TITLE OF PROJECT

The spirit of volunteerism and service to the people through interest-free loan

CMBA/CMPA Executive

Name: MUHAMMAD ADNAN

Roll No: BX510018
Registration No: 19PSA02278

Department of Commerce
Faculty of Social Sciences and Humanities
Allama Iqbal Open University Islamabad
Year-2021
 IN
NE
R
TI
TL
E

Name:
MUHAMMA
D ADNAN
Roll No:
BX510018
Registration
No:
19PSA02278
NAEEM KHAN
Name of Supervisor

This Project is submitted to Department of

Commerce, Faculty of Social Sciences
and Humanities, Allama Iqbal Open
University, Islamabad in partial
fulfillment of the requirement for the
degree of CMBA/CMPA Executive.

Depart
ment of
Comme
rce
Faculty of
Social Sciences
and Humanities
Allama Iqbal
Open
University
Islamabad
Y
ea
r-
20
21
EXECUTIVE SUMMARY

Not more than one (2) pages

Currently, entrepreneurs and

corporations
overwhelmingly do not view
the alleviation of global
poverty as a strategic
priority. Yet business
activity can have a negative
as well as a positive effect
on each distinctive form of
poverty. In order to reduce
poverty, entrepreneurs have
to find ways of limiting the
negative aspects. This might
be achieved by deliberately
augmenting strategies so
that they can achieve a
synthesis, in partnership
with governments, NGO’s
and Microfinance’s.
 APPROVAL SHEET
(Viva Voce Committee)

Title of Project: The spirit of volunteerism and service to the people through interest-free loan

Name of Student: MUHAMMAD ADNAN

Roll No.: BX510018

Registration No.: 19PSA02278

Accepted by the Viva Voce Committee, Department of Commerce, Faculty of Social Sciences
and Humanities, Allama Iqbal Open University, Islamabad in partial fulfilment of
requirements for the Degree of CMBA/CMPA Executive.

VIVA VOCE COMMITTEE

Chairman

Member

Member

(Day, Month, Year)

 CERTIFICATE

The Project entitled “ The spirit of volunteerism and service to the people through interest-free loan
at CMBA/CMPA Executive conducted by Muhammad Adnan
Roll No. BX510018 , Registration No. 19PSA02278 has been completed
under my guidance and I am satisfied with the quality of student‟s research work.

Signature
Supervisor
Name: NAEEM KHAN
Address:Aptech Computer Education
Center 669-A Haider Esquire 1st Floor
Satellite Town Sargodha.
 ATTESTATION OF AUTHORSHIP

I, Muhammad Adnan Roll No. BX510018 RegistrationNo. 19PSA02278

a student of CMBA/CMPA Executive in Allama Iqbal Open University,
solemnly declare that my research project entitled “ The spirit of volunteerism and service to
the people through interest-free loan ”
is my own work and that, to the best of my knowledge and belief, it contain no material
previously published or written by another person. This research project is not submitted
already and shall not be submitted in future for obtaining a degree from same or another
University or Institution. If it is found to be copied/plagiarized at later stage of any student
enrolled in the same or any other university, I shall be liable to face legal action before Unfair
Mean Committee (UMC), as per AIOU/HEC Rules and Regulations, and I understand that if I
am found guilty, my degree will be cancelled.

Signature
Name Muhammad Adnan
Roll No. BX510018
Registration No. 19PSA02278
Address: Village Bakhar Bar Tehsil

Shahpur District Sargodha.

 DEDICATION

d to my supervisor, who taught me that the best kind of knowledge to have is that which is learned for its own
ed to my mother, who taught me that even the largest task can be accomplished if it is done one step at a time.

Student Name
 ACKNOWLEDGEMENTS

Sir Naeem Khan has been the ideal thesis supervisor. His sage advice, insightful criticisms, and
patient encouragement aided the writing of this thesis in innumerable ways. I would also like to
thank Sir. Naeem Khan whose steadfast support of this project was greatly needed and deeply
appreciated.

Student Name
ABSTRACT

In the last several years, there have been mixed views on the economic and social impacts
of microfinance. To respond to some of the criticisms facing the microfinance industry, some
microfinance practitioners are experimenting with new alternative lending models and
management frameworks. One of these models that has recently gained increasing attention
among economists and practitioners is qard hasan based microfinance. We take a close look at
Akhuwat, a qard hasan based MFI offering interest-free microcredits to the poor, focusing on its
sources of financing.
 Table of contents

Sr # Contents Page #

Introduction
Scope & Goals
Methodology
Analysis
Recommendations
Implementation
Consequences and Requirements
 Conclusions
INTRODUCTION

Microfinance is an innovative financial tool used for poverty alleviation. It offers

essential financial services to the poor. The Consultative Group to Assist the Poor (CGAP)
defines microfinance as “the provision of financial services to low-income people” (“What is
Microfinance?”). Professor Muhammad Yunus won the Nobel Peace Prize for founding the
Grameen Bank and pioneering and popularizing the concept of microfinance. This idea spurred a
movement that envisions a world where poor households have “permanent access to high-quality
and affordable financial services to finance income-producing activities, build assets, stabilize
consumption, and protect against risks” (“Microfinance FAQs”). Though initially, the term was
often associated with microcredit, microfinance has since evolved to include a wide range of
other financial products, such as savings, insurance, payments, and remittances.

The rapid growth of the microfinance industry is nothing short of commendable.

According to the recent estimate by the International Finance Cooperation, microfinance has
reached approximately 130 million clients around the world (“Microfinance”). The year 2005
was named the International Year of Microcredit to recognize microfinance’s contributions to
building inclusive financial sectors to achieve the Millennium Development Goals. In his
remarks, Kofi Annan, former United Nations Secretary-General, praised microfinance as a
weapon against poverty and hunger. He said, “It really can change people’s lives for the better –
especially the lives of those who need it most” (“International Year of Microcredit 2005”).

Providing financial services to the poor is never an easy task. The prevalent problem of
information asymmetries among the poor and their inability to offer assets as collateral
undermine well-functioning credit markets. Through innovative contractual arrangements and
new management practices, microfinance institutions (MFIs) have succeeded in offering
uncollateralized loans to low-income communities while securing high repayment loan rates
(Cull 107). Global microfinance success stories have forced economists and practitioners alike
to rethink the conventional understanding of banking and financial practices. A great deal of
literature has been written on microfinance theory, practice, and challenges within the past few
decades.

In the last several years, however, there have been mixed views on the economic and
social impacts of microfinance. While passionate advocates of microfinance continue to
highlight its success, some of its ardent critics have questioned the sustainability of its operations
and the consistency of its missions (Banerjee). In 2007, when Banco Compartamos filed for an
initial public offering (IPO), it was revealed that Banco Compartamos was charging annual
interest rates of around 86% on its loans (Pereira). In response to the shocking news, Dr.
Muhammad Yunus accused Banco Compartamos of exploiting the poor for the benefit of the rich
in the name of sustainability and drifted away from the original mission of microfinance of
“protecting [poor people] from the moneylenders” (“Poor People, Rich Returns”).

A November 2010 article in The New York Times claims that some microcredit
companies around the world extend loans to the poor at exorbitant interest rates in pursuit of
profits without any regard for their ability to repay the loans (Polgreen and Bajaj). Also, a
December 2010 article in the BBC News cites a government report that claims that a 40-year-old
carpenter had suffered a heart attack “due to pressure put by the microfinance institutions for
repayment” (Soutik). To explain India’s microfinance suicide epidemic, the author quotes Vijay
Mahajan, Chairman of India’s Microfinance Institutions Network, who claims that “multiple
lending, over-indebtedness, coercive recovery practices, and unseemly enrichment by
promoters and senior executives [of micro-credit companies] has led to this situation” (Soutik).

To respond to these criticisms facing the microfinance industry, some microfinance

practitioners are experimenting with new alternative lending models and management
frameworks. One of these models that has recently gained increasing attention among
economists and practitioners is qard hasan based microfinance. In some respects, qard hasan
based MFIs utilize similar contractual arrangements and management practices like other MFIs.
However, unlike other MFIs, qard hasan based MFIs only provide interest-free microloans. We
take a close look at Akhuwat, a qard hasan based MFI offering interest-free microcredits to the
poor, focusing on its sources of financing.

This paper is organized as follows. Section 2 describes the concept of qard hasan. Section
3 provides an overview of the literature on MFI sources of financing. Section 4 presents a case
study of Akhuwat, a qard hasan based MFI. Section 5 concludes.

II. THE CONCEPT OF QARD HASAN

Definition of Qard Hasan

The word qard originates from the Arabic word ‫ القرض‬, which has the same meaning as
the Arabic word ‫ القطع‬which literally means to cut off or to tear something apart (Wehr and
Cowan 906; Manzur 3588). Symbolically, the act of lending means that the lender is cut off from
his ownership of the property when it is loaned to the borrower. Legally, qard means “giving of
anything with value in the ownership of another so that the receiver may avail the benefit of the
lent item with the condition that the same item or its equivalent should be returned to the lender
on demand or at a specified future date” (Najeeb and Lahsasna 15-16). The word hasan
originates from the Arabic word ‫الحسن‬which literally means beautiful, fine, and good. A
beautiful act is an act that “benefits persons other than those from whom the act emanates
without any obligation” (Odeduntan and Oni 104).

When the two words are combined, qard hasan literally means a beneficial loan, a
benevolent loan or a gratuitous loan (Odeduntan and Oni 104). Iqbal and Mirakhor define qard
hasan as a “loan extended without interest or any other compensation from the borrower. The
lender expects a reward only from Allah” (Glossary). Iqbal and Shafiq describe qard hasan as
“a voluntary loan” whereby the creditor is not expecting any return on the capital. Also, “while
the debtor is obligated to return the principal, the creditor, of his own free will, does not press
the debtor for exact timing of its return” (26). The International Institute of Islamic Banking and
Insurance provides a comprehensive definition of qard hasan as follows:

[Qard hasan is] an interest-free loan given for either welfare purposes or for fulfilling
short-term funding requirements. The borrower is only obligated to repay back the
principal amount of the loan. Most of the Islamic banks provide such interest-free loans
to their customers in real need. If this practice is not possible on a significant scale, even
then, it is adopted at least to cover some needy people, including among the bank’s
customers and students. The Islamic view about loan is that it should be given to the
 borrower free of charge. A person seeks a loan only if he is in need of it. Hence, it is a
moral duty of the lender to help his brother who may be in need. The lender should not
make an effort to take advantage of somebody’s needs. He should help the needy by
lending him money without any charge. The reward of this act is with God. Hence, it is
referred to as qard hasan which signifies the benevolent nature of the act of lending.

Qard Hasan in the Quran

The term qard hasan appears six times in the Quran. The related verses are listed below:

i. Chapter 2, verse 245

Who is it that would loan Allah a goodly loan so He may multiply it for him many times
over? And it is Allah who withholds and grants abundance, and to Him you will be
returned (“Surah Al-Baqarah [2:245]”).

ii. Chapter 5, verse 12

And Allah had already taken a covenant from the Children of Israel, and We delegated
from among them twelve leaders. And Allah said, “I am with you. If you establish prayer
and give zakat and believe in My messengers and support them and loan Allah a goodly
loan, I will surely remove from you your misdeeds and admit you to gardens beneath
which rivers flow. But whoever of you disbelieves after that has certainly strayed from
the soundness of the way (“Surah Al-Ma’idah [5:12]”).

iii. Chapter 57, verse 11

Who is it that would loan Allah a goodly loan so He will multiply it for him and he
will have a noble reward? (“Surah Al-Hadid [57:11]”).
iv. Chapter 57, verse 18

Indeed, the men who practice charity and the women who practice charity and [they who]
have loaned Allah a goodly loan - it will be multiplied for them, and they will have a
noble reward (“Surah Al-Hadid [57:18]”).

v. Chapter 64, verse 17

If you loan Allah a goodly loan, He will multiply it for you and forgive you. And Allah is
Most Appreciative and Forbearing (“Surah Al-Taghabun [64:17]”).
vi. Chapter 73, verse 20

Indeed, your Lord knows, [O Muhammad], that you stand [in prayer] almost two thirds of
the night or half of it or a third of it, and [so do] a group of those with you. And Allah
determines [the extent of] the night and the day. He has known that you [Muslims] will
not be able to do it and has turned to you in forgiveness, so recite what is easy [for you]
of the Qur'an. He has known that there will be among you those who are ill and others
traveling throughout the land seeking [something] of the bounty of Allah and others
fighting for the cause of Allah. So recite what is easy from it and establish prayer and
give zakat and loan Allah a goodly loan. And whatever good you put forward for
yourselves - you will find it with Allah. It is better and greater in reward. And seek
forgiveness of Allah. Indeed, Allah is Forgiving and Merciful (“Surah Al-Muzammil
[73:20]”).

From the six Quranic verses, two central themes emerge. First, in each of these verses,
the Quran characterizes the qard hasan transaction as a transaction between God as the
borrower and the believer as the lender. Second, in each of these verses, God promises to pay
back the
qard hasan loan with better benefits or returns. In his discussion of these verses, Abdullah Yusuf
Ali in his translation of the Quran explains:

Spending in the cause of God is called metaphorically a beautiful loan. It is excellent in

many ways: (1) it shows a beautiful spirit of self-denial; (2) in other loans there may be a
doubt as to the safety of your capital or any return thereon; here you give in the Lord of
All, in Whose hands are the keys of want or plenty; giving you may have manifold
blessings, and withholding you may even lose what you have. If we remember that our
goal is God, can we turn away from His cause? (Ali 108)

The beautiful loan should be that of our own souls. We should expect no returns in kind,
for that is not possible. But the reward we shall find with Allah will be infinitely greater
and nobler (Ali 1844).

Key Characteristics of Qard Hasan

Key characteristics of qard hasan are as follows:

A non-rewarding loan

Qard hasan loan is a non-rewarding loan whereby the lender has no expectations of any forms of
monetary rewards in return for the value of the loan. However, the borrower is under a moral
obligation to repay the principal. The primary objective of qard hasan is to help the poor to
engage in economic activities “in a dignified and cost-effective manner” (Iqbal and Shafiq 26).
Qarḍhasan is for those who are in need but are “expected to be able to pay it back” (Farooq 18).
A benevolent and spiritual act of lending

The act of extending qard hasan loans is a charitable act. The incentives for the lender to engage
in providing qard hasan loans are benevolent and spiritual, abiding by God’s command to
provide such loans and seeking rewards from God in this world and the hereafter. For the lender,
such benevolent act cannot be compensated by any forms of monetary rewards (Iqbal and Shafiq
26).

Permissibility of gracious repayments of qard hasan loans

Although the lender is not allowed to seek any forms of monetary rewards from extending qard
hasan loans, the borrower is permitted to repay the lender in excess of the principal “out of free
consent and without any precondition or demand by the lender” (Najeeb and Lahsasna 20). This
excess repayment is acceptable “as a gesture of gratitude” from the borrower to the lender
(Farooq 19).

III. MFI Sources of Financing

MFI Funding Instruments

The spread of microfinance around the world and the increase in its popularity as a
poverty alleviation tool have led to the expansion of MFI sources of financing. MFIs require
capital to provide microcredits to their customers and to finance their lending operations. The
following are some of the traditional MFI funding instruments:

Grants and Soft Loans

Given its role in providing the poor with access to financial services, microfinance
has received wide attention and support from donor communities, government agencies, non-
governmental organizations, and international groups. According to CGAP, grants are “transfers
of resources that do not have to be repaid” (“Funding Instruments”). In contrast, soft loans are a
financing instrument that “offers flexible or lenient terms for repayment, usually at lower than
market interest rates” (“What is Soft Loan?”). Soft loans are often regarded as a form of highly-
subsidized loans. Among the organizations that offer grants and soft loans to MFIs are
multilateral banks (e.g., the World Bank), government aid agencies (e.g., United States Agency
for International Development), foundations (e.g., Ford Foundation) and apex institutions (e.g.,
Accion). Both grants and soft loans have historically been the principal source of funding for
MFIs, primarily at their early stages. However, some argue that an overreliance on grants and
soft loans among MFIs reduces the incentives for them to become operationally and financially
self-sufficient (Bogan). In addition, the flow of funds from grants and soft loans are often
irregular and unpredictable.

Savings

Savings in the form of deposits have traditionally been one of the primary sources of
funding for financial institutions, including MFIs. In some countries such as Bangladesh,
Bolivia, Columbia, and Peru, deposits play a key role in expanding access to credit for the poor.
However, in other countries such as India, Mexico, and Morocco, where deposit volumes are
low, deposits play a minor role (Sapundzhieva ). In some countries, MFIs are not allowed to
utilize deposits to extend microcredits to their borrowers until “they can meet certain minimum
capital requirements” mandated by local authorities (Fehr and Hishigsuren 135). However, such
requirements can only be met by the more mature MFIs that have achieved certain levels of
scale
and outreach. In addition, though deposits can be a major source of funding for MFIs, managing
small savings accounts by poor and low-income clients can be very costly (“Savings”).

Debt

As MFIs mature and attempt to reduce dependency on grants and soft loans, they often
turn to lenders to access debt instruments. These lending institutions ranged from “small local
NGOs to large international funds, from government programs to local banks” (Sapundzhieva
3). According to a survey conducted by the Microfinance Information Exchange, between 2007
to 2010, debt instruments comprised “over one-third of the total funding of MFIs”
(Sapundzhieva 1). However, debt instruments often come in the forms of concessional or
commercial loans and with certain covenants and guarantee requirements. In addition, higher
leverage is often correlated with a decrease in the relative level of outreach to the very poor due
to an increase in the cost of capital (Hoque , Chishty, and Halloway ). In countries where capital
markets are well-developed, some MFIs have begun to issue bonds to diversify their funding
base (“FINCA Armenia”).

Equity

Some microfinance institutions have enjoyed tremendous growth and achieved the
scale that allows them to access domestic and international equity capital through commercial
capital markets. In 2007, Banco Compartamos became one of the first MFIs to issue an IPO of
its shareholders’ holdings. According to CGAP, the IPO was “13 times oversubscribed”
(“CGAP Reflections”). The success of the IPO by Banco Compartamos proved the viability of
accessing public equity capital through commercial capital markets for MFIs. Since then,
numerous other
MFIs, including SKS, Ujjivan, and Equitas Bank have succeeded in their IPOs (“Microfinance
Institutions”). The mobilization of private equity capital has allowed these MFIs to expand their
operations and extend their outreach. However, some academics and MFI practitioners are
concerned that public, for-profit MFIs may sacrifice their original mission to provide financial
access to the poorest of the poor to satisfy the short-term demand of their profit-oriented
shareholders (Armendariz and Szafarz ).

The Evolution of MFI Funding Processes

Various theories have been developed to describe and explain the different
factors affecting the evolution of MFI sources of financing. The following are the two
major explanations for the evolution of MFI funding sources:

Life-Cycle Theory

Most research on microfinance attempts to describe the evolution of MFI funding sources
from the perspective of an institutional life-cycle theory. Models of the life-cycle theory
presuppose that “there are regularities in organizational development” and that changes in the
organizational structures and strategies adopted by organizations may follow “some uniform
pattern” (Smith 801). The life-cycle theory, therefore, suggests that sources of funding for MFIs
are “linked to the stages of MFI development” (Bogan 1047).

Within the context of an institutional life cycle theory of MFI development, most MFIs
begin as non-governmental, non-profit organizations with a mission to provide financial access
to the poor. An early stage MFI funds its operation through grants and soft loans from donor
communities, government agencies, non-governmental organizations, and international groups.
During this formative stage, grants and soft loans comprise “the majority of the funding” for
MFIs (Bogan 1047). As the MFI mature and achieves certain levels of scale and outreach, debt
instruments become available, although they often come with “restrictive covenants or
guarantees” (Bogan 1047). Some MFIs may also utilize clients’ deposits to fund their operations,
though deposit redeployment is often restricted by domestic regulatory requirements. As the MFI
continues to expand its outreach and sustain its growth, equity financing becomes available.

Profit-Incentive Theory

In the context of MFI funding sources, the profit-incentive theory presupposes a link
between MFI capital structures and profit incentives. Models of the profit-incentive theory posit
that accessing commercial funding is beneficial to MFIs in enhancing their operational
efficiency and improving their outreach. Intense scrutiny by private capital providers helps
ensure transparency and good governance among MFIs. For-profit, commercially-funded MFIs
respond to the profit incentive by working to decrease operational expenses and increase
revenues to maximize profit. In contrast, an overreliance on grants and highly-subsidized loans
allows MFIs “to avoid pressures to operate efficiently” (Bogan 1047). Some MFIs with access to
grants and soft loans may deliberately sacrifice efficiency and choose to serve the poorest of the
poor with higher operational costs (Bogan 1047). However, given the recent emphasis on
sustainability, there has been more pressure for MFIs to achieve both operational and financial
sufficiency.
IV. Sources of Funding for Qard Hasan Based MFIs: A Case Study of Akhuwat

Background

Akhuwat is a non-profit organization founded by Dr. Amjad Saqib in 2001. The name
‘Akhuwat’ literally means brotherhood (“About Us – Akhuwat”). Akhuwat derives its
organizational philosophy from the Islamic concept of brotherhood, which is best represented by
the brotherhood between the citizens of Medina and the immigrants from Mecca at the time of
the migration of Prophet Muhammad. The citizens of Medina were willing to share their wealth
to welcome and support the livelihood of the immigrants from Mecca who had to flee their home
to avoid severe discrimination and persecution. Akhuwat’s vision is “a poverty-free society built
on principles of compassion and equity” (“Akhuwat”). Akhuwat aims to realize its vision by
developing and sustaining a social system based on mutual support between the affluent and the
marginalized.

Initially, Akhuwat was started as a philanthropic exercise to experiment with the idea of
qard hasan based microfinance (Mahmud and Wahhaj). Akhuwat was formed with an initial
donation of Rs. 10,000 from Dr. Amjad Saqib and several of his friends. By 2003, Akhuwat
received more than Rs. 1.5 Million. After two years of successful operation, Akhuwat was
formalized and registered under the Societies Registration Act of Pakistan (“About Us –
Akhuwat”). Today, Akhuwat is registered with the Securities & Exchange Commission of
Pakistan with headquarters at Lahore. As of April 2018, Akhuwat has an outstanding loan
portfolio of Rs. 150 Billion, 901,513 active loans, upto 832 branches, 5,693 employees, and
total cumulative loan disbursements of around Rs. 58.7 Billion (“Overview – Akhuwat”).
Table 1:

Year No. of Amount Disbursed (Rs.) Recovery Rate

Loans (%)

2001-2002 192 1,895,000 100.00

2002-2003 282 2,791,300 99.90
2003-2004 832 8,504,000 99.90
2004-2005 3,124 31,811,000 99.90
2005-2006 6,264 66,020,700 99.90
2006-2007 8,674 89,935,600 99.80
2007-2008 11,388 122,445,242 99.80
2008-2009 13,821 164,226,000 99.80
2009-2010 21,073 251,808,800 99.80
2010-2011 34,194 418,211,100 99.80
2011-2012 67,683 1,137,684,000 99.83
2012-2013 159,138 2,580,467,000 99.82
2013-2014 234,883 4,047,109,100 99.85
2014-2015 367,798 7,310,527,000 99.92
2015-2016 496,458 11,205,522,500 99.92
2016-2017 619,396 16,585,952,800 99.96
2017-2018 653,858 105,000,000,000 99.98
2018-2019 688,320 125,000,000,000 99.92
2019-2020 722,782 136,060,000,000 99.95

Yearly Loan Disbursements and Collections (“Overview – Akhuwat”)

In many ways, Akhuwat operates like a regular MFI. Akhuwat offers both individual
and group loans. In the early years of its operation, for group loans, Akhuwat organized
individuals
into socially viable community groups called Self Help Groups (SHGs) and provided loans to
SHGs using the joint liability lending model. In contrasts, individual loans were provided
against two personal guarantees (2003 Annual Report). Beginning in 2007, Akhuwat moved
away from group lending towards individual lending to avoid inter-group politics and peer
pressure (“Akhuwat: A Decade of Hope”). Akhuwat has also moved away from gender-specific
loans towards family loans in which the wife and the husband co-sign their loans and are
responsible for repayment (“Akhuwat: A Decade of Hope”). Akhuwat also offers different types
of loan to suit the different needs of its clients, though 90% of its loan portfolio comprises of
enterprise loans.

Type of Purpose of Loan

Loan
Enterprise For starting a new business or expanding existing one
Liberation For paying principal amount of loans taken at
exorbitant interest rates from loan sharks
Housing For house renovation
Education To pay tuition fee, admission fee, and book purchases
Health For medicine and health treatment
Marriage For dowry or marriage arrangement
Emergency For accident or emergency
Silver For expanding existing business

Table 2: Overview of Loan Products (“Akhuwat: A Decade of Hope”)

 Akhuwat is different from other MFIs in several ways. Unlike other MFIs that charge
interest on their loans, sometimes at exorbitant rates, Akhuwat provides interest-free loans based
on the concept of qard hasan. By utilizing the concept of qard hasan in its operation, Akhuwat
remains true to its mission to help “the poorest strata of society in accordance with Islamic
principles” (“Akhuwat: A Decade of Hope”). Along with access to capital, Akhuwat also
provides its clients with technical assistance to support them in their entrepreneurial ventures.

Akhuwat also adopts several unique ways to reduce its operational costs. Akhuwat
institutionalizes the use of religious infrastructures such as mosques, churches, and temples as
centers for loan disbursements and repayments. By utilizing existing infrastructures, Akhuwat
manages to minimize its operational cost, enhance borrowers’ commitment for loan repayments,
and have a higher level of transparency and accountability (Harper 77). By utilizing religious
infrastructures for its operation, Akhuwat capitalizes on the spiritual incentives of its borrowers
to further strengthen their sense of duty to fulfill their loan repayment obligations.

Much of Akhuwat’s success can also be attributed to its ability to mobilize the spirit of
volunteerism among its staff. Akhuwat believes that an ideal social enterprise uses “a mixture of
volunteerism and necessary compensation” (“Akhuwat: A Decade of Hope”). Akhuwat’s human
resource includes volunteers and paid staff. Akhuwat always encourages its employees to
exemplify the spirit of brotherhood themselves by contributing to the organization “beyond what
is dictated by their formal contract” (“Akhuwat: A Decade of Hope”). In fact, Akhuwat’s senior
staff comprises of volunteers and those who receive less than they could potentially earn
elsewhere (Harper 76).
Sources of Funding

Akhuwat has succeeded in sustaining and expanding its qard hasan based microfinance
model by relying on philanthropic capital. Akhuwat refuses to accept funds that come with
conditions or covenants that require Akhuwat to compromise on its principles. The following
are Akhuwat’s main sources of funding:

Donations

In the early years of its operation, Akhuwat relied mainly on funds provided by its Board
of Directors and donations from local philanthropists and individual donors to provide loans and
to sustain and expand its operation. Besides engaging local philanthropists through various
fundraising events, Akhuwat also placed donation boxes at different community and retail
centers as part of Akhuwat’s Community Donation Program. Recently, Akhuwat has also
increased its social media presence to engage with international donors. Donations from local
philanthropists and communities continue to be one of the main sources of funding for Akhuwat.

In addition to regular donations, Akhuwat also receives donations in the form of zakat.
Zakat is one of the five pillars of Islam and forms the foundation of Islamic economic system.
The Encyclopedia of Islam defines zakat as “the obligatory payment by Muslims of a
determinate portion of specified categories of their lawful property for the benefit of the poor
and other enumerated classes” (Zysow). As around 97% of the total population of Pakistan is
Muslim, Akhuwat becomes an avenue for the Muslim population to pay zakat, which will then
be used to provide interest-free microcredit to Akhuwat’s clients (“The World Factbook”).
 Beginning in 2008, Akhuwat introduced the Member Donor Program (MDP) to
encourage its borrowers to become donors to support its mission. Though the MDP was not
originally part of Akhuwat’s fundraising programs, it was introduced when a successful
borrower expressed his desire to help other people to get access to Akhuwat’s loans
(“Akhuwat: A Decade of Hope”). Akhuwat decided to formalize the program as part of its
fundraising activities, though donations would not be made compulsory. Along with their loans,
Akhuwat’s borrowers receive small donation boxes intended for them to donate themselves and
to collect donations from their local communities. These donations are usually given to
Akhuwat’s staff together with the loan repayments every month (Mahmud and Wahhaj 7). In
light of its brotherhood principle, Akhuwat strongly believes that “the greatest indication of
poverty reduction in a society is the transformation of borrowers to donors” (“Akhuwat: A
Decade of Hope”).

Membership Fee and Application/Processing Fee

When it first started, Akhuwat charged Rs. 400 membership fee for each loan. All
members belonged to one of the SHGs and were responsible for repayment of the loan of other
members of the groups (2002 Annual Report). In 2003, the membership fee for each loan was
changed from Rs. 400 to 5% of the principal amount. However, loans less than or equal to Rs.
3000 were exempted from the membership fee (2003 Annual Report). Beginning in 2009,
Akhuwat completely abolished the 5% membership fee requirement to make sure that its
products were accessible to the poorest of the poor without placing any further financial burden
on them (“Akhuwat: A Decade of Hope”). Akhuwat now charges a flat fee of Rs. 100-200 per
loan application.
Insurance Contributions

Akhuwat also provides an option for its borrowers to purchase credit insurance. The
borrower voluntarily pays an insurance fee of 1% of the principal amount at the time of the loan
disbursement (“Akhuwat: A Decade of Hope”). Loans less than or equal to Rs. 5000 are not
considered for insurance options (2012 Annual Report). All voluntary insurance contributions
are included in the Akhuwat Mutual Support Fund, a fund dedicated to “write off loans of
deceased/disabled borrowers and to pay funeral charges to the heirs of deceased borrowers”
(2017 Annual Report). The Akhuwat Mutual Support Fund was established to ease the burden of
Akhuwat’s clients in the events of death or permanent disability (“Akhuwat: A Decade of
Hope”).

Partnerships with Local and Foreign Governments and International Organizations

Beginning in 2009, Akhuwat has diversified its sources of funding by establishing

partnerships with local and foreign governments and international organizations. Under the
terms of a microfinance scheme approved in September 2009, which are supported by the
Pakistani Italian Debt Swap Agreement (PIDSA) signed in November 2006 between the
Government of the Italian Republic and the Government of the Islamic Republic of Pakistan,
Akhuwat has purchased assets such as computers, furniture and fixture, office equipment, and
vehicles worth Rs. 1.3 Million to support its operation. In addition, in November 2010, Plan
International Inc., a non-profit international humanitarian child-focused development
organization, agreed to support Akhuwat’s operation through asset purchases worth Rs. 360,000
(2017 Annual Report).
 The year 2011 was a transformative year for Akhuwat. Given its well-established records
of providing financial services to the poor for over a decade, the Government of Punjab
requested to work with Akhuwat to disburse small interest-free loans to businesses and small
enterprises based on the concept of qard hasan. Up to 2021, Akhuwat has received Rs. 150
Billion from the Punjab Small Industries Cooperation (PSIC) under the Chief Minister’s Self
Employment Scheme to be used on a revolving basis to provide interest-free loans to small
entrepreneurs in Punjab, especially graduates of technical and vocational institutions
(“Microfinance – Akhuwat”). PSIC also agreed to pay service charges at the rate of 7% of the
disbursed amount to cover Akhuwat’s operational expenses (2020 Annual Report). Since then,
Akhuwat has worked with several other local governments and institutions to provide access to
interest-free microloans.

Service
Amount
Institutions Schemes Charges
Received (Rs.)
(%)
Punjab Small
Chief Minister’s
Industries
Self Employment 10,000,000,000 7
Cooperation
Scheme
(PSIC)
Chief Minister’s
Government of
Self Employment 575,000,000 10
Gilgit-Baltistan
Scheme
Prime Minister
Pakistan Poverty
Interest Free Loan 446,000,000 10
Alleviation Fund
Scheme
Technical
Educational &
Vocational - 500,000,000 8
Training
Authority
FATA Governor KPK
Development Interest, Free 500,000,000 10
Authority Loan for FATA
Agriculture Interest Free
Department, Agriculture E- 2,000,000,000 5.9
Govt. of Punjab Credit Scheme

Table 3: Akhuwat’s Partnerships with Local Governments and Institutions (2020 Annual Report)
 Besides working with local governments and institutions, Akhuwat works with
international organizations to provide interest-free microloans to the poor. Up to 2020, Akhuwat
has received Rs. 70 Million from Care International, UK (CARE) to be used on a revolving
basis to provide interest-free microloans. CARE also agreed to pay service charges at the rate of
$3,500 annually to cover Akhuwat’s operational expenses (2020 Annual Report). Akhuwat is
also working with Helping Humanity and British Asian Trust to expand its operation.

Operating Income 2019 (Rs.) 2020 (Rs.)

Service Charges 1,138,822,505 703,348,073
Processing Fee 133,272,800 118,594,200
Community Donations from
1,492,367 351,842
Donation Boxes
Income from Akhuwat Health
2,240,600 1,763,810
Services Clinic

Table 4: Akhuwat’s Operating Income for the Years 2019 and 2020 (2020 Annual Report)

Income 2020 (Rs.) 2019 (Rs.)

Operating Income 1,883,994,548 2,004,365,908
Donations 386,068,230 225,176,057
Other Income 85,587,839 91,834,455
Contributions 246,164,062 200,165,441

Table 5: Akhuwat’s Income for the Years 2020 and 2019 (2020 Annual Report)
 V. Conclusion

Since the founding of the Grameen Bank to the success of Banco Compartamos’ IPO, a
body of literature on best practices in microfinance has been developed and agreed upon by
scholars and microfinance practitioners. These best practices include lending through some form
of group mechanism, capitalizing on social capital through joint liability lending, focusing on
lending to women, and complementing microcredits with technical training (Beatriz and
Morduch). Some argue that microfinance can only fulfill its promise of eradicating poverty
sustainably by reducing its reliance on subsidies and translating its innovative practices into
profitable ventures (Cull 107). It is generally accepted that MFIs should strive to achieve
operational and financial sufficiency to attract and retain investors.

For MFIs to become sustainable, their sources of funding should evolve as they mature.
The life-cycle theory posits that as an MFI mature, its sources of funding should shift away from
donations and soft loans towards debt and equity financing. Moreover, the profit-incentive theory
suggests that for-profit, commercially-funded MFIs respond to the profit incentive by becoming
more effective and efficient in their operations. Thus, MFIs must access commercial funding by
becoming operationally and financially self-sufficient to be a sustainable solution to poverty.

In many ways, Akhuwat’s success goes against the common expectations of scholars and
microfinance practitioners. In light of both the life-cycle theory and the profit-incentive theory,
it is fair to say that Akhuwat refuses to become ‘mature’ and to be ‘sustainable’ in the traditional
sense. Even after 19 years of operation, Akhuwat is still relying on donations from
philanthropists and donor communities and contributions from local governments and
international organizations. In addition, Akhuwat’s qard hasan based microfinance model that
provides interest-free microloans to the poor also means that Akhuwat will never become
‘operationally and financially sustainable.’

Akhuwat’s various financial indicators, however, tell a different story. If we consider

donations from philanthropists and donor communities and contributions from local governments
and international organizations as part of Akhuwat’s income, Akhuwat has managed to produce
operating surplus consistently. In addition, if sustainability is judged by “continuing ability to
raise donated funds” and other forms of grants, Akhuwat has been very ‘sustainable’ in its
operation (Harper 75). Akhuwat has been very successful in maintaining its relationship with
existing donors, local governments, and international institutions and in transforming its
borrowers into donors who then contribute to expanding Akhuwat’s operation.

Yea Expenditure Surplus

Income (Rs.)
r (Rs.) (Rs.)
2013 406,327,207 219,571,224 186,755,983
2014 513,272,299 384,030,025 129,242,274
2015 898,196,246 628,327,009 269,869,237
1,400,771,42
2016 1,035,101,905 365,669,515
0
2,468,253,05
2017 1,482,034,144 986,218,912
6

Table 6: Akhuwat’s Income, Expenditure, and Surplus (2013-2017 Annual Report)

Akhuwat’s experience of providing qard hasan based microfinance should help us rethink our
approach to understanding MFI sources of funding in particular and sustainability in general.
Several studies have suggested that some MFIs that aimed to achieve profitability and
meaningful outreach to the poor have experienced trade-offs between the two objectives (Cull
108). Akhuwat completely avoids the dilemma between profitability and outreach by prioritizing
its mission to provide interest-free loans to the poor and by placing faith in “the altruistic spirit of
the Pakistani people” (“Akhuwat: A Decade of Hope”). Nevertheless, judged by its continuing
ability to raise donated funds and other forms of grants, Akhuwat can be considered
operationally and financially ‘sustainable.’
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