslim principles.
Moreover, provided the West’s proposals to significantly reduce foreign aid to Pakistan (Cookman and French 2011), and U.S. diplomatic officials stressing the importance of focusing future efforts in Pakistan more on a societal level (Munter 2012), microfinance is becoming a crucial variable in Pakistan’s future development.
This case study research project will try to understand what characteristics of Akhuwat’s Islamic microfinance model make it so successful. The findings are based on a visit by the author to Pakistan, graciously made possible by funds from Fletcher’s Institute for International Business in a Global Context, where he met Akhuwat through his charity no mountain too high.
Akhuwat’s innovative model can be broken down into five key distinguishing factors that together enable both access to loans for practicing Muslims and a sustainable microfinance model. These factors are (1) interest-free loans, (2) use of religious infrastructure, (3) loan offering and process, and (4) a virtuous cycle and (5) simple operations, and will each be elaborated on in the next paragraphs.
Interest-Free Loans (Qarz-e-Hasna)
As discussed above, it is not allowed under Islamic principles to charge others interest, or riba. A literal translation of riba in the Arabic language is ‘excess,’ and refers to the belief that interest is equal to effortless profit or profit free from compensation. The arrival of interest-charging microfinance organizations in Pakistan brought along a difficult challenge to poor practicing Muslims – microloans could help them generate or maintain a certain level of income, but getting a loan would be against the tenets of Islam. Our meetings with various poor Pakistanis suggested that many did not take out a loan, and those that did felt very conflicted about it.
Akhuwat provides a much-needed alternative to these organizations. There is no interest, only a one-off 5% administration fee, which is not charged to borrowers with loans under Rs. 4,000 as such borrowers are seen to be too poor to be able to pay this without hardship. In so doing,
Akhuwat relaxes capital and liquidity constraints among the Muslim poor. A man we met at
Akhuwat’s second oldest office, below the Shah Jamal shrine, had just completed his documentation for a Qarz-e-Hasna. In our conversation with him, he said he met with many people and institutions that charged very high interest rates, and that he was glad he found Akhuwat because he is “at peace with this money.”
Similarly, Muhammad Rizwan, a shoemaker we met in Faisalabad, believes the loans he takes from Akhuwat are blessed because they are interest-free and given without interest in personal gain. He believes this purity of intent contributes to the success of his business. “I have a business now and I am respected – I am satisfied.” he says contentedly. Starting with nothing but his shoemaking skills and an Akhuwat loan, he now employs five workers and produces 300-400 shoes per week.
Use of religious infrastructures
Mosques and churches are a crucial component of Akhuwat’s business strategy, for three key reasons.
First, as Dr. Amjad Saqib, founder of Akhuwat mentions: “there are over 1,100 mosques and shrines in Lahore, and this infrastructure is only used a fraction of the time.” Since Akhuwat endorses the tenets of Islam, it has been allowed to run its branch offices from an office space inside these existing religious structures, hence reducing overhead costs. Moreover, Akhuwat’s monthly loan disbursement events take place inside the mosques outside of prayer times.
Second, the use of religious sites underscores Akhuwat’s philosophy of civil participation. Akhuwat means ‘brotherhood’ in Arabic and tries to make people aware of their ability to contribute to other people’s lives. According to Dr. Amjad Saqib, the Quran states that the function of mosques is to be used for social and religious gatherings to promote civic participation and Akhuwat stresses that religion should act as a moral compass and a force of good for people. Our discussions with men and women after several loan disbursement events and at their shops is that this intention is understood by borrowers and clearly espoused by them to fellow community members. The ‘virtuous cycle’ discussed below is closely related to this point.
Third, as many borrowers see their loans directly linked to their religion, they treat it as a sacred gift that should be managed as such. Many borrowers we spoke to said the loan they received was holy and it had to be treated with respect. This belief seems to have had an effect on Akhuwat’s repayment rate, which is an unusually high 99.85%, and borrowers’ honesty in their loan amount requests and their use of these funds.
Loan offering an process
Akhuwat’s lending methodology is also unique. Contrary to market trends, Akhuwat has moved away from group lending. A passage in their institutional review clearly explains why:
“The reason for phasing out group loans is that the group leaders were found to manipulate their position and extort money from the borrowers for group membership. Most group members were selected on the basis of their popularity in the locality and not on their genuine need for credit. The LO was also sidelined by the President of the group. [Finally,] if the recovery is not 100 percent then the whole group has to wait until the recovery is completed.”
Armed with these findings, Akhuwat introduced a system of individual loans where the borrower is required to get two non-relatives who know the borrower well to collateralize his or her loan. Next, the loan officer does a social and financial appraisal of the potential borrower, which determines the officer’s understanding of the likelihood that the potential borrower will repay the loan. We found it refreshing to see that Akhuwat critically assesses every aspect of microfinance, and does not feel a need to copy other models simply because they are typical for the industry. Similarly, Akhuwat does not feel obliged to focus predominantly on female borrowers and does not discriminate between gender or religion in providing people access to its microloans.
This methodology also has an impact on Akhuwat’s product offering. Unlike traditional microfinance organizations, which typically restrict borrowers to use the borrowed funds productively by means of capital expenditure or working capital purposes, Akhuwat provides different products that put people’s needs at the center of attention:
- Family loans are meant for starting up or expanding a small business, and are more similar to interest-based microloans. Akhuwat reviews the borrower’s business plan prior to providing a microloan, and loan amounts are anywhere between Rs. 3,000-25,000.
- Liberation loans are given to people who are burdened with outstanding high-interest loans from money lenders. Akhuwat pays off the principle and total accrued interest for the borrower and the borrower repays Akhuwat this total amount in installments. Loan amounts are typically larger than Rs. 25,000.
- Housing loans provide borrowers help with purchasing a room, house, or an apartment and need to be repaid in two years. Loan amounts range between Rs. 40,000-50,000.
- Wedding loans are specifically designed to marry off daughters or sisters of extremely poor households. Marriage is crucial to the financial well-being and status of these families. Loan amounts are at most Rs. 15,000 and need to be repaid within a year.
- Health loans provide funds to individuals in case of health issues that are expensive to remedy but need to be addressed to ensure survival or continued economic productivity. Loan amounts are at most Rs. 15,000 and need to be repaid within a year.
- Education loans not only provide families with funds to pay for the tuition of prospective students, but also provide aspiring educational entrepreneurs with funds to start their own private schools. Loan amounts are up to Rs. 100,000 for such as venture, and Akhuwat is currently in search of a partner NGO with expertise in education.
Dr. Amjad Saqib refers to the virtuous cycle, as opposed to the vicious cycle, as one of the key components of Akhuwat’s philosophy. These two words embody the behavioral impact that Akhuwat’s message seeks to accomplish – if a borrower feels like he or she is not exploited by the institution that provided him or her with funds to climb out of poverty, then the borrower would feel it to be unjust to exploit his or her customers too. This trickle-down effect is not only present with Akhuwat’s borrowers, but for all stakeholders it cooperates with:
- Local Philanthropy: Akhuwat’s message gives people – many of whom look to their religion as their guiding moral force – hope, and speaks to them in their own language. Anecdotal evidence from our visit to Pakistan shows that people familiar with Akhuwat seem to have a higher awareness of their duty to help their community, and do so in their own capacity.
- Volunteerism: Akhuwat recruits its workforce from the community it operates in and borrows to. Akhuwat tells its existing and prospective employees that working for Akhuwat should be seen more as volunteering than as income generating. Akhuwat’s Board of Directors only consists of very capable philanthropists and social workers. When we spoke with the manager of a branch office in Faisalabad, he told us that he earns about one-third of what he used to earn while working for a different microfinance organization, but that he prefers his current job as it covers his basic needs and he feels like his contribution has a bigger and better impact on his community. Indeed, our discussions with Akhuwat’s human resource manager confirm that this spirit of volunteerism has resulted in very low staff turnover rates (2-3%) and higher levels of motivation and dedication.
- Borrowers as donors: every borrower receives a small donation box when it receives a microloan. Like Mr. Khalil in the picture to the right, the borrower often puts this donation box at its shop where its
customers can see it. Whenever the borrower or his or her customers have a few spare rupees, they put this money inthe box, thus becoming an Akhuwat donor themselves. The borrower brings the box over to Akhuwat whenever they visit the office to pay a loan installment. This ‘borrower as donor’ concept is highly successful and strengthens the belief of borrowers that they too can do good for the community with the little they have. When asking borrowers why they donate, without exception we received looks of incomprehension, and an answer that it would be wrong to have been granted a gift from God and keep the all benefits to themselves.
In discussing the concept of a virtuous cycle with Akhuwat’s Board members and management, we understood that one hope is that it will transcend the operational environment of Akhuwat and influence the microfinance industry at large. In a way, by showing their concept is sustainable, successful and financially viable they believe Akhuwat can function as a pressure group and an organization that helps bring key microfinance components such as interest rates and borrower management into a healthier equilibrium.
A visit to Akhuwat’s headquarters and its branch offices is a humbling experience. Since Akhuwat believes a lender-borrower relationship should be one of equals, their offices share the same comforts as the homes of their borrowers. This means no airconditioning, no power generators, no cars, and very limited furniture. We visited these offices in the hottest month of the year, and temperatures outside reached 45 Celsius (113 Fahrenheit). Sitting on rugs in rooms that were sometimes cooled with fans that operated intermittently as a result of Pakistan’s load shedding issues, our meetings genuinely brought us back to basics. Borrowers we talked to often commented on this aspect, and mentioned it reduced the perceived barrier between lender and borrower, and increased their honesty and efforts to stick to repayment policies.
Moreover, these simple offices and operations not only lower overhead costs and operational expenses, but also force Akhuwat to keep its lending model simple and operations intuitive. It uses a basic accounting program to track and aggregate loans and repayment amounts, and uses company bikes as the main mode of transportation for loan officers. As Dr. Amjad Saqib states, Akhuwat tries to minimize overhead costs as much as possible as “even an extra penny spent [by us] is transfered directly to the shoulders of the poor.”
After a decade of operations and growth, Akhuwat and the Islamic microfinance model it espouses have caught on by the civilian government of Pakistan’s Punjab province.
During our trip, we visited Dr. Shujat Ali, the Secretary of Industries of Pakistan’s most populous province, Punjab and spoke about this government support. In its capacity, it has provided a Rs. 3 billion 5-year loan to Akhuwat to expand the number of its branch offices, hire additional staff and management at both the local and central level, and provide microfinance loans to a larger pool of people.
Although this is an inspiring success story of a grassroots organization that has grown to become the most capable entity in the eyes of the government to solve some of the macroeconomic issues Pakistan faces, it also requires a word of caution. The newly available public funds allowed Akhuwat to inaugurate 82 new branches across the country in September 2012, more than doubling the number of branch offices Akhuwat has to 163. It is rare for an organization to grow that much without growing pains, and this growth may challenge Akhuwat’s management and staff to focus on its philosophy of sharing and simplicity.
Akhuwat had organized a brief ceremony for us at the final day of our trip, which coincidentally was also the final day of one of Akhuwat’s loan officer training programs. As such, we were asked to provide a short speech in front of the 80-100 new loan officers from all over Pakistan. In addition to commending them on their patronage to Akhuwat and personal sacrifice for the betterment of their communities, we cautioned the new loan officers of the shared responsibility they have to the continued success of Akhuwat. As Akhuwat is based on a concept of ‘brotherhood,’ kindness, and shared responsibility, a deviation from that philosophy by one of Akhuwat’s officers may prove detrimental to its success, and its perceived advantages over other conventional microfinance organizations.
Dr. Amjad Saqib is the beating heart of Akhuwat, and a rare example of a highly capable person whose life revolves around helping people; it is his raison d’être. He has the gravitas to captivate a crowd of hundreds, be they poor men and women who try to get a loan from Akhuwat or students at some of the world’s most prestigious institutions that are used to see world leaders speak. Dr. Amjad Saqib has been a major component in the success of Akhuwat, and will continue to play that role. There is a risk that Akhuwat is too dependent on its founder. Akhuwat’s Board understands this and Dr. Amjad Saqib has as such handed over operations to second line of management about two years ago. Although still an invaluable contribution to Akhuwat, the organization is taking steps to ensure Akhuwat can live on for many years to come.
Appendix A – background of no mountain too high
no mountain too high (NM2H) was founded in 2009 and uses its mountaineering expeditions around the world as a metaphor for what it takes entrepreneurs in developing countries to push themselves out of poverty. Similar to the treacherous environment of some of the highest mountains on Earth, these business founders operate in highly adverse environments and need capital and equipment to succeed.
As William Douglas, former Supreme Court Justice and hiking enthusiast phrases it:
“Mountains symbolize the indomitable will, an unbending resolution, a loyalty that is eternal, and character that is unimpeachable. When man pits himself against the mountain, he taps inner springs of his strength. He comes to know himself. For he realizes how small a part of the universe he actually is, how great are the forces that oppose him.”
Although mountain climbing expeditions – unlike starting a business – generally do not take more than a few weeks, in mountaineering one too has to cope with the situation at hand and make quick decisions. Success is dependent on exogenous factors like weather, logistics and team members, but also influenced by creativity and skill.
Climbing out of the trough and pushing physical and mental limits to succeed is something micro-entrepreneurs encounter too and they, like mountaineers when they attempt the summit of a mountain, need proper equipment and expertise to do so successfully.
Specifically, NM2H believes providing ‘equipment and expertise’ is pivotal to the success of a micro-entrepreneur:
- Equipment: an entrepreneur needs capital, machinery, raw materials and labor to succeed, similar to how a mountaineer needs good gear to reach his or her summit. As such, NM2H partnered up with Akhuwat, one of Pakistan’s largest, most successful and most innovative microfinance organizations, who provide access to interest-free capital to start a successful micro-enterprise.
- Expertise: Like a mountain guide and intense mountaineering training, vocational training and basic business and management skills help an aspiring microentrepreneur to run a business sustainably and trigger true entrepreneurial spirit. As such, NM2H partnered up with the Pakistan Innovative Network, a network under Harvard’s South Asia Initiative.
Mission: To promote, support, and cooperate with micro-entrepreneurs and raise awareness and funds to bring attention to the formidable challenges microentrepreneurs face, through the challenge of climbing the highest mountain on each continent.
Vision: NM2H envisions a fair chance for every global citizen, regardless of background, ethnicity, or religion, to make a positive difference in people’s lives by creating business opportunities that benefit themselves and others.
United States Ambassador to Pakistan Cameron P. Munter supports the efforts of no mountain too high and Akhuwat:
“An increasingly important ingredient for future development in Pakistan is support on the societal level – the work of no mountain too high and Akhuwat is an inspiring showcase of how such efforts can transcend borders, languages, and cultures. Their work is a great example of the power of people-to-people ties.”
Jelmer Ikink led a microfinance initiative in the Netherlands with support of Dutch Crown Princess Máxima Zorreguieta, and worked several years in China investing in companies that are operative in clean technology in China’s poorest regions. Jelmer was a consultant for McKinsey & Company and is currently studying at the Fletcher School of Law & Diplomacy.
Roman Lentz founded the student union at his university and has started up his own company in London, UK. He worked at BCG as a consultant and as management associate to the CEO of Heidelberg Cement. Roman currently studies at the Harvard Kennedy School.