Final Project. IMF. SBP.sir Waheed

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The Need & Potential of

Islamic Micro Finance in

Pakistan

A Case Study of

AkhuwatSuper visor; Sir Waheed Butt

Submitted by; Zulqarnain Hiader. MBA (Islamic

Business & Finance). Riphah Center of Islamic

Business. Riphah International University

Islamabad. Internee 4rth batch SBP BSC,

Rawalpindi

8/14/2011


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Table of Content

Abstract .3

Introduction ..4

Section.1

Overview of Micro Finance.5

Mechanism and Objectives of Micro finance6

High Rate of Interest...7

Sustainability Problem10

Outreach issues10

Section.2

Islam poverty and Micro Finance....11

Islamic microfinance in Pakistan a Case Study of Akhuwat..13

Section.3

Issues and Challenges for Micro Finance.21

Potential for Islamic Microfinance Bank.22

Suggestions and Recommendations...23

Conclusion...24

References... 25


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Acknowledgement:

I like to thank Almighty ALLAH (Suhanaho Wataala) the most beneficent and the most

merciful for enabling me to do this project, its all the Karam and help of ALLAH (S.W).

Without the help of Allah (S.W) nothing possible in this world.

I am very thankful from the core of my heart to my supervisor Sir, Waheed Akram Butt SBP,

BSC Rawalpindi; under his supervision I learn many things during the internship.

I am very thankful to him to guide me time by time and give me such a valuable ideas. I am also

very thankful to sir, Obaid & maim, Sabeen Raja, to guide me and facilitate me during the

internship.

May Allah bless them all and give them the happiness of this world and hereafter.


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Abstract

Pakistan is one of the countries where majority of population suffering from poverty. The

average Pakistani household remains outside the formal financial system, saving at home and

borrowing from family or friends in cases of dire need. Fourteen percent of Pakistanis are using a

financial product or service of a formal financial institution (including savings, credit, insurance,

payments, and remittance services)1.

The purpose of this study is to highlight the need & potential of Islamic Micro Finance in

Pakistan, and to assess the potential of Islamic financing schemes for micro financing in

Pakistan. Obviously, many efforts have been taken by the government and other Micro finance

institutions for poverty alleviation. Conventional MFIs and MFBs are already being working for

poverty alleviation but due to many reasons peoples are not showing their interest to avail their

facilities. One of the most important reason is Riba based financing.

Islamic microfinance is a vital component for poverty alleviation. While conventional

microfinance products do not success to fulfill the needs of Muslim clients. While taking an

overview of Islamic microfinance, this study undertakes a case study of Akhuwat, an Islamic

microfinance organization operating in Pakistan. Critical analysis of Akhuwat indicates that it is

providing its services for poors, Interest free loans can be used as a powerful tool against

poverty. It recommends that integrating Islamic microfinance with NGOs, Zakah, Waqf andwith Takaful as well as with professional training and capacity building institutions will enhance

the financial stability of Islamic microfinance institutions and will be helpful to achieving their

goals and objectives of providing micro financial services to the poor society.

Islamic Financial system is growing globally and peoples showing Interest to adopt the Interest

free financial system. Islamic Financial system is become more popular in Malaysia, Indonesia,

and Pakistan. Islamic Micro Finance is one of the parts of Islamic Financial system which is the

need of poors and low income society, because they have not access to commercial banks to

take financial facilities. Estimates suggest that as many as 5.6 million households in Pakistan

need microfinance services, but services reach only a tiny fraction of this population, probably

less than one percent.2

1 (World Bank, 2008c)2 Pakistan Micro Finance Network


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Introduction:

Islamic Financial system takes important place in global market as a true and effective financial

system. Current financial crises had shown that, interest free financial system is more secure than

interest based financial system.

Pakistan is amongst those countries which are doing efforts for the success of Islamic financial

system. But unfortunately economic downfall and inflation create problem for the establishment

of Islamic Financial Institutions. Today poverty has become a serious global problem. It has

spread widely particularly with the global economic meltdown, and this affects sustainable

development in the developing countries. According to the Human Development Index(HDI),

60.3% ofPakistan's population lives on under $2 a day, compared to 75.6% in nearby India and

81.3% in nearby Bangladesh,3 and some 22.6% live under $1 a day, compared to 41.6% in

India and 49.6% in Bangladesh4.

Micro Finance institutions are working for a long time for poverty alleviation, but what are the

main reasons, poverty level still not reduce, why not become major change in society as they

want. There are some important reasons and issues on the side of micro finance players, i.e. high

rate of interest, product development, HR problems, and funding issues, etc. Because of these

reasons and issues historical data shows that MFIs are not able to alleviate the poverty. On other

side Islamic Micro finance has opportunity to fill this market gap according to the shariah

guidelines, and they have opportunity to capture this market and buildup the peoples trust on

Islamic microfinance. According to the 2008 Consultative Group to Assist the Poor ( CGAP)

survey, Islamic microfinance accounts for about 0.5 per cent of global microfinance despite a

global Muslim population of about 1.2 billion.

In this study, my focus on the main issues with conventional Micro finance, what is the reason

still they are not success to fulfill the need of poors. And then will elaborate the Islamic

ideology of micro finance, and a short introduction of Islamic Micro Finance Institutions in

Pakistan (IMFIs), and their need. As well as will discuss the main issues & challenges withmicrofinance in Pakistan, in last some suggestions for IMFIs how they can become more

effective and efficient Micro finance players for poverty alleviation.

3 "Human Development Report 2009 - Population living below $2 a day (%)".Hdrstats.undp.org. Retrieved 2011-07-26.

4 "Human Development Report 2009 - Population living below $1.25 a day (%)".Hdrstats.undp.org. Retrieved 2011-07-26.
http://en.wikipedia.org/wiki/Human_Development_Indexhttp://en.wikipedia.org/wiki/Human_Development_Indexhttp://en.wikipedia.org/wiki/Human_Development_Indexhttp://en.wikipedia.org/wiki/Bangladeshhttp://en.wikipedia.org/wiki/Bangladeshhttp://hdrstats.undp.org/en/indicators/103.htmlhttp://hdrstats.undp.org/en/indicators/102.htmlhttp://hdrstats.undp.org/en/indicators/102.htmlhttp://hdrstats.undp.org/en/indicators/103.htmlhttp://en.wikipedia.org/wiki/Bangladeshhttp://en.wikipedia.org/wiki/Human_Development_Index


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Section.1

Overview of Micro Finance:

Microfinance considers a tool for poverty alleviation. Microfinance A programme offering

non-collateralized small loans/finance to poor households to foster self-employment and income

generation. Microfinance A range of financial services such as deposits, loans, paymentservices, money transfers, and insurance.

The Micro Credit Summit held in Washington, DC (2-4 February 1997) defined Micro Credit as:

Programs (which) extend small loans to poor people for self-employment projects that generate

income, allowing them to care for themselves and their families

Serious efforts in this regard are on-going in many countries. In 1960s Ankhtar Hameed Khan

was started work from East Pakistan on Microfinance. An important step was taken by Dr.

Younas in 1970s for the poverty alleviation in Bangladesh, after very long effort he made a

Micro Finance bankby the name of Grameen Bank for the poors of Bangladesh. This model

become very successful with passage of time and worldwide appreciated. Many countries follow

the model of Grameen Bank and now rest of the world many MFBs, MFIs, NGOs are working

for poverty alleviation, but still they are not achieve their goals and objectives.

Dr. Fazal Husain Abid the founder of BRAC, Shamsul Halq chaudary the founder of ASA arealso worked for microfinance and their contributions are very valuable in this regard.

In Pakistan, since the establishment of the Agricultural Development Bank (now ZTBL) in the

early 1970s, the Government of Pakistan, civil society, and later the privates sector have been

interested in extending financial services to poor and low-income Pakistanis. In Pakistan the

modern microfinance movement started in 1982 with the establishment of Orangi Pilot Project in

Karachi and the Aga Khan Rural Support Programme (AKRSP) by two different NGOs. AKRSP

spawned the rural support movement that accounts for approximately 70% of NGO outreach in

microfinance and includes some of the largest providers in the country5

.

5(World Bank Report on Performance and Transparency: A survey of microfinance in South Asia Page No. 67).


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It was only in the 1990s that a variety of other NGOs began to offer microfinance services. In

1996 Kashf Foundation was established for poverty alleviation.

In 2000 Pakistan Poverty Alleviation Fund (PPAF) was establish with the coordination of World

Bank, while establishing a microfinance bank namely Khushhali Bank at the same time.

Microfinance institutions have since been diversifying their product-offering by exploring new

areas which include enterprise loans, housing finance, personal loans and deposits, leasing,

insurance and remittance services.

According to the Khshhali Banks Annual Report for the year 2007, the investors are now

beginning to see microfinance as an emerging investment opportunity and by one estimate the

funding to microfinance will rise significantly by the year 2015 pre-dominantly from the private

sector6.

Currently eight MFBs and many other MFIs are established for poverty alleviation and to

facilitate the low income society with different financial services. They all are doing their jobswith their specific vision and mission in different part of the country.

Mechanism and Objectives of Micro finance;

The aim and objectives of Conventional micro finance are very valuable and admirable for the

poverty alleviation. These MFBs, MFIs and Islamic micro finance have many common

objectives. Both emphasize on the benefit of the society as a whole, and to promote

entrepreneurship and believe that the poor should participate in such economic activities. Both

focus on developmental and social goals of the poors people. Microfinance helps very poor

households to meet their basic needs and protect against risk. The use of financial services by

low-income households is associated with improvements in household economic welfare and

enterprise stability or growth.

Microfinance Banks and Institutions providing a verity of services and products in Pakistan, the

lending methodology is surprisingly uniform. About 92% of the borrowers and 89% of the funds

have been provided through the group lending methodology. Because group lending more secure

rather than to individuals lending, and the benefit of group lending is to reduce the operation and

other costs and to mitigate the risks.

Type of loan and services of Micro Finance institutions in Pakistan;

The microfinance sector consists of a diverse range of institutions; the products that they offer do

not vary very significantly. Mostly the sector offers a general loan or an agricultural loan of just

under US$ 200 for a year. The repayments begin more or less immediately and repayments are

6 (Khushahali Bank Annual Report 2007Page No. 4).


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expected to be made generally on a weekly or bi-monthly basis. The most common use of loans

is for trade (31%), agriculture (24%), livestock (16%), and manufacturing (7%). A few loan

products like housing have recently been added by a few MFIs but still make up a small

proportion of the loans.

The Figure below gives the overall purpose for which the loans were being used at the end of

December 2008.

Regardless of the purpose for which the loan is taken, the loan amount and repayments are notstructured to reflect their use. Thus most people who are using micro-loans are borrowing from

other sources as well. At one point the State Bank of Pakistan was offering technical assistance

to MFIs for developing innovative financial products based on Islamic principles of financing. A

few MFIs have introduced Islamic products but these have not really reached any significant

scale.

Some MFIs are very innovative in introducing new products others are satisfied with a standard

one product portfolio such as the National Rural Support Programme and other RSPs. The First

Micro Finance Bank has been among the innovators in the sector and has gradually developed a

range of products, support services and linked up with other agencies to expand the outreach ofits services. First Micro Finance Bank (FMFB) offers a full range of financial products, such as

deposits and loans and transfer of funds, etc.


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According to Microfinance hub, 2010 an overview of Microfinance network in Pakistan

Total MFIs: 25

Total Deposits with MFIs: $52.3 million

Gross Loan Portfolio: $144.5 million

Number of Borrowers: 1. 83 million (updated figures for Dec, 2009)

Average Loan Balance: $150.4

Average Interest Rates: 28% to 30%

Portfolio at Risk: 11%; very high, Pakistan is facing a repayment crisis

Microfinance Products Offered in Pakistan

Loans

Savings

Consulting and Training

Insurance

Fund Transfer Services

Livestock Loan

Funding Sources for MFIs in Pakistan

Grants

Savings

Shareholder Capita7

Issues of Micro Finance;

MFBs & MFIs are working for poverty alleviation but they are not success to bring a majorchange in the society due to some key issues, in which High rate of interest, Sustainability, andoutreach problems are very important.

High rate of Interest:

The interest rate for microfinance services or the price of funds should be made up of a

combination of costs;

Cost of capital + Administration costs + Cost of default = Price of credit (interest rate)

8

7 http://microfinancehub.com/2010/04/19/microfinance-in-pakistan-country-profile8 (Johnson, 1997:51). Johnson, Susan and Rogaly, Ben. (1997). Microfinance and Poverty reduction. UKandIreland: Oxfam GB.
http://microfinancehub.com/2010/03/14/microfinance-flirting-with-danger/http://microfinancehub.com/2010/03/14/microfinance-flirting-with-danger/http://microfinancehub.com/2010/02/07/easy-paisa-telenor-tameer-microfinance-bank-pakistan-case-study/http://microfinancehub.com/2010/02/07/easy-paisa-telenor-tameer-microfinance-bank-pakistan-case-study/http://microfinancehub.com/2010/03/14/microfinance-flirting-with-danger/


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The rate of interest very high of the MFBs and MFIs, the borrowers cant repay the loan with

interest, because their financial position not too much strong so they cant repay the actual

amount with interest.

Interest rate charged in microfinance is relatively higher than the usual banking services. It is

because the services provided are for a small amount of money. Loans that are extended are

small in amount and thus the cost of these loans automatically rises. Consultative Group to Assist

the Poor (CGAP) has defined three kinds of costs that an MFI has to cover when it makes micro

loans: the first two, the cost of the money that it lends and the cost of loan defaults, are

proportional to the amount lent. For example if the cost paid by the MFIs for the money it lends

is 10% and it experiences defaults of 1% of the amount lent, and then these two costs will total

$11 for a loan of $100 and $55 for a $500 loan. An interest rate of 11% of the loan amount thus

covers both these costs for either loan.

The third type of cost, transaction cost, is not proportional to the amount lent. The transactioncost of the $500 loan is not much different from the transaction cost of the $100 loan. Both loans

require roughly the same amount of staff time for meeting with the borrower to appraise the loan,

processing the loan disbursement and repayments, and follow up monitoring. Suppose that the

transaction cost is $25 per loan and that the loans are for one year. To break even on the $500

loan, the MFI would need to collect interest of $50+5+$25 = $80, which represents an annual

interest rate of 16%. To break even on the $100 loan, the MFI would need to collect interest of

$10+1+$25 =$36, which is an interest rate of 36%. Because the interest rates charged by

microfinance institutions very often range from 2.5% to a 4% a month (about 31% to 50% a

year), it has been subjected to controversial debates.9

Dr. Muhammad Yunas, commented that microfinance institutions which charge more than 15%

above their long-term operating costs should face penalties. On the other hand, these interest

rates are low compared with those charged by local money lenders (often over 10% a month)10.

In most cases, without access to microfinance, the poor people would have no access to credit at

all. Though, at the first glance, an interest rate this high looks abusive to many people, especially

when the clients are poor, but in fact, this interest rate simply reflects the basic reality that when

loan sizes get very small, transaction costs gets larger because these costs cannot be cut below

certain minimums.

Dr. Amjad Saqib the CEO of Akhuwat Islamic Micro Finance, comment on the high interest rate

of conventional micro finance. Microfinance is seen as an important strategy for poverty

alleviation and brining improvements in the quality of life of the poor. However, in recent years,

some micro-finance institutions have been criticized for high interest rates and alleged coercive

measures for debt collection. In the south-eastern Indian state of Andhra Pradesh, for example,

9http://www.cgap.org/p/site/c/template.rc/1.26.130910http://www.answers.com/topic/microfinance?cat=biz fin
http://www.cgap.org/p/site/c/template.rc/1.26.1309http://www.cgap.org/p/site/c/template.rc/1.26.1309http://www.cgap.org/p/site/c/template.rc/1.26.1309


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Section.2

Islam Poverty and Micro Finance:

Socio-economic justice is the fundamental of Islamic way of life. Every religion has the same

basic aim. In an Islamic environment, an individual not only lives for himself, but his scope of

activities and responsibilities extend beyond him to the welfare and interests of society at large.

The Quraan is very precise and clear on this issue.

Human society in Islam is based upon the validity of law of life and the validity of mankind. All

these are natural corollaries of the faith. Islamic laws promote the welfare of people by

safeguarding their faith, life, intellect, property and their posterity, these all the Maqsid u

Shariah. God nurtures, nourishes, sustains, develops and leads humanity towards perfection.

Even though an individual may be making a living because of his efforts, he is not the only one

contributing towards that living. There are a number of divine inputs into this effort and

therefore, the results of such an effort obviously cannot be construed as entirely proprietary.

Islam is not only a religion but a complete way of life that was revealed to humanity by ourcreator who is most knowledgeable, wise and just. Islam was revealed as a practical religion tobe implemented in our daily life since it covers all aspects of human life. As such, whenimplemented honestly and correctly, Islam provides solutions to all problems that are faced byhumanity. One of the most well-known and dangerous problems faced by humanity is that ofpoverty, hunger and starvation. Millions of human souls on this world are living under extremepoverty and very heartless conditions. According to world vision micro statistics report;

One in five people worldwide survive on less than $1.25 a day

Only 3% of the need for microfinance is being met 16 million people currently use microfinance

500 million people could potentially benefit from microfinance12

Poverty is as old as the human existence itself. This has been a cause of concern in every societyand throughout the history. During current era poverty came under attention recently and hasbeen a focus of international community. Governments, NGOs and others social welfareorganizations are talking about poverty reduction and different measures are being suggested forthe purpose. Different instruments are being tried with different levels of success. Howeversituation has not improved to such a level where it can be claimed that this Anti poverty drivehas paid its dividends.

Islamic microfinance is recently entered in market and since then been in experiment mode with

varied degrees of success. Islamic Microfinance is based on concept of prohibition of interest

and profit and loss sharing.

12 http://www.worldvisionmicro.org/pages/statistics


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Microfinance is considered to be a solution against poverty. It is being used to fight poverty ineach country and region with different demographics. Every region has adapted Microfinance toits own needs, culture and requirements. Potential demand for adapt made microfinance is stilllargely unmet especially in countries with large Muslim population. It is not easy to integrateMicrofinance in Muslim societies based on their religious beliefs. Here arises need to set up

specialized institutions to cater microfinance needs of Muslims.

Islamic Microfinance is the provision of financial services to the poor subject to certainconditions laid down by Islamic Jurisprudence. Islamic microfinance represents the confluenceof two rapidly growing industries: microfinance and Islamic finance. It has the potential to notonly respond to unmet demand but also to combine the Islamic social principle of caring for theless fortunate with microfinances power to provide financial access to the poor. Unlocking thispotential could be the key to providing financial access to millions of Muslim poor who currentlyreject microfinance products that do not comply with Islamic law. Islamic microfinance is still inits immaturity, and business models are just emerging.

Islamic Microfinance is building on core concepts of prohibition of Interest, Profit and Losssharing, absence of uncertainty. These are the concepts which are making Islamic MicrofinanceIndustry different from Conventional Microfinance. Despite the fact that Islam was revealedalmost 1432 years Islamic Microfinance is a very emerging Industry. Since it has recentlysurfaced after Microfinance revolution it has very limited Literature, Case studies, Successstories and of course client base on its credit. Like the conventional Microfinance it targetspeople with adequate skills but inadequate funds to raise their income levels but with adistinction i.e. with being Interest Free. Being Interest free has two implications. On religiousfront is saving Muslims from waging war against Allah (s.w.t) and his prophet (P.B.U.H). Onmarketing grounds (Interest Free) is a selling brand which can attract a huge number of devoteMuslims who needs funds but they stay away from taking loans from Interest bearingInstitutions.

Inspired by teachings of Islam, focus of such a program is to maximize social benefits. WhenImplemented such a program will be a huge success like Islamic banking because customers willbe mostly devote Muslims who believe that, Riba is Prohibited in Islam, Cheating is Haram, Nonrepayment of loan except due to genuine reason is Haram.

Taking loans is permissible in Islam but are not encouraged. Rather Islam encourages livingwithin means, mutual cooperation and brotherhood. From this it can be stated that borrowers ofIslamic Microfinance program will be genuine borrowers who will reveal their true credit needsand the utilizations.

It is to be noted that almost 1.7 billion people are hand to mouth and living lives below thepoverty line. Amongst them 44% are residing in Muslim countries and this factor highlights theneed of Islamic microfinance in an effective way. Recent surveys and research reports ofUSAID, CGAP, World Bank, IFC and Frankford Finance School report Islamic microfinance thebest substitution for the poverty alleviation. Currently more than 300 Islamic microfinanceorganizations in Indonesia, Kenya, Afghanistan, Bangladesh, Sri Lanka, Yemen, Egypt, Sudan,Tanzania, Mauritius, South Africa, Malaysia and Pakistan are working for poverty alleviation.


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It is a pleasing aspect that this number is rapidly increasing not only in Muslim countries but alsoin non Muslim countries. To unite all these organizations in one platform, an IslamicMicrofinance Network has also been formed

13.

In the recent past Islamic Finance industry has witnessed extraordinary growth with development

of over 500 Shariah compliant institutions spread over 75 Muslim and non Muslim countries.Similarly Islamic Microfinance is growing day by day with new Institutions being set up.Research material is growing to keep the issues addressed and different products are beingdeveloped. This has already spread to different countries and different regions.

In Pakistan few Islamic Micro Finance Institutions doing their jobs for the benefit of society andwith special mission for poverty alleviation, which have their own particularly philosophy oflending and offer some unique financial products. One of these is Akhuwat whose philosophy isbased on the principle of Qarze-e- Hasna, i.e. helping someone in need with interest-free loans.Islamic Relief Pakistan, Muslim Aid, Helping Hand, Nemat foundation, Farz foundation andsome other MFIs are providing shariah compliant Micro finance Product/Services, but these all

in growing stage and still need very hard work and need of awareness programs for customers tocapture the market.

Islamic microfinance in Pakistan with a Case Study of Akhuwat:

This study will be providing a case study on Akhuwat to identify if there are benefits in

providing Islamic microfinance to low income people.

Pakistan and Bangladesh account for an estimated 122 million Muslims living in poverty, orabout 10 per cent of the world's Muslim population.Pakistan is among the few countries in the world which has a separate legal and regulatoryframework for microfinance banks. The framework allows microfinance and commercial banks

to extend a range of microfinance services to poor and low income people through variousarrangements. Consequently, the State Bank of Pakistan has formulated guidelines for provisionof Islamic microfinance produces and services. These guidelines are intended to increase thescope of microfinance services and products consistent with Shari'a principles, and specify thefour types of institutional arrangements eligible in offering Islamic microfinance. Apart from thebanks, the other notable Islamic microfinance institutions (IMFIs)

13 Alhuda Center for Islamic and Economics


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VISION

a poverty free society built on the principles of compassion and equity.

MISSION

to alleviate poverty by empowering socially and economically marginalized families through

interest free microfinance and by harnessing entrepreneurial potential, capacity building and

social guidance.

OBJECTIVES

To provide interest free microfinance services to poor families enabling them to

become self reliant.

To promote qard-e-hasana as a viable model and a broad-based solution for poverty

alleviation.

To promote qard-e-hasana as a viable model and a broad-based solution for poverty

alleviation.To provide social guidance, capacity building and entrepreneurial training.

To institutionalize the spirit of brotherhood, compassion, and volunteerism.

To transform Akhuwat borrowers into donors.

To make Akhuwat a sustainable, growth-oriented and replicable organization.

In Pakistan Akhuwat has developed a unique mosque-centered structure. Akhuwat, Islamic

microfinance is dispensed by small interest-free charitable loans (qard al-hasan) in a spirit of

Islamic brotherhood. All activities revolve around the mosques and involve close interaction

with the community. There are no independent officers and loans are disbursed and recovered in

the mosque. It uses collateral-free group and individual financing based on mutual guarantees.

Evidence suggests that fact the loans are disbursed in a mosque, also attaches a religious sanctity

to the oath of returning it on time.

Akhuwat was established in 2001 by Dr. Amjad Saqib and his friends with the objective of

providing interest free credit to the poor so as to enhance their standard of living. At the time Dr.

Saqib was working at the Punjab Rural Support Programme (PRSP) and found the 20 percent

interest charged on the loans, disturbing. One reason was the fact, he felt, that it was in direct

conflict with the teachings of Islam, and the other was that in the formal banking sector theinterest was much lower, which was available to creditworthy affluent individuals. Therefore,

he wanted to start a microfinance programme where the loans were in the form of Qarz-e-Hasna.

With an initial donation of Rs.10,000, Akhuwat was formed and the first loan was given out to a

woman.

For the initial few years Akhuwat was simply a philanthropic venture to see how interest free

microfinance would do, but by 2003, the donations had increased to Rs. 1.5 million and the loan


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recovery rate was 100 percent. Consequently, it was decided to formalize the organization and

Akhuwat was registered under the Societies Registration Act of 1860, and now under the

companies ordinance 1984.

Akhuwat derives its name from Mua-khaat brotherhood, which was first exhibited by the

citizens of Madina when they shared their wealth with the muhajirin, the immigrants from

Makkah. The philosophy is based on the premise that poverty can only be eliminated if society is

willing to share its resources with the poor and needy. For Akhuwat, microcredit is a means to an

end and not an end in itself; the end is a vibrant, economically strong society, based on sharing

resources.

Akhuwat staff provides technical training to its clients. They make the latest knowledge and

market information available to the clients so that they become more efficient. Clients who lack

expertise are taught and trained in the vocations of their interest. They may do intern-ships

with borrowers who are already running some specific enterprises and are desirous of impartingskills to others. Akhuwat coordinates activities with other NGOs and Social Welfare

Organizations so that social services can reach their own clients. Akhuwat focuses especially on

education and health because these are basic necessities and the right of every individual and

have benefits beyond the individual himself. Legal aid has also been provided to the needy by a

team of volunteer law students through one of the Board member who is a lawyer and Principal

at a local Law College.

Competition and Expansion Strategy:

Akhuwat is not in competition with other MFIs. It is a completely different model which is free

from interest and commercial considerations of all nature and dimensions, including sources offunding. Akhuwat closely follows the principle that success is not confined to sustainability of

figures; how widely the model is replicated, how effectively and efficiently the poor are served,

is more important. Numbers overwhelm but saving the life of one person is akin to saving the

entire mankind. Akhuwat emphasis in replicating the model, looking for local partners and like

minded people to start a branch in their own cities. In case a partner organization is found

Akhuwat provides training to the local staff, helps in setting up the branch. Leaving the

operations to the partner organization, Akhuwat acts as monitoring organization. A team from

Akhuwat head office regularly visits the branches for monitoring and training purposes.

Audit System:The organizational structure is well defined and the hierarchies provide various checks briefly

indicated here below:

The Area Managers spend one day every week in the branches under his control.

The Credit Operations Manager visits the branches ones in a month.


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The Finance Manager monitors the funds inflows and outflows, he also visits the

branches every month.

The Internal Auditor carries out audit of the branches quarterly.

An External Auditor carries out an appraisal of the branches annually.

Every year social audit is also conducted in which 80% credit cases are physically

verified during field visits.

External Audit is conducted by a reputed Chartered Accountant Firm annually.

GUIDING PRINCIPLES OF AKHUWAT:

Interest-free microcredit:

Akhuwat provides the economically poor with interest free loans so that they may acquire a self-

sustaining livelihood. It also provides the skills and support they need to actualize their full

potential and abilities.

Reliance on philanthropy:

Since its inception Akhuwat has solely relied upon the philanthropists in extending its services to

the community. However, in order to fulfill the increased credit needs of its ever-increasing

clientele it is now willing to work with the international donors as well.

Spirit of volunteerism:

The spirit of volunteerism that Akhuwats management and its team members exhibit is

indicative of the success Akhuwat achieved within a short span of time.

Family loans:

Family loan is the most common type of loan that Akhuwat offers to its clients for setting up or

expanding a business. Income from this business is jointly shared by the whole family. The loans

given by Akhuwat are co-signed by male and female head of the family. Akhuwat believes in

strengthening family unit as some studies show that separate loans to male and female in a

family may result in tensions in the family and hence may cause disintegration of this important

institution.

Linkages with Mosque and Church:

An important and novel idea associated with individual loans is the use of the local

mosque/church infrastructure as the center for loan disbursement and as an avenue for

community participation.

Combination of individual and group lending program:


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Diversification of loan portfolio by offering different loan products has helped to increase the

outreach of the organization.

Credit Plus approach:

Akhuwat has employed a credit plus approach by introducing the idea of social guidance for its

credit beneficiaries. The purpose of this approach is to help borrowers flourish their small

enterprises so that they can lead socially healthier lives than before.

Akhuwat Loan Products:

Family Enterprise Loan:

These loans are given for establishing a new business or expanding an existing one. Family

Enterprise loan is the most common type of loan offered by Akhuwat. It comprises 91% of

Akhuwat's loan portfolio. The Family Enterprise loan varies in the bracket of Rs.10,000 to Rs.

30,000, however, most common amount for the first loan is Rs.15,000. The individual has to

come up with a viable business plan to become eligible for the loan. The Enterprise loan is alsoknown as the family Enterprise loan because during the period of appraisal and lending the entire

family is involved in the process with the view to make it a family venture instead of individual

effort.

Liberation Loan:

It is used for repayment of loans taken from money lender on exorbitantly high interest rates.

This type of loan is given to those who have borrowed money from moneylenders at very high

interest rates. Akhuwat believes that of lending by the money lender is exploitation of the poor

and needy and is resulting in increasing the poverty instead of making dent into it. Akhuwat pays

the principle amount in one go for the client and then the client has to pay back the amount in

interest free installments to Akhuwat. Range of this loan is upto Rs. 40,000.

Education Loan:

It is utilized for paying dues (fees) or purchase of books and material of poor students. It

provides education expenses in easy way. Range of education loan is upto Rs. 25,000.

Marriage Loan:Marriage loan is given for dowry of bride (daughter) or marriage ceremony arrangements. This

loan helps in meeting the marriage expenses of a girl of a poor family. Range of this loan is upto

Rs. 25,000. Boys are not entitled for such loans.

Emergency Loan:

This type of loan is given to meet emergency situations such as school admission fee, treatment,

purchase of medicine, etc. These loans are given to prevent the poor from major fallbacks. The


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amount loaned to the poorest of the poor is generally Rs. 5,000 and this has to be repaid within

one year.

Silver Loan:

This is given to increase the size of the existing business. Akhuwat recently launched this new

product. This medium size loan of Rs. 50,000 is given to those who have successfully completed

three or more cycles of borrowing from Akhuwat and are interested to further expand their

business.

Housing Loan:

For renovation of house, construction of room, roof, or walls, etc. Range of this loan varies

between Rs. 25,000 to 70,000 and has to be repaid within two years time limit. Akhuwat started

this product in collaboration with Al-Noor Umar Welfare Trust, another nonprofit organization

founded by Mr. Khalil Mian, former Chairman of Pakistan Credit Rating Agency (PACRA).

An overview of Akhuwat loan products and portfolio14:

Loan Products Portfolio

Enterprise 91%

Liberation 5%

Housing 1%

Education 1%

Marriage 1%

Emergency 1%

Total 100%

14 www.Akhuwat.com.pk


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Lending Methodology:

Program Introduction:

Individual loans are marketed through awareness campaign in poor localities, market places andthrough previous borrowers. An introduction to the program is also given in nearby mosque orchurch when people have congregated there for prayers. This has not only tremendously savedthe operational costs but has also opened the doors of the religious places for socio-economicdevelopment. It also attaches a moral responsibility to return the loan on time.

Individual Selection:

The loan process starts with the submission of applications by persons interested in gettingfinancial assistance. The Unit Manager (Loan Officer) then evaluates that whether the applicantdeserves the loan or not i.e. lives below the poverty line, has a reliable social capital, is notinvolved in any illegal business and possesses entrepreneurial abilities.

Preparation of Business Plans:Through the preparation of business plans the business idea of the intended loanee is evaluated tosee if it is viable and whether it can generate income beyond the household expenses of theindividual so that the loan could be repaid easily. The applicant's family is also interviewed tomake sure that they know about the loan and support the business idea.

Credit Appraisal:

After initial appraisal by the Unit Manager, the application is forwarded to Branch Manager whoappraises the technical section of the appraisal process. Then the case is referred to LoanApproval Committee. The committee comprising of Unit, Branch and Area Mangers whichreviews the credit case. If the committee approves the case loan disbursement is done. The wholeprocess takes almost 3 weeks.

91%

5%1%1%1% 1%

Enterprise

Liberation

Housing

Education

Marriage

Emergency


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Guarantors of Loans:

Every borrower also provides two individual guarantors who vouch for his/her credentials andaccept the responsibility of monitoring the borrower and give assurance to persuade the borrowerfor timely payment of loan. One of the two guarantors may be from the same family.

Credit Disbursement/Capacity Building:Disbursement takes place 2-3 times a month and 100-150 loans are disbursed at one eventusually held at branch office/mosque or church. Every borrower has to be accompanied by one ofthe guarantors. Other people present at the time of disbursement include community members,Akhuwat staff, from the branch and Head office. Social Guidance events are also heldsimultaneously in which the capacity of loonies is built to carry on their work more efficientlyand effectively. They are also apprised of social agenda that includes:

Emphasis on girl's education Serving the community at large Protection and improvement of environment Importance of plantation Observance of traffic rules and local laws Following highest ethical values in business

Recovery/Follow up:

Once the loan has been disbursed, the Unit Manager monitors the client with regular visits to his

residence and place of work. The loan repayment has to be submitted at the branch by the 7th of

each month. If a payment is not in by the 10th, the Unit Manager visits the client to remind and if

repayment is still not done then the guarantors are contacted and asked to make the payment.

Cost Structure of Akhuwat:


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Progress report up to Jun 30, 2011:

Section.3

Potential for Islamic Micro Finance Bank:

Islamic Banking system already growing worldwide and now Islamic Banks has a significantrole in financial market, and still they have potential to capture the market demand and needs.Islamic Micro Finance institutions are working for poverty alleviation and for the empowermentof poors but still they are not to meet the need of poors because these organizations has notpermission to take savings from peoples, as well as the sustainability problem is also the mainbarrier in the way of success of these IMFIs. Islamic Micro Finance Banks can play a veryeffective and significant role for poverty alleviation. If Islamic Banks spread their network torural areas of Pakistan with the Islamic Micro finance banking system so they can capture a bigmarket of small savings. Because our rural areas peoples are not familiar with baking system andthey are very strong religiously so they avoid the banking system. Islamic banks already build upthe trust of peoples but unfortunately they are also providing financial facilities to rich society, ifthey take a step for Micro Finance Banks so it might be possible the low income peoples availthe facility and to become use the micro level financial facilities. SBP already take initiative forIslamic Microfinance Bank and provide a full guideline and rules regulation, by the nameDraft Guidelines for Provision of Islamic Microfinance Services and Products by

Financial Institutions

Now many IMFIs planning for Islamic Microfinance banks, but one think should be keep in

mind before this, the main objectives should be the Economic empowerment of the poors and toadopt the Islamic values, totally differentiate from conventional system. By this way they can

capture the market and to buildup the costumer trust.

Islamic Micro finance banks can use the Islamic modes of finance to utilize the small savings.

Islamic modes of finance which can use by Islamic Microfinance Banks


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Musharakah

Mudarabah

Murabaha

Salam

Ijarah

Istisna

Qarze Hasanah

Musharakah & Mudarabah are very useful modes for poltry farming, Fish farming, and Small

business enterprise, e.t.c.

The focuse should be on these two modes because it will very helpful for economic

empowerment of the poors, who can use their skills for the specific field.

Islamic Microfinance Bank can use SALAM (Islamic mode of finance for agriculture sector).

Because the main source of income of the rural areas peoples is agriculture, it can be very

beneficial for the farmers, to provide them financing facility for better production, and altimatly

it will bring a major change in our agri production.

Murabaha is a useful mode to fulfill the working capital need and to fulfill the needs of farmers

to provide seed, fertilizer and agri medicines .e.t.c

Ijarah can be use to provide farmers Tractors, and others machinery. All these modes of

financing can be use according to the market need.Islamic Micro Finance banks can play a very effective and a very useful role to promote the

Islamic Financial system in large.

Issues and Challenges for Microfinance:

A key challenge to microfinance institutions (MFIs) in Pakistan is raising significant funding to

grow, attaining sustainability, and better integrating with financial markets.

Source of funding can be an issue for IMFIs, since the grants available from aid development

agencies are predominantly interest based. This will be reviewed to see what funding is availableto Islamic MFIs like Akhuwat.

The support from the government is still lacking and this is even more the case with the current

political instability.

Poor socioeconomic conditions, gender bias, and low levels of basic education and financialliteracy remain barriers.Lake of awareness in society is a big challenge and a key issue for IMIs, they need to a very

effective complain for the awareness of peoples.


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A big challenge in this sector is high transaction cost. The volume of transactions is very small,whereas the fixed cost of those transactions is very high. Should be reduced the coast and thinkabout the ultimate objective of poverty alleviation.

Suggestions and recommendations:

Pakistan has an existing zakah institution in place, but its not used to its full capability andgenerally had been neglected by the state in terms of upto- date regulations, practices and overall

management of the system. Government should take a significant step for the betterment of this

core institute, it will be very helpful for povrty alleviation and for the empowerment of poors.

The government needs to provide an enabling environment for Islamic microfinance.

The government and SBP need to set the goals to increase Islamic microfinance outreach in

country especially in rural areas where 2/3 of total population living.

Pakistan MFPs are constantly innovating to increase outreach and although sustainability is

highly recognized by SBP, PMN and MFPs, but still more attention needs to be made in this

direction.

With conventional microfinance an Islamic alternative can contribute a core part for poverty

alleviation.

Akhuwat needs to provide a large-scale publicized campaign targeting donors locally and

overseas.

Akhuwat should explore the use ofzakah; zakah may need to be used for specific purposes like

replacing Akhuwats liberation loans and clearing clients of prior burdened debts.

Akhuwat should use other Islamic modes of finance to fulfill the market demand.

IMFIs must hire, train, and promote large numbers of staff to grow.

Microfinance should not restrict themselves to just micro credit. A wide range of Islamic

products are included in it.Proper legislation is required to protect this sector from their exploitation.SBP can play very key role for the implementation and for the promoting Islamic financialsystem as a whole.SBP should facilitate the IMFIs, Banks to provide the full range of financial services to poors.SBP should give some especial incentives to conventional Micro Finance for the Islamization oftheir system

Conclusion:

After the study of MFIs and the overall structure of Akhuwat Islamic Micro finance, it is veryeasy to compare Islamic Microfinance with Interest based microfinance, which one is more

effective and suitable measure for poverty alleviation and for poors. If alone Akhuwat can do

this kind of tremendous work for poverty alleviation so why not others? They can also adopt the

Islamic microfinance methodology and can play an effective role for the benefit of Pakistan

economy and for the empowerment of poors. Others conventional and Islamic banks and

institutions should also start to provide micro financial services to low income society and to


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contribute in the empowerment of the poors. It will help to uplift the living standard of people

and ultimately contribute towards the economic development.

References:

(World Bank, 2008c)

2 Pakistan Micro Finance Network

3 "Human Development Report 2009 - Population living below $2 a day (%)".Hdrstats.undp.org. Retrieved 2011-07-26.

4 "Human Development Report 2009 - Population living below $1.25 a day (%)".Hdrstats.undp.org. Retrieved 2011-07-26.

5 (World Bank Report on Performance and Transparency: A survey of microfinance in South

Asia Page No. 67).

6 (Khushahali Bank Annual Report 2007Page No. 4).

7 http://microfinancehub.com/2010/04/19/microfinance-in-pakistan-country-profile

8 (Johnson, 1997:51). Johnson, Susan and Rogaly, Ben. (1997). Microfinance and Povertyreduction. UK andIreland: Oxfam GB.

9 http://www.cgap.org/p/site/c/template.rc/1.26.1309

10 http://www.answers.com/topic/microfinance?cat=biz fin

11 http://microfinancehub.com/2011/03/31/islamic-microfinance-as-the-plausible-solution-speech312 http://www.worldvisionmicro.org/pages/statistics

13Alhuda Center for Islamic and Economics

14www.Akhuwat.com.pk
http://hdrstats.undp.org/en/indicators/103.htmlhttp://hdrstats.undp.org/en/indicators/102.htmlhttp://microfinancehub.com/2010/04/19/microfinance-in-pakistan-country-profilehttp://www.cgap.org/p/site/c/template.rc/1.26.1309http://microfinancehub.com/2011/03/31/islamic-microfinance-as-the-plausible-solution-speech%203http://microfinancehub.com/2011/03/31/islamic-microfinance-as-the-plausible-solution-speech%203http://www.worldvisionmicro.org/pages/statisticshttp://www.worldvisionmicro.org/pages/statisticshttp://microfinancehub.com/2011/03/31/islamic-microfinance-as-the-plausible-solution-speech%203http://microfinancehub.com/2011/03/31/islamic-microfinance-as-the-plausible-solution-speech%203http://www.cgap.org/p/site/c/template.rc/1.26.1309http://microfinancehub.com/2010/04/19/microfinance-in-pakistan-country-profilehttp://hdrstats.undp.org/en/indicators/102.htmlhttp://hdrstats.undp.org/en/indicators/103.html

Documents

Final Project. IMF. SBP.sir Waheed