Akhuwat: Linking Social Development with Interest-free Microfinance
Shamim had no choice: with her daughter seriously ill and husband unemployed, she was forced to approach a local moneylender to borrow PKR 20,000 ($235) at a 200% interest rate to cover her daughter’s medical expenses. After 18 months and PKR 36,000 ($423) paid in interest, the principal amount owing stood unchanged.
Fortunately, at that point, someone told her about Akhuwat. Akhuwat took over the loan, paid the money lender the outstanding amount and asked Shamim to return the principal in 20 installments of PKR 1000 ($12) with zero interest.
Rehana’s story is a bit different. She struggled daily to provide each next meal for her family. The only bread winner and five people depending on her, she was determined to find a way to increase her income to improve her situation. Although she had a skill set and an idea for a business, she lacked the financial capital to turn her idea into a reality. During her search for financing she came to know about Akhuwat.Akhuwat helped her to buy her first sewing machine to start her business sewing bridal clothing. With three successive loans, Rehana built up a successful small business and now exports fancy bridal clothing to England. She can afford to send her children to school, provide them with medical care, and above all, she no longer has to worry about where her family’s next meal will come from.
Shamim and Rehana’s families are just two out of about 150,000 that have benefited from Akhuwat’s services. Akhuwat is a Pakistan-based microfinance institution that provides interest-free loans to the poorest of the poor. Literally meaning brotherhood, Akhuwat seeks to incorporate faith into finance by establishing partnerships between the privileged and the less-privileged of the society. Akhuwat provides loans, mostly on an individual basis, for small entrepreneurial projects, emergencies and accidents, education, and to liberate borrowers from loan sharks. The strategy focuses on volunteerism, common ownership and low operating costs. While Akhuwat is a nonprofit organization, they seem to have a sustainable model, as they have been able to expand without needing to take on debts from financial institutions.
At the heart of Akhuwat’s model lies a pool of charitable loan money. This pool is lent, recovered, and lent again: recycled indefinitely, benefiting many families in the process. The pool is comprised of donations from various individuals, clients and well wishers; it doesn’t rely on funding from financial institutions or other organizations that might restrict the way Akhuwat operates. The credit pool, which started from a humble PKR 10,000 ($117), now stands at about PKR 2 billion ($25 million). With a recovery rate of about 99.85%, Akhuwat currently has about PKR 608 million ($7 million) in outstanding loans, reaching 49 cities and towns through 80 local branches.
To keep operating costs low, Akhuwat operates out of mosques and churches. Each branch is located within or very near a religious center, which not only saves on cost of rent and utilities but also promotes interfaith harmony and community participation. Akhuwat’s focus is not just on developing the financial acumen of its beneficiaries; it also leverages its position to increase awareness about the importance of market research, technical education, health care, community development and philanthropy. Akhuwat hires staff from the same communities to which it is providing the loans, which helps to further reduce costs, foster a sense of ownership, increase self esteem and bring the members of the community closer.
A cornerstone of Akhuwat’s strategy is the “Borrower to Donor” program. To ensure the long term sustainable growth of the fund, Akhuwat encourages borrowers who have benefited from the interest-free loans to become donors themselves once they are financially stable. There is no minimum donation: one can contribute whatever amount his financial condition allows, and contributions are not compulsory, nor do they impact the borrower’s credit profile.
Although Akhuwat derives its principles from the teachings of Islam and using religious centers as distribution channels, its beneficiaries are not only Muslim. Akhuwat does not discriminate on the basis of religion, race, or gender. To qualify for a loan, the only criteria is that the borrower is poor, and that they have a valid reason for obtaining the loan. In addition to its standard micro-loan program, Akhuwat has initiated larger projects directed toward particular segments of society. Its beneficiaries include women, men, transgenders, those with disabilities, Muslims, Christians, Hindus and even sex workers. In a first of its kind initiative in Pakistan, Akhuwat provided loans to 25 women of Lahore’s red light area to set up food stalls or small kiosks selling candy in order to provide them with alternate livelihood.
At a time when conventional microfinance is under heavy criticism for imposing high interest rates, arm-twisting the poor, and using unethical social pressure to recover loans, Akhuwat’s model presents a compelling alternative. Its growth over the last decade, and its success in transforming the lives of thousands in Pakistan, demonstrates the potential for microfinance and beyond.