This paper describes the operations of Akhuwat, a microfinance institution which offers shariah-compliant micro-financial services to clients in Lahore and elsewhere in Pakistan. The institution has been in business for ten years. It charges no interest or any other fees for its loans, and has reached about one hundred thousand borrowers. It relies heavily on volunteer staff, and all its funding is from local and mainly unofficial voluntary donations, including substantial amounts from its clients, which cover over half its operating costs. Akhuwat generally lends to households, rather than to individual women, or men, and without any form of group intermediation. It is an important example of an efficient but non-commercial approach to microfinance, from which many other microfinance institutions may be able to learn.
Keywords: Islamic microfinance, Pakistan, graduation, sustainability
Microfinance has coMe of age and has lost its innocence. It is now coming to be seen as just another business, which makes its profits as and where it can. Microfinance is not the only business to have chosen the poor as its preferred ‘market segment’. The late C.K. Pralahad showed that there are many ways of making profits at ‘the bottom of the pyramid’ (Pralahad, 2006), and Unilever is not criticized for marketing shampoo in tiny sachets, or Colgate for its profitable 10 rupee toothpaste tubes. It is assumed that the people who buy these products are satisfied with their purchases, and their producers are not expected to lose money on their sales to the poor.
Most microfinance institutions (MFIs) were started with public interest funds, and with welfare objectives, but many have successfully ‘graduated’ from these limited sources of support. Their promoters argue with some logic that they must make high profits to access equity from profit-seeking investors. They must have this equity in order to leverage commercial debt which they will on-lend to satisfy the credit needs of the millions of poor people who are presently not served by traditional commercial banks. These institutions must also hire qualified and experienced managers; they must also be able to offer competitive salaries, to replace the well-meaning but unskilled voluntary sector staff who may have started the institution.
Malcolm Harper is an emeritus professor of Cranfield University. He was for ten years Chairman of BASIX Finance in
India, he is Chair of M-Cril, the international microfinance rating agency, and was the founding editor of Enterprise Development and Microfinance.
© Practical Action Publishing, 2012, www.practicalactionpublishing.org doi: 10.3362/1755-1986.2012.007, ISSN: 1755-1978 (print) 1755-1986 (online)
One microfinance organization is growing, in spite of what might appear to be a totally uncommercial approach
Akhuwat’s cumulative disbursements amount to about $13 m, which has been lent to about
Many microfinance practitioners feel this pressure for commercialization. There is a lively debate on whether and how it may be possible to achieve or even to maximize both social and financial objectives at the same time, but others feel that it may be preferable to remain firmly focused on social objectives, even at the cost of never achieving financial sustainability. This paper shows how one organization, strongly based on the principles of Islamic finance, has achieved a very different form of sustainability, and is continuing to grow, in spite of what might appear to be a totally uncommercial approach.
Microfinance practitioners have also learned many lessons (although perhaps not enough), and a body of ‘best practice’ has grown up. Not every institution adheres to every practice, but it is generally accepted (see for example Harper, 2003; Rhyne, 2009) not only that they must be ‘sustainable’ (that is, profitable) in order to survive and to attract and retain investors, but also that MFIs should lend through some form of group mechanism, that they should lend mainly to women, and that they should make rather high charges, not only to be ‘sustainable’ but also to discourage misuse of loans, to encourage repayment and to ensure that their loans are not ‘hijacked’ by those who are not needy, as so many subsidized goods and services are.
This paper describes some aspects of the operations of Akhuwat (meaning ‘brotherhood’), an MFI which operates through 63 branches in Lahore and 34 other cities in Pakistan. It was started in 2001; its present portfolio is around $4 m, which is outstanding from 40,000 clients. Its cumulative disbursements amount to about $13 m, which has been lent to about 125,000 clients.
Akhuwat is unique because it breaks many of the generally accepted rules of microfinance, but has nevertheless (or perhaps for that reason) survived and grown. In the present crisis of opinion and reputation which is swirling around microfinance, not only in Andhra Pradesh and India, but globally, Akhuwat shows that it is possible to chose a totally different paradigm, and still grow and serve large numbers of poor people.
Akhuwat is not as large as the largest for-profit MFIs, but it is large, and growing; it has long passed the stage where it might have been dismissed as the dream of an idiosyncratic idealist. It is a large going concern, reaching towards a client base of one hundred thousand people, and it has also been widely copied.
Why is Akhuwat so special?
First and most obviously, because its loans are interest free. There is endless debate about the meaning of ‘usury’, or riba, which is
|condemned in both the Christian Bible and the Holy Koran; it can mean ‘excessive’ or ‘unreasonable’ interest rates, however those imprecise terms might be defined, or it can mean any kind of fixed interest charge, a cost for the use of the money, even one which is levied to cover the bare administrative costs of the lender, or to compensate for the loss in the value of money over time which is caused by inflation.
One way to avoid this dilemma is to adopt one of the profitsharing modes of shariah-compliant finance, such as musharaka, or mudaraba (Siddiqui, 1994). Or, more understandably in the West, ‘venture capital’, or ‘equity’ investing, where the person or business that has been financed shares its profits with the institution which provided the finance. These methods are never easy; the prospective profit shares of each party have to be negotiated at the time when the investment is made, and the precise definition and calculation of the profit, from a single transaction or from a business as a whole, are complex and fraught with potential for disagreement.
There are many well-known venture capital funds, some of which have taken stakes in microfinance institutions, but they rarely take stakes in start-ups, or ‘ventures’. They can more correctly be called ‘development capitalists’, who invest substantial sums in businesses which have survived their earliest years and have proved that they can make profits. The ‘transaction costs’ of such investments are high even in relation to the several millions of dollars which are invested.
|Attempts to apply profit-
sharing methods to microfinance have generally foundered, or have remained very small
|There have been some isolated attempts to apply profit-sharing methods to microfinance (see Harper,1996 and Harper et al., 2008). These have generally foundered, or have remained very small, because of the issues mentioned in the preceding paragraph.
Larger businesses keep records of their profits, even if they are not always accurate. Many of the micro-entrepreneurs who are served by microfinance are illiterate; they do not separate their personal incomes from the profits of their tiny businesses, and it may even take longer to estimate what their profits may be in the future, and are at present, and how to share them, than it does for a multi-million dollar business with audited accounts. If the investment is as little as $100, or even $1,000, the transaction costs may exceed the amount invested. There are other shariah-compliant financing methods, such as mudaraba sale and leaseback, and murabaha, where the banker buys the asset which the client wishes to finance and immediately resells it to the client, often without physically taking possession of it or inspecting it, but adding a profit margin which covers the risk and the use of money. These methods adhere to the letter of no fixed interest but not to its spirit.
Hence, Akhuwat has chosen to avoid interest or other disguised charges completely; it makes no charges at all. Initially, Akhuwat levied
‘Akhuwat’, means brotherhood in Arabic, or looking out for those who are less fortunate than you
Clients’ voluntary contributions cover about 60 per cent of Akhuwat’s operating costs
a flat fee of 5 per cent to cover some of its administrative charges; this was of course very low, except for short-duration loans, and it did not cover all Akhuwat’s costs. After a few years, management decided to stop levying any charges at all. This may appear to be the antithesis of ‘sustainability’, but Akhuwat remains in business, and is growing, when other MFIs have disappeared, and others may do likewise. How has this been achieved?
The answer lies in the name: ‘Akhuwat’, meaning brotherhood in Arabic, or looking out for those who are less fortunate than you. The term was originally applied in the period of the Hijra, when Muslims living in Medina provided financial support to their fellow Muslims who were forced to migrate to Medina from Mecca. Even before Akhuwat abandoned the 5 per cent charge, some clients had made voluntary contributions to its costs, in gratitude for their assistance. I myself met one such person in Lahore. He was a small mechanic; a loan from Akhuwat helped him to expand his business, he used the profits to finance a trip to the Gulf, and had returned relatively well-off; he felt that it was only right to contribute something to allow Akhuwat to do the same for others.
This system has been formalized, and clients’ voluntary contributions cover about 60 per cent of Akhuwat’s operating costs. The borrowers contribute what they can; those who have been successful give more than those who have not, and some give nothing; there appears to be no compulsion, moral or otherwise, and clients who have made donations are apparently treated no differently from those who have not when decisions are being made about new loans.
For this reason alone, Akhuwat is unique, but there are many other features which are unusual, which may provide a model from which other microfinance institutions can learn, irrespective of their religion or other motivation.
Sources of funds, and of labour
Akhuwat is the final link in a value chain of generosity. Its funds are donated by a large number of individuals and, to a lesser extent, by institutions. In addition to its own borrowers, these include local business men and women and their firms, some politicians, friends, and acquaintances of the founders, and a small group of donors in the United Kingdom. There are no dominating donors or group of donors, and there are no foreign institutional donations, apart from one small grant from an Italian foundation to cover the capital costs of establishment in a new location.
Akhuwat does not receive funds from the Pakistan government zakat fund, to which many Pakistanis donate their obligatory annual donations, but individual donors presumably consider that their
Akhuwat’s loans are inexpensive, because they cost nothing, but they are still repaid on time
donations to Akhuwat can be counted towards zakat, which traditionally amounts to an annual donation of around 2.5 per cent of one’s assets, excluding one’s residence and household possessions. In general, management have tried to avoid any sources of funding which may have conditions, overt or otherwise. Since 2001, it has proved possible to raise sufficient donated funds to cover Akhuwat’s operating costs, and to finance its expansion, without offering any interest or other financial remuneration to those who provide the finance.
Apart from the need to cover costs, and to pay the cost of funds, one major argument for charging high interest rates, levied according to the period for which the loan is not repaid, is the fact that borrowers can be expected to invest more wisely and to repay more rapidly if the amount to be repaid increases over time. They will behave as ‘economic women’, and men, and will tend to repay the most expensive loans first, and to delay repayment of the cheaper ones.
Akhuwat’s performance gives the lie to this statement of economic common sense. Its loans are inexpensive, because they cost nothing, but they are still repaid on time. Its on-time repayments were 98.8 per cent for the 2010 financial year. Akhuwat’s financial position at the end of 2010 is summarized in Table 1.
Table 1. Akhuwat’s financial position, 2010
|Cash and investments
|Employee provident fund
|Less accumulated losses
|Assistance to new replicators
|Provision for bad debts.
|Other donations for operations
Note: US$1 equals approximately 85 Pakistani rupees
|The operating loss of Rs6 m was charged to the general fund, and a total of Rs35 m rupees was donated to this fund during the year, so that the funds available to the organization increased by the balance of Rs29 m. The average loan was for about Rs10,000, or $120, and Akhuwat’s cumulative donations have amounted to some Rs1,250 m, or almost $15 m, since it started in 2001 (see website, www.akhuwat. org.pk/, accessed 18 September 2011).
This is clearly not ‘sustainable’ in the normal market sense of the word, whereby it is assumed that funds will continue to be available if the institution can pay the market price for them. But if sustainability is judged by continuing ability to raise donated funds, Akhuwat appears to be as sustainable as other established charities which rely on donations for their continued existence.
Commercial loans and investments are not themselves wholly reliable, as was found in the recent financial crisis, and as many businesses and individuals of the kind who are assisted by Akhuwat have always found.
|Most MIVs are financed by wealthy individuals and institutions which are not profit maximizers
|But human generosity seems to continue. There are now over one hundred ‘micro-finance investment vehicles’ or ‘MIVs’. Most of them are financed by wealthy individuals and institutions which are not profit maximizers.
This sacrifice is in itself socially motivated, and the managers of these funds are now searching for effective ways to measure the social impact and poverty outreach of potential investee MFIs; they may be willing to reduce their profits in order to achieve more of their social objectives.
These are generally investors who want to preserve their capital, and also if possible to receive a sub-optimal and modest return on it. Their investments are situated on the ‘social’ side of the continuum of return expectations, rather than the financial side, and Akhuwat’s investors, or donors, are in some sense off the continuum of blended values which has been conceptualized for more conventional microfinance institutions and other social enterprises (see Tulchin, 2003; and Emerson and Spitzer, 2006). They are not, however, simply donors; they do not want to recover their money, but they invest in the anticipation that Akhuwat will recycle the money so that it benefits many people, rather than making a straight donation which would benefit only one person.
This is of course one of the reasons why investors find microfinance so attractive; it appears to offer a genuine ‘double bottom line’. It can even be argued that those who expect to recover their investments in microfinance institutions, with or without interest, even though their expectations are more on the financial end of the continuum, are actually doing more ‘good’ than those who give to an institution such as Akhuwat. Management will be motivated to recover and recycle
The flow of donated funds is in some ways as reliable as the flow of commercial funds Group intermediation is almost axiomatic in microfinance, outside Latin America and Indonesia
the money rather than to lose it, because they are obligated to repay it. This will ensure that more people are able to benefit from it.
Akhuwat is not a licensed deposit-taking institution, although it may become one in the future under Pakistan’s quite liberal microfinance regulations. It could not pay interest on deposits even if it was licensed to mobilize deposits, because it adheres to the strict letter of shariah law, and at present the flow of donations, or non-returnable investments, is sufficient to cover the 40 per cent of operating costs which are not covered by client donations, and to permit growth at an annual rate of about 75 per cent from 2006 to 2010. This is not corrected for inflation, which has averaged around 10 per cent a year during the period, but is nevertheless a respectable rate of growth.
The international aid world is embarrassed with funds, both private and public, and donor agencies’ main concern is often to achieve their spending targets. There are many reasons why people donate to Christian Aid or to Islamic Relief, or willingly pay their taxes to DFID or USAID, but generosity, brotherhood in the broadest sense, is one of them. The flow of donated funds is in some ways as reliable as the flow of commercial funds. Akhuwat has designed a unique value proposition for those who want to maximize the social impact of their donations, and it appears likely to continue.
Individuals and institutions may be willing to donate money, but it is often more difficult to mobilize voluntary labour. Akhuwat has also successfully mobilized this source of support. This is in part due to the remarkable example of Akhuwat’s founder, but it also comes from the same natural generosity, the spirit of brotherhood, that encourages donors to give money.
Most of Akhuwat’s senior staff are volunteers, and those who are paid receive less than they could earn elsewhere. The junior staff, who are mainly drawn from the same communities as the clients, are paid the ‘market’ rate for their work. They too tend to work harder and for longer hours than they would elsewhere, being inspired by the powerful spirit of brotherhood which pervades the whole institution. Akhuwat has successfully tapped the voluntary market for money and for labour.
The clients, the product, and its delivery
Group intermediation is almost axiomatic in microfinance, outside Latin America and Indonesia. The groups may themselves borrow and then on-lend to their members, as in the Indian self-help group model, or the groups may only be ‘social’ intermediators, as in the conventional and widely replicated Grameen Bank approach, where groups appraise and approve each other’s loans, assist with recoveries, and, in some cases, act as guarantors for their fellow members’ loans.
|Similarly, and for related reasons, microfinance is in most countries dominated by women. Women are generally the poorest and most marginalized members of society, and they can be ‘empowered’ to improve their situation through group membership and by having some control over small sums of money. Women also work better in groups than men do, and they have fewer other options; it is therefore easier for an MFI to organize them and keep them in groups, and to ensure that they repay their loans.
|Groups tend to discourage and even to crush individualists, and entrepreneurs are above all
Loan repayment and disbursement takes place in mosques, or churches, not in
Akhuwat’s own very modest offices
|There are also some reasons why it may not be so good to work in groups, and exclusively with women. Groups tend to discourage and even to crush individualists, and entrepreneurs are above all individualists. Group guarantees are inequitable if some members want to borrow more, or more often, than others; groups tend towards the lowest common denominator (Dichter and Harper eds, passim)
Women make up more than half the population, and in most societies and activities their skills and entitlements are seriously neglected. The family, however, is the basic building block in most societies, and families include women and men. Discrimination in favour of women can have its disadvantages; men may force their wives to take loans and to repay them, but then misuse the money, and the family disharmony can end in disaster.
Men also tend to start more businesses than women that eventually grow and employ many others, but they also tend to take bigger risks, to be less reliable, and to fail more often. An institution that aims to assist in the building of an equitable society and a modern economy should work with both women and men.
Akhuwat started with groups, and still uses them in some particular cases, but the main customer unit is the household, the wife and the husband. Both co-sign their loans, and are responsible for repayment, and the household also takes a guarantor, who is usually also an Akhuwat client. The guarantors are themselves not allowed to borrow until the loans which they have guaranteed have been fully repaid.
For this reason, some borrowers prefer a more traditional group system, and Akhuwat also offers group borrowing to satisfy them; prospective borrowers can choose whether to take a guarantor, or to join a group. On-time recoveries are similarly high for both types of intermediation, and the joint household loan is the more popular.
Akhuwat also uses another unusual method which substantially reduces the cost of premises and also strengthens borrower commitment. Loan repayment and disbursement takes place in mosques, or churches, not in Akhuwat’s own very modest offices.
These meeting places involve no cost, because they are not needed for worship at the times when Akhuwat uses them, and they confer a sense of solemnity which enhances borrowers’ commitment to repay. The priests and imams also welcome Akhuwat as a bridge between
MFIs encourage their clients to move up the ‘loan ladder’, to borrow larger sums, and to remain in debt to the institution
Akhuwat aims to
‘process’ its clients to ‘mainstream’ banking, not to retain them for its own profit
people’s spiritual and secular lives. The Holy Koran says that money is given in trust, to be used wisely and then handed on to others; a loan which has been received and acknowledged in a place of worship is probably more likely to be viewed in that light than one which is taken in a banker’s office.
The process: ‘Graduation’ and replication
MFIs are businesses, and businesses do not like to lose their best customers, or to discourage them from buying more of what the business sells, and to keep on buying it. Hence, MFIs encourage their clients to move up the ‘loan ladder’, to borrow larger sums, and to remain in debt to the institution. Some even expel customers who repay a loan and then do not take another within a set period, usually one or two months. Clients are permitted to ‘rest’ for this period, but then they have to borrow again, or to cease to be clients. This is rational business practice, because non-borrowing clients are unprofitable.
Akhuwat adopts a different policy. It is understood that clients are being helped to become better off, and that they should ‘graduate’ to regular banks as soon as they have outgrown Akhuwat’s scale of lending. Akhuwat’s maximum loan is around $500, and when clients reach this level they are required to return to the bottom of the ‘ladder’ and can only borrow about $100. The aim is to encourage them to ‘graduate’ rather than to retain them, and Akhuwat’s staff make every effort to introduce such clients to banks, and to facilitate their transfer to regular accounts.
In general, Akhuwat aims to ‘process’ its clients to ‘mainstream’ banking, not to retain them for its own profit. Akhuwat has lent to over one hundred thousand people in the ten years of its existence, but now only 35,000 are borrowing. The remaining 65,000 have ‘flown out’, that is, they no longer need credit from Akhuwat or they have ‘graduated’ to banks from where they can borrow larger sums, or they have ‘dropped’ out, because they failed to repay on time and were not allowed to borrow again. Brief visits to a sample of ex- borrowers suggested that around 20 per cent would like to borrow from Akhuwat again but cannot, and the remaining 80 per cent do not need to borrow because their needs have outgrown Akhuwat or they are self-financing.
The owners and management of most businesses, of all kinds, aim for growth, as Akhuwat has grown and is still growing. Growth enables more people to benefit from their products and services, it enhances the ego and reputation of their founders, and it also increases profits for the founders and shareholders. Growth is often hard to manage, as the recent experience of MFIs in Andhra Pradesh in India has shown,
Akhuwat’s concern is not to grow as large as it can; it is to bring its services and its approach to as many people as possible
Microfinance is becoming a conventional profitmaking business; it has been ‘Wal-Martized’
and it can also involve losing the ‘personal touch’ which comes from association with particular communities.
Here again, Akhuwat is different. It has grown and is still growing in Lahore, its birthplace, but it has adopted two different approaches to growth beyond Lahore. In some towns, local groups are willing to sponsor new units. They are encouraged to do so, using the Akhuwat name if their promoters so wish. Akhuwat works with them to transfer its methods, it sends its own staff to assist them in their early stages, but then they are encouraged to move forward on their own, to develop their own approaches and solutions, to be local successes, rather than branded clones of Akhuwat itself.
In other places, where suitably committed groups do not come forward, Akhuwat grows in a more traditional way, by opening its own branches. This dual track approach does not maximize Akhuwat’s earnings, but it does maximize the extension of Akhuwat’s services. Akhuwat’s concern is not to grow as large as it can; it is to succeed in its mission, to bring its services and its approach to as many people as possible.
There are of course a number of challenges; some are similar to those which face any microfinance institution, while others relate to Akhuwat’s unique business model.
Generosity is probably as ‘sustainable’ as the market, but it is not always as predictable, and this makes it difficult to plan future developments. Because so many of the senior staff are volunteers, the management structure is less hierarchical than is usual in South Asia, and some managers themselves find this difficult. Many clients complain that Akhuwat’s loans are too small, and the demand for loans exceeds supply. This in itself ensures that clients are not encouraged to become over-indebted, which avoids some of the difficulties which have caused so many problems in Andhra Pradesh and elsewhere, and it also encourages clients to ‘graduate’ to banks when they have outgrown the scale of credit that Akhuwat can offer. This is not always easy, but it is in Akhuwat’s interest to help its clients to do this, so that Akhuwat’s limited funds can be used to assist clients who are further down the ‘ladder’ of growth.
Microfinance is becoming a mature industry, with set principles and practices. It is also moving away from government and NGOs and becoming a conventional profit-making business; it has been ‘Wal-Martized’.
Akhuwat is important because it can serve as a reminder to the microfinance community of their original objectives. At the same time, however, Akhuwat is breaking the mould, and its unconventional
|practices have important lessons for other MFIs. Microfinance practitioners anywhere, with whatever motives, should at least question
demonstrates that generosity and brotherhood can be equally powerful motivators as profit maximization
|the accepted wisdom of working with groups, client retention, focus on women, and their approach to growth. The conventional practices may still be the correct ones in some circumstances, but Akhuwat shows that there are other ways, which can work equally well or better.
Above all, however, and perhaps most significantly, Akhuwat demonstrates that generosity and brotherhood can be equally powerful motivators as profit maximization. This conclusion goes far beyond microfinance.
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