Akhuwat.org.pk

In early 2001 a group of senior civil servants met at the Gymkhana Club in Lahore to talk informally about the problems of poverty, and the difficulties experienced by both government and non-government organisations which were trying to assist the very large numbers of people in Pakistan who live below the poverty line. Dr. Amjad Saqib, one of those present, was managing the Punjab Rural Support Programme, a government institution. He mentioned that one of the many problems he experienced related to the issue of the 20% annual interest which was charged on loans made by his institution. This was a problem for two reasons: first, the cost itself made it more difficult for borrowers to repay, and secondly many borrowers were reluctant to pay any interest at all since fixed interest on loans, or on savings, is specifically forbidden in the Holy Koran. Some of the staff of the institution, including Dr. Saqib himself, agreed on the same religious grounds.

There is endless debate in Muslim circles, as there is indeed elsewhere, about the definition of ‘usury’, and whether this means excessive interest or any fixed interest at all.  We have already referred to the ‘liberal’ interpretation of the term which is advocated by some Christian authorities, who believe that the sustainability of any financial institution serving the poor is more important than the interest rates it charges. This view is supported by the fact that the returns on investment in petty trading and most other activities in which microfinance borrowers invest their loans are extremely high, averaging over 800% per annum, so that the interest paid on micro-loans is far less important than their accessibility. From a purely commercial point of view, high interest rates are also not an issue for microfinance institutions, since their only competition is informal moneylenders. In urban Lahore, the area of immediate concern to Dr Saqib and his colleagues, moneylenders typically charge ten per cent or more per month. 

The traditional Islamic view, however, is that it is wrong to charge any fixed interest at all. This is based on the belief that it is unjust for anyone to earn an income purely from money itself, without any labour, and also because a fixed interest rate implies total confidence in the outcome of a business venture, whereas only God can know the future. As a result of this, a complete alternative system of Islamic financing has been developed, which bases the reward for savings, and the cost of loans, on the cost of the services which have been provided by the lender, and on the actual outcome of the ventures in which the savings or loans have been invested.

There is now a large and rapidly growing Islamic financing sector, in which not only specialised Muslim institutions but also Western banks are playing a major part, but Islamic principles have generally not been applied in microfinance (Harper, Partnership Financing for Small Enterprise, Some lessons from Islamic credit systems, ITDG Publications, London, 1997).  There are a number of reasons for this, including the ‘Western’, Christian or secular origins of most microfinance institutions, and the practical difficulties of calculating the profitability of micro businesses.

One solution to this, of course, is not to make any charge to borrowers for loans, or at least only to charge for the operating and transactions costs of the lending operation, and to ignore the ‘cost’ of the money itself. This is legitimate in Islamic financing, but it of course implies that the money which is lent out should come free of cost, from a source that demands no return.   Dr. Saqib and his colleagues discussed the issue at some length, and they concluded that common charity, ordinary people’s desire give money to help those less fortunate than themselves, could be the answer. One of the people round the table offered Rs. 10,000 or about $150, there and then, to start a pool of free money for lending to the poor, and Dr Saqib volunteered to manage the process of identifying suitable borrowers, lending the money, and recovering it so that it could be recycled indefinitely.

This first donation was loaned to a woman, on the basis of a guarantee from the other members of a small group which she formed with Dr. Saqib’s assistance, and the institution took off from that point. Friends of the original founding members contributed a further $1,000 within a few weeks, and a few months later a wealthy well wisher made a donation of $2,000, and Dr. Saqib, with the help of a few friends, lent this money to the members of five more groups. He followed the same group lending method that was used in the Punjab Rural Support Programme.At the end of 2001 it was decided to formalise the activity. Dr. Saqib and his friends registered it as a Society under the 1860 Act, which is fundamentally similar to the Charities Act in the United Kingdom or the regulations for Foundations in the United States, and they chose the name Akhuwat, which means ‘brotherhood’, in recognition of the fact that it had been started by a group of friends, and that their intention was to build an institution which would develop a sense of common ownership and community among borrowers, donors and whoever was managing the institution. Akhuwat, which means Brotherhood in Arabic, refers to the period of the Hijra, when financial support was offered to Muslims migrating to Medina from Makkah by Muslims living in Medina. Dr. Saqib and his friends continued to give their leisure time free of cost to the managing of the new institution, but it soon became clear that it was growing too fast to be managed and run totally on a voluntary basis. They decided that they would charge borrowers an administration fee of five per cent of their loans, irrespective of the timing of the repayment.

By the end of 2003 Akhuwat was employing six people, and the pool of funds had increased to four million rupees, or approximately $40,000. They had lent out almost $100,000 to a total of 900 men and women in about forty groups, by recycling the funds. There had been no defaults. The five per cent administration fee is not levied on loans for less than Rs. 4,000, because such borrowers are felt to be too poor to be able to pay this without hardship.   The group formation and management process was quite time-consuming, for Akhuwat staff and for the members of the groups. Some members, both men and women, complained that the regular group meetings which were part of the system which had been copied from the Punjab Rural Support Programme were taking too much time. Some potential borrowers who were very poor and clearly needed loans to enable them to start or expand their petty trading or other activities found it difficult to form or join a group, and some people, quite often those who were more enterprising than their fellows, did not want to work in groups; they were individualists, and wanted individual loans just like better-off people who did business with banks. Akhuwat’s management were also aware that they had competition from other microfinance institutions in Lahore, and that groups were unpopular. Akhuwat might be able to use individual lending as a ‘selling point’ to attract new clients. It was therefore decided to experiment with individual loans as well as working through groups.  This was an immediate success. The staff had to spend less time on each loan, since they had only to visit the applicant to check on his or her income level and reputation in the community, and on the feasibility of the proposed or existing micro business. They had to do that in any case for group members, but they also had to help to form the groups and to attend the weekly meetings.

Around this time there was also some evidence from Bangladesh that lending only to women could cause severe and sometimes tragic social problems. Some Bangladeshi men were very frustrated at what they saw was their loss of prestige, as their wives were able to take over the financial affairs of their households and to marginalise their husbands. There were many cases where men beat up their wives, or even disfigured them by throwing acid on their faces.

Akhuwat’s very name implied solidarity and mutual support, rather than conflict, at all levels, and in pursuance of this, when they moved from group to individual lending, in order to strengthen family relationships rather than to promote conflict, Akhuwat instituted a policy of lending to households rather than to individuals. Wives and husbands were required to sign loan agreements, or mothers and sons, or fathers and daughters, and the loans were known as family loans. Every member of the family knows that they have taken a loan, and this creates a sense of unity in the household and avoids duplication of loans in the same family. The entire family is the guarantor and the beneficiary.  Borrowers are also required to bring two other guarantors, who are not from the same household, to co-sign their loans, in order to replace the group guarantee. These guarantors do not have to be any wealthier than the people whose loans they are guaranteeing; they have merely to be respectable people in the same communities who know the applicants well and are prepared to stand behind them.

Akhuwat was by this time attracting some attention among practitioners of more conventional microfinance. They had initially been very doubtful whether Dr. Saqib and his friends would be able to attract enough funds to finance any significant expansion, and, if they did, whether borrowers would repay regularly. Akhuwat was not following normal practice in many respects. It relied completely on generous individuals to give funds for on-lending, rather than raising commercial money, it relied quite significantly on volunteers to give their time. Its five per cent fee, which was the same irrespective of how long the loan was outstanding, seemed to be an invitation to delay repayment. Akhuwat’s individual loans, which were rapidly replacing group-based loans, were also made to men as well as to women. This was completely contrary to accepted best practice in microfinance, where the vast majority and often all the borrowers are women.

The many skeptics frequently pointed out these potential difficulties to Dr. Saqib and his colleagues. Initially, when Akhuwat only had a handful of clients, they had said that the system would surely break down after it reached a few hundred clients. When Akhuwat achieved one thousand clients, without major problems, the skeptics said that it could never grow much beyond that number. In 2006 when the figure of ten thousand clients was reached, some skeptics changed their views. Dr. Saqib felt that in a modest way 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.

By 2007 Akhuwat was lending to over 15,000 clients. They are still charged a fixed membership fee of five percent of the loan amount, irrespective of the repayment period. Potential borrowers are carefully screened by Akhuwat’s field staff, and 90% of them have incomes of below $70 a month, which is close to destitution in the city of Lahore. A small number of better-off borrowers are also accepted, whose incomes may be up to twice this amount, because they wish to start or expand small businesses which can employ others in the same community.

The operating losses were covered by special grants which were made for the purpose, and it was calculated that the five per cent fee would cover the full operating costs by the end of the year, as the programme expanded.All the funds come from individuals. These include large sums from prominent people such as General Musharaf, the President of Pakistan, the Mayor of Lahore and prominent business leaders, and much smaller donations from ordinary citizens. The Governor of the Punjab has been particularly helpful; he contributed three hundred thousand rupees from his own pocket and organised three fund raising dinners at his official residence, as well as introducing Akhuwat to other influential people such as the President.

Most of the donors are residents of Lahore, but some are living in the United States and elsewhere, and wish to give something back to the city where they have come from.  Not all the donors are wealthy. A local mechanic whose property had been destroyed by a flood had successfully restored his business with the assistance of a loan from Akhuwat, and he then got a job in Dubai. A year later, he donated a substantial sum to Akhuwat from his foreign earnings, in order to enable others to benefit as he had. Many other borrowers have made similar smaller donations when their businesses prospered, because they felt a sense of identification with the institution. In this way the local branches of Akhuwat are slowly becoming self-financing, and local small business people who do not need Akhuwat’s loans are also making contributions. Borrowers, donors, volunteers and the paid staff feel that they stand on the same footing. Although the loans are only made possible by the charitable generosity of donors, there is no sense of obligation; all the stakeholders feel that share a common purpose.

Akhuwat deliberately avoids grants from official foreign donors or other similar sources. Dr. Saqib and his colleagues feel that these would inevitably come with ‘strings attached’, and that there are in any case enough generous individuals in Pakistan, and overseas, who sympathize with and understand the basis of Akhuwat’s operations. On the same principle, funding has not been requested from the Pakistan Poverty Alleviation Fund, which has been established by the Government, with foreign assistance, to finance microfinance institutions. It is unlikely that such funds would be suitable for Akhuwat in any case, since they are generally provided as interest bearing loans. It is possible however that in the future Akhuwat might receive funding from the Pakistan Government’s zakat fund, which is financed by contributions from taxpayers who prefer to leave the disposition of their zakat donations to the government, rather than identifying suitable recipients themselves.

The average Akhuwat loan is for about Rs.11,000 or just under two hundred dollars. This is partly because the institution is growing very fast, and the first loan to any borrower cannot exceed ten thousand rupees. Depending on the borrower’s need, and repayment performance, larger sums can follow, but the maximum is Rs. 25,000 or about four hundred and twenty dollars. Akhuwat’s lending is restricted by the amount of funds it can raise from donors, and their goal is in any case to relieve poverty and to help people to better themselves, rather than to grow for the sake of growth, or to create permanent dependence.

Borrowers who have reached the maximum loan can borrow again if they wish, but they have to revert to the first loan level of ten thousand rupees. They can then climb back up again to the Rs. 25,000 level, but the hope is that this will be less than they need, because their businesses have grown during the three or four years they have been borrowing from Akhuwat, and that they will therefore look to banks or to other lenders for larger sums. Akhuwat has successfully introduced one women borrower to First Women’s Bank. The Bank was impressed by her record as a good client of Akhuwat, and approved her loan application for fifty thousand rupees.

The loan terms are flexible, but the maximum period is eighteen months. Most of Akhuwat’s loans are repaid in eleven months, and most borrowers repay at the rate of one thousand rupees a month. If any installment is overdue more than 30 days it is considered as being in default, and pressure is brought to bear on the borrower, and his or her guarantors, to bring the repayments up to date. The most important sanction is the knowledge that those who fail to pay promptly risk losing any chance of receiving loans in future. Up until early 2007, the repayment rate has remained at about ninety nine percent.  International experience shows that group loans are more likely to be repaid on time than loans to individuals. Akhuwat’s group loans are being phased out in favour of household loans, which are similar to individual loans. The repayment on group loans has been 98.4% on time, and the overall repayment rate for all kinds of loans is 99.7%; this is marginally reduced by the slightly poorer performance of the group loans, and the repayment rate on the individual household borrowers is 99.9%; the difference is very small, but is quite contrary to what might have been expected.

In addition to the five percent fee, borrowers also pay a compulsory one percent insurance charge. In case of death or permanent disability, outstanding loan balances are waived, and needy families receive a five thousand rupee cash payment as well as a stipend of three thousand rupees a month for three months. This fee has so far been sufficient to cover such problems as may occur, in that by early 2007, after five years of operation, only half the total amount which had been collected as insurance fees had been paid out. The balance of half of one per cent is treated as the fee for managing the insurance operation.

Akhuwat’s operating expenses have been maintained at a very low level, in spite of the rapid rate of expansion. From July 2005 to June 2006, around 6200 loans were disbursed amounting to 63 million rupees. The total of all the costs was 4.7 million rupees, including loan loss provision and a substantial donation to the victims of the 2005 earthquake in Northern Pakistan. The total income from the five per cent membership fees was 3.4 million rupees, plus a small amount for the administration of the insurance programme. The cost per rupee lent during last financial year was thus seven percent, and Akhuwat had to provide an operating subsidy of 1.3 million rupees to make up the difference. This was drawn from the funds which were donated, both for this purpose and from the general fund.

Management anticipate that as the volume expands costs will eventually fall to five per cent by the end of 2007, so that the membership fees will cover them and the operating losses will thus be eliminated. This may take some time, however, as Akhuwat is expanding quite rapidly and the costs of hiring and training staff, and purchasing equipment, must be incurred before any revenue is generated.

There are eight branches in the city of Lahore, and six branches outside the city, with about sixty full time staff, paid at approximately the same level as they could expect elsewhere. It is Akhuwat’s policy, however, to recruit staff from the same communities as their borrowers, and not to hire highly qualified professionals. This reduces costs money, and it also ensures that staff turnover is much lower than in other microfinance institutions whose staffs are more highly qualified. The operating systems are very simple, partly because no interest charges are levied, and success depends mainly on inter-personal relationships rather than professional skills. Akhuwat owns no vehicles; its loan staff can take loans from the organisation to buy motorcycles if they wish, and they receive a small allowance to cover the costs of fuel.

Dr Saqib himself is a former civil servant who resigned from the civil service and works on a voluntary basis. He is assisted not only by the full-time staff but also by a large team of volunteers, at all levels. One vendor of perfume and ornaments from a small stall at the entrance to a mosque has taken and successfully repaid four loans from Akhuwat, but he also voluntarily helps by visiting other borrowers at their homes to remind them when repayments are due.  Several hundred students at a local university have also volunteered to ‘adopt’ borrower families, to help them with their businesses, to learn from them, and generally to try to bridge the wide gaps between the middle class and poorer people such as borrow from Akhuwat. 

Another important way in which costs are reduced and the general spirit of Akhuwat is supported is the use of local mosques as meeting places for loan disbursement. The Imam of the Dar-ul-Haq mosque in the Township area of Lahore initially offered space in his mosque for this purpose in between the afternoon prayer periods, for Akhuwat staff to discuss any problems and to disburse its loans. This extension of the use of the mosque from purely ibadat (worship) to khidmat-e-khalq (service to mankind) has become central to the approach of Akhuwat, and it builds and strengthens the links between Akhuwat and the local communities that the mosque serves.

This means that Akhuwat’s offices can be very small and inexpensive, since meetings are held in nearby mosques, and it also reinforces the sincerity of borrowers’ commitment to repay; nobody likes to break an undertaking he has made in a place of worship. The imams are also pleased that their premises are being more regularly used, and borrowers who come to receive their loans also remain for prayers; this reinforces the position of the mosque in the community. Women do not participate in the prayers if these are taking place before the disbursement, but they sit at the side of the mosque and then move to take their place along with the men to receive and sign for their loans.

Akhuwat has also made use of a local church in the same way to serve its Christian clients; unfortunately the priest who initiated this was transferred to another church outside Akhuwat’s area of operations, and his replacement was unwilling to continue the arrangement. The priest is trying to persuade the Bishop to encourage priests throughout the diocese to work with Akhuwat in the same way. In the meantime, the Christian borrowers come to their nearest mosque to receive their loans, just like their Muslim fellows, and the few loan officers who are Christians are also welcome in the mosques. Some imams are also reluctant to allow financial transactions to take place in their mosques, but this resistance is being overcome as they see the benefits that it brings to the community.  

Akhuwat’s expansion depends on continuing donations to finance growth in the loan portfolio, and on the continued willingness of the voluntary staff. There is as yet no evidence that these will stop, and although substantial effort has to be put into fund raising, and further initiatives will be required in future, there does not seem to be any reason why a programme which depends on brotherhood, generosity and goodwill should be any less ‘sustainable’ than one which depends on purely financial incentives. In the three years from early 2002 to 2005 Akhuwat raised donations of about a third of a million dollars; in the following one year, they raised half a million dollars.  

A number of  influential individuals in Rawalpindi and Faisalabad and other cities in the Punjab have observed Akhuwat’s success, and have raised local funds to start what are effectively locally managed ‘franchisees’ of Akhuwat. They and their locally recruited staff and volunteers have spent time in Lahore with Akhuwat’s staff, and it is hoped that this will eventually extend the institution’s outreach throughout Pakistan, without straining the management or financial resources of Akhuwat in Lahore.   

Author’s Introduction

Malcolm Harper was educated at Oxford University, the Harvard Business School and the University of Nairobi. He worked for nine years in a medium-sized household hardware manufacturing business in England, mainly in marketing. He then taught in Nairobi, from 1970 to 1974, before coming to Cranfield School of Management, where he was Professor of Enterprise Development. Since 1995, he has worked independently, mainly in India. He has published some twenty books and numerous articles on various aspects of self-employment, enterprise development and micro-finance. His research and consultancy work has been supported by a wide range of national, international and non-government development agencies. He has advised and evaluated a number of enterprise development and micro-finance programmes and institutions in India and in East and West Africa, Latin America and the Caribbean, the Middle East and Gulf area, South and South East Asia, as well as in the United Kingdom. From 1996 until 2006, he was Chairman of Basix Finance of Hyderabad, a leading ‘new generation’ micro-finance institution, and he is Chairman of M-CRIL of New Delhi, the pioneer of micro-finance credit rating in Asia. He was also the founding Editor-in-chief of the journal Small Enterprise Development, and is a director and trustee of a number of other institutions, including Homeless International, EDA (UK) Limited, APT Enterprise Development and Intermediate Technology Publications in the United Kingdom.