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The Citizen

The Uncertain Future of Microfinance

By Imran Sarwar, News Writer, MPP ‘13

Microfinance has lost its halo. Once touted as the instrument for economic advancement of the poor, an enterprise model that was not only self-sustainable but also socially responsible, the microfinance sector’s efficacy is now in doubt.

Microfinance started out as the work of nonprofit organizations and then shifted to for-profit companies, providing small loans to poor borrowers to help them generate income and lift themselves out of poverty. But there has been a drastic shift from this starting principle. Microfinance organizations have focused attention on generating high profits on these loans in order to pay back the debt based on which these loans were financed, and cover their operating costs. Loans were thus, extended to the poor left, right and center, as microfinance institutions (MFIs) increased their portfolios, charged exorbitant interest without taking into account the ability of the clients to repay. In turn, these MFIs displayed amazing growth rates at the end of each fiscal year. Effects of high growth rates at break-neck speed are starting to show. Krishnamurthy Subramanian, in his recent article “Microfinance Lenders: To Profit or Not To Profit”, finds that for-profit MFIs in India tend to have higher costs and expenses, and consequentially higher interest rates. Microfinance Story Pic

These high interest rates, coupled with not-so-pleasant recovery mechanisms may have resulted in events such as suicides of close to 30 borrowers in the Indian state of Andhra Pradesh. Sheikh Hasina, the Prime Minister of Bangladesh, has declared that MFIs are “sucking the blood from the poor in the name of poverty alleviation”. MFIs in Pakistan are having a hard time recovering disbursed loans after a series of natural disasters struck the country. Many Rural Support Programs in Pakistan have had to wrap up their operations in some locations hit by the 2010 flood. MFIs are having trouble recovering loans from over-indebted borrowers who were given the loans for non-productive purposes in an attempt to increase loan portfolios.

In an environment where different MFIs are concerned about financial sustainability and are looking for ways to increase interest rates even further in order to meet growing costs, one Pakistan based organization, Akhuwat, is giving microloans totally interest-free.

In a recently published paper entitled, ‘Akhuwat – it sometimes makes sense to break the rules,’ Malcolm Harper, Chairman Micro-Credit Ratings International, noted the organization 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”. The most significant of these is the insistence on interest-free loans. The organization derives inspiration from teachings of Islam, though it serves all religions, and considers charging interest not only against the principles of Islam, but also unjust when dealing with the poorest strata of society. Working since 2001, Akhuwat has expanded into more than 30 cities in Pakistan, served more than 100,000 families and disbursed approximately $14 million. Just how have they done this?

The secret lies in the name: Akhuwat, literally translated as ‘brotherhood’, a spirit whereby each member looks after the other in the community. The gratitude that the borrowers feel towards Akhuwat is genuine, unforced, and has been translated into voluntary contributions by clients who have fared well due to these loans. This system has been formalized, where voluntary contributions taken from borrowers now cover sixty percent of the operating costs. There is no compulsion in these contributions, and those who give are not treated any differently from those who don’t. The other end of this brotherhood lies with civil society – Akhuwat has relied so far entirely on donations by civil society to distribute these loans, with no funding from ‘official’ sources or international organizations. The credit pool for operations has been furnished through donations from individuals, clients and well-wishers. This translates to little or no capital costs which allows the organization to extend interest free loans.  In addition, senior staff members work as volunteers or are paid salaries far below market rates. But is this source of funding sustainable? Dr. Amjad Saqib, the Executive Director of Akhuwat, is aware of the concerns raised by many regarding the sustainability and scalability of an organization working on donations, voluntary contributions and voluntary efforts. “We do not view Akhuwat as a short term experiment nor are we interested in gaining some sort of permanence through profit alone. Instead through a spirit of volunteerism, the principle of low operational cost and dependence on generosity of the community, Akhuwat has not only sustained itself but is also expanding and being replicated.”

With a recovery rate of 99.85%, Akhuwat is a challenge to conventional MFIs, to exorbitant interest rates, and traditional usurious practices towards the poor. Akhuwat, in Malcolm Harper’s words “takes us back to the early days of innocence, when poverty alleviation was what microfinance was for, and this reminder is healthy, and necessary.”