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Akhuwat – It Sometimes Makes

Sense to Break the Rules

Malcolm Harper1

icrofinance 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 it’s preferred ‘market

segment’. The late CK Pralahad showed that there are many ways of making profits at ‘the bottom of the pyramid’, and we do not criticise Unilever for marketing shampoo in tiny sachets, or Colgate for its profitable ten rupee toothpaste tubes. We assume that the people who buy these products are satisfied with their purchases, and we do not expect their producers to lose money on their sales to the poor.

Most microfinance institutions (MFI), at least until recently, were started with public interest funds, and with welfare objectives, but they 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 un-skilled voluntary sector staff who may have started the institution.

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 not only that they must be ‘sustainable’, that is profitable, in order to

1 Malcolm Harper was educated at Oxford, Harvard and Nairobi. He first worked in

marketing in England, and then taught at the University of Nairobi. He was Professor of Enterprise Development at Cranfield School of Management, and since 1995 he has worked independently, mainly in India. He has published extensively on enterprise development, micro-finance and livelihoods. He was Chairman of Basix Finance in India for ten years, and is Chairman of M-CRIL, the international microfinance and social rating company. He is chair, trustee and board member of a number of institutions in the United Kingdom, the Netherlands and India, and has worked on poverty issues in Bangladesh and Pakistan, and in North, East, Southern and West Africa, Latin America and the Caribbean, the Middle East and Gulf area, South and

South East Asia and China, and in the United Kingdom.

M This paper is part of the volume

entitled ‘Exploring New Horizons in

Microfinance’ printed by Friends of

Akhuwat.

Opinions expressed by the authors

of the article do not necessarily

reflect those held by Akhuwat.

www.akhuwat.org.pk

For Further Information:

info@akhuwat.org.pk

House No. 382, Block-15,

Sector B-I, Township,

Lahore, Pakistan

Tel: +92-042-3512-2743,

3848-6894

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survive and to attract and retain investors, but 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 subsidised goods and services are.

This paper describes some aspects of the operations of Akhuwat (meaning ‘brotherhood’), an MFI which operates in Lahore and elsewhere in Pakistan. It was started in 2001, its present portfolio is around two million dollars, lent to some 30,000 clients, and its cumulative disbursements amount to about ten million dollars, which has been lent to almost one hundred thousand clients, and it is growing quite rapidly.

Akhuwat is unique because it breaks just about all 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 is a lively proof that there is ‘another way’, which may also be a better way.

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?

INTEREST

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; does it mean ‘excessive’ or ‘unreasonable’ interest rates, however those imprecise terms might be defined, or does it 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 profit sharing modes of Shariah-compliant finance, such as musharaka, or mudaraba. 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 investors, some of which have taken stakes in microfinance institutions, but they rarely take stakes in start-ups, or ‘ventures’. They should more correctly be called ‘development capitalists’, who invest substantial sums in business 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.

There have been a few isolated attempts to apply profit sharing methods to microfinance.i These have generally foundered, or have remained very small, because of the issues mentioned in the preceding paragraph.

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Larger businesses do at least 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 figure out 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 $1000, the transaction costs may exceed the amount invested. There are other sharia compliant financing methods, such as mudaraba sale and leaseback, but I hope I will be forgiven for my sense that these adhere to the letter of ‘no fixed interest’ but not to its spirit.

Hence Akhuwat has chosen what may be the only totally genuine way of avoiding interest or other disguised charges; they make no charges at all. Initially, Akhuwat levied a flat fee of five 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 of all Akhuwat’s very low costs. After a few years, management decided to be completely absurd, to stop levying any charges at all. This may appear crazy, the antithesis of ‘sustainability’, but Akhuwat is still alive and well, when other MFIs have disappeared, and many others may do likewise in the next few months, while Akhuwat is growing, fast. How has this been achieved?

The answer lies in the name; Akhuwat, brotherhood, looking out for those who are less fortunate than yourself. Even before Akhuwat abandoned the five 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 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 now been formalized, and clients’ voluntary contributions cover about sixty 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 is no compulsion, moral or otherwise, and clients who have made donations are 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 make it an ideal, and also a model from which others can and should 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, from all manner of sources, large and small, rich and not so rich; those who give their money in this way clearly feel that this is a more productive way of helping poorer people than giving them grants or doles. The funds are recycled, the same sum can continue to help people forever, subject only to inflation, and Akhuwat’s recovery rates are as high as any ‘normal’ MFI.

One major argument for charging interest, and high interest at that, levied according to the period for which the loan is not repaid, is the fact that borrowers will obviously repay faster if the amount to be repaid increases over time. What is more, they will be ‘economic women, and men’; they will tend to repay the most expensive loans first, and to delay repayment of the cheaper ones.

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Akhuwat’s performance gives the lie to this statement of obvious economic common sense. Its loans are the cheapest, in fact they cost nothing at all, but they are still repaid on time. Its on-time repayment record is about ninety-nine percent.

Conventional wisdom may be overturned in this case, but Akhuwat’s choice of sources for its funds seems even more foolish. It might have been possible to raise some donations at the start, but is it not irresponsible to build an institution on which its clients will depend on such an unreliable and unpredictable source of funds? Experience so far suggests otherwise; Akhuwat has until very recently taken no official foreign grants at all, and the only grant of that kind so far has been a capital sum to finance expansion to a new area. Akhuwat has also avoided taking ‘official’ local funds; they have relied entirely on individual donations, large and small, from clients, from well-wishers and from all manner of other sources.

Can this be ‘sustainable’? Will the funds keep on coming? Commercial loans and investments are not themselves wholly reliable, as we all found in the recent financial crisis, and as many businesses and individuals of the kind who are assisted by Akhuwat have always found.

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 who are not wholly profit maximisers, who want to ‘give something back’, who are looking for below market returns in order to do more than make more money.

This sacrifice is in itself generous, and the managers of these funds are now searching hard for effective ways to measure the social impact and poverty outreach of potential investee MFIs; they want to reduce their profits in order to do more good.

These are investors who want to preserve their capital, and to receive a sub-optimal and modest return on it if they can. They are already started on the slippery slope down, or perhaps up, towards straight giving, even though some of them are in some sense embarrassed by their own behavior, and are anxious to portray themselves as hard-nosed capitalists; ‘brotherhood’ lurks in all of us, as Akhuwat has found.

The international aid world is embarrassed with funds, both private and public, and donor agencies’ main concern is often to ‘move the money’, in order 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 we must not be too cynical. Generosity, brotherhood in the broadest sense, has a great deal to do with it. People keep on giving, rich and poor people, NGOs and governments, and the flow of such funds is probably as reliable as the flow of commercial funds. Akhuwat has designed a unique value proposition for those who want to get the biggest ‘bang’ for their donated ‘buck’, and there is no reason why this should not continue.

It is quite easy to give money, even if you do not have very much, but it is much harder to give time. Not an hour here or there to attend a committee meeting, to talk to a group of children or to organise a fund-raising event, but regular time, just like paid time, except that it is unpaid. 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.

Many of Akhuwat’s senior staff are volunteers, and most are paid far less than they could earn elsewhere. Only 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

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hours than they would elsewhere; they also become infected with the dangerous spirit of brotherhood which pervades the whole institution. The market, for money, for labour and for skills, need not always be the king.

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 the groups appraise and approve each others’ loans, and assist with recoveries, and, in some cases, act as guarantors for their fellow members’ loans.

Similarly, and for related reasons, microfinance is everywhere dominated by women. There are good reasons for this; 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 are weak and have fewer options; it is therefore easier to put them and keep them in groups, and to ensure that they repay their loans.

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.

Women are more than half the population, and in most societies and activities their skills and entitlements are woefully neglected. The family, however, is the basic building block for most societies, and families include women and men. Discrimination in favour of women can have its downsides; men may force their wives to take loans and to repay them, but then use the money for liquor or other amusements, and the family disharmony can end in disaster. Anyone who has seen a Bangladeshi woman’s face which has been foully disfigured by the acid which was thrown at her by her frustrated husband will be aware that family unity should be enhanced, not destroyed.

Men also tend to start more business that eventually grow and employ many others, than women, but they also tend to take bigger risks, to be less reliable, and to fail more often. Both sexes have their roles to play.

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 has recently re-introduced group borrowing to satisfy them; prospective borrowers can chose whether to take a guarantor, or to join a group.

Here again, Akhuwat’s practices fly in the face of accepted best practice, but they achieve good results. Any MFI can learn from them, whether its goals are to make big profits, or to create a ‘big society’.

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Akhuwat has another unusual strategy which saves money and also strengthens commitment and the sense of brotherhood. Loan repayment and disbursement takes place in mosques, or churches, not in Akhuwat’s own very modest offices. Jesus Christ threw the money changers out of the temple in Jerusalem, saying that they had made the house of God into a den of thieves, and some of them may indeed have been money-lenders also. Akhuwat may be accused of being foolish, although its results tell otherwise, but it is certainly not a thief.

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 surely enhances borrowers’ commitment to repay. The priests and imams also welcome Akhuwat as a bridge between people’s spiritual and secular lives. The Holy Koran says that money is given to us 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

Most 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 keep on borrowing. Some MFIs even expel customers who repay a loan and then do not take another within a set period, usually a month or so. They are permitted to ‘rest’, as the MFIs call it, for this period, but then they have to get back into debt, or get out. This is a sensible business practice, because non-borrowing clients are unprofitable.

Akhuwat adopts a very 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 staff make every effort to introduce such clients to banks, and to facilitate the transfer, and only a very small number of larger so-called ‘silver’ loans are approved, for special cases.

In general, Akhuwat aims to ‘process’ its clients to ‘mainstream’ banking, not to retain them for its own profit. It is a school which prepares people and helps them grow for larger things, not a prison which retains them in perpetual indebtedness. Akhuwat has lent to 93,000 people in the ten years of its existence, but now only 30,000 are borrowing. The remaining 63,000 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 one on five would like to borrow from Akhuwat again but cannot, and the remaining eighty per cent do not need to borrow.

Most institutions of all kinds like to grow, 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 enables promoters and investors to make more money. Growth is often hard to manage, and it involves losing the ‘personal touch’ which comes from association with particular communities. But the mantra is that businesses must grow or die, so grow they do, and sometimes die in the process.

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, and

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Akhuwat works with them to show them what has to be done, it sends its own staff to assist them in their initial efforts, 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 people do not come forward, Akhuwat grows in a more traditional way, by opening its own branches. This dual track approach does not maximise Akhuwat’s earnings, but it does maximise the extension of what Akhuwat is doing. 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 spirit of brotherhood 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; the informal trusting culture of Akhuwat is in many ways more like that of a hi-tech start-up in California, and some managers themselves find this difficult.

Clients often complain that Akhuwat’s loans are too small, and demand naturally 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 in India, 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 funds can be used to assist clients who are further down the ‘ladder’ of growth.

In a very broad sense, Akhuwat is itself a paradox. It depends on the generosity of people who have made their money in the ‘greed-based’ market system, but is at the same time promoting a quite different model. If this model was universally adopted, there would be no surplus funds for Akhuwat. This possibility is however somewhat theoretical, and very remote. For the foreseeable future, Akhuwat should be able to access generous people’s funds, and skilled people’s time, and to continue to grow and to demonstrate new possibilities.

CONCLUSION

Microfinance is becoming a mature industry, with set principles and practices. It is also moving away from government and NGO into the hands of real businesses; it has been ‘Wal-Martised’.

Akhuwat is supremely important because it reminds us of what we set out to do, and why we did it. Akhuwat takes us back to the early days of innocence, when poverty alleviation was what microfinance was for, and this reminder is healthy, and necessary.

At the same time, however, Akhuwat is breaking the mould, and is one of the most important innovators in microfinance, anywhere. Anyone who is setting up a new MFI anywhere, with whatever motives, should at least question the accepted wisdom of working with groups, client retention, focus on women, and 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.

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Above all, however, and most significant in these market-driven times, Akhuwat demonstrates that there is another way, that generosity and brotherhood can be equally powerful motivators as profit maximisation. This conclusion goes far beyond microfinance.

NOTES

i See Harper M, "Islamic Partnership Financing for Small and Microenterprise", Small Enterprise Development, Vol. 5, No.2, 1996, and Harper M, Rao DSK and Ashis Kumar, Development, Divinity and Dharma, The Role of Religion In Development Institutions and Microfinance, PA Publications, Rugby, 2008