AKHUWAT MFI ASSIGNMENT 3

SUBMITTED TO DR.ARSALAN HASHMI

NOSHABA KANWAL
ST: ID 64431

PAF-KIET NN CAMPUS
QUESTTION-1

What is a microfinance institution and describe its business model? Also explain its Origins.

ANSWER

Microfinance means providing financial aid services to poor and needy people in the form of credit,
Leasing, insurance and savings. It was introduced in 1983 by Dr. Mohammad Yunus who established
Grameen Bank to accomplish his vision of providing self-support to the poorest people through loans on
easy terms. As the procedure, terms and conditions of traditional commercial banks were very strict to
lend money to anyone unable to offer some form of collateral. So, MFIs worked on the assumption that
the poor could manage their own financial affairs, given suitable conditions. Dr. Yunus won the 2006
Nobel Prize for Peace for His contributions to the microfinance system.

ORIGIN

Usually in MFIs small loans are issue to startup a small new business. Like to purchase a bicycle, a sewing
machine or to establish a stitching unit, a fruit and vegetable street cart and so on for a period of 1–3
years. For the payment of loan easy and small monthly instalments are conditioned. As the procedure,
terms and conditions of traditional commercial banks were very strict to lend money to anyone unable
to offer some form of collateral. So we can say that MFIs worked on the assumption that the poor could
manage their own financial affairs, given suitable conditions.

BUSINESS MODEL OF MICRO FINANCIAL INSTITUTION

In general MFIs generate loans by borrowing most of their capital from financial institutions. But it is
been observed that in some cases, government organizations would set up groups of financial
institutions that would facilitate the provision of capital to MFIs. MFIs would add their operational costs
to the interest charged by these lending institutions that would result in subsequent higher interest
rates charged by the MFI.

QUESTTION-2

ANSWER

What is Akhuwat? How is Akhuwat different from a conventional microfinance Institution?

Akhuwat a non-profit interest-free microfinance organization. It was established in March 2001 by Dr.
Saqib. It was based over his personal philosophy and experiences in the Microfinance industry. The
vision of Dr. Saqib was to create a poverty-free society on the beliefs of compassion and equity
(Akhuwat), He called Akhuwat’s microloans ‘Qarz-e-Hassan’ a concept used in
Islamic texts to describe non-oppressive lending practices.

Akhuwat is very different from a conventional micro financial institutions because they have a strict
criteria of repayment the loans with high interest rate and collateral condition. But in case of Akhuwat
the policy is quite change although they issued very small loans. But they offers interest free loan on
very small and easy instalments.

Moreover, they do not required any physical collateral but they worked on social collateral. This was just
like a blessing of Allah for those who are unable to earn money even for their necessities. So Akhuwat
give them a sense of thankfulness to those who help poor and encouragement to move forward in their
life independently.

QUESTTION-3

Explain the concept of social collateralization? Is it a good alternative to the Collateralization practices
used by conventional banks? Why?

ANSWER

Social Collateral is a unique financial term which is used by Akhuwat as an alternative method for the
recovery of their loans. In this method, MFIs employed ‘Loan Officers’ who helped people apply for
microloans by facilitating the creation of a group of borrowers and providing trainings on the application
process, including the MFI’s rules and regulations. For each loan extended to a group member, the
remaining group members provided guarantees. In case a group member failed to return the loan, the
entire group would be barred from future lending. The model worked as an alternative to physical
collateral to MFIs as the group members kept each other under check for the return of the loan and
misuse of funds.

Yes, from my point of view this is a very good practice as the recovery rate of Akhuwat is 99.9% which
leary indicates their successful journey. Because through this method the basic concept of micro
financing is been accomplished on social basis for the welfare of poor and needy person. As Akhuwat is
working on interest free basis so it is being trusted by most of the people on the aspect of charity and
donation. So we can say that in an Islamic society Akhuwat can prosper more efficiently with the
passage of time.

QUESTTION-4

How was Akhuwat able to minimize its operational expenses but still maintain very High recovery
rates over the years?

ANSWER

As Akhuwat is depend on heavily on charitable donations and contributions from people

who shared its vision. So, to keep their services simple, Akhuwat had very limited expenses most of the
work was done with the help of volunteers, including Dr Saqib himself. The paid staff consisted of people
without strong educational or social backgrounds to lower the expenses and to have a workforce that
could relate to its target population.

Moreover, offices were simple in terms of furniture and equipment and usually consisted of a small
room that was donated to Akhuwat by the property owner. Most of the community work was done
through religious spaces, such as mosques and churches, instead of rented facilities. Some branches had
one or two computers that were donated by individual donors.

The basic concept which is remarkable about Akhuwat is the spirit of devotion. As Rehan Hussain, Chief
Financial Officer said, Akhuwat made many sacrifices to keep the costs low:

Akhuwat’s employees have always ensured that all the money collected would be used for Akhuwat’s
cause. Akhuwat’s office spaces are all shared, except for computer labs, and have no furniture. Everyone
sits on the floor. Our senior management can easily charge half a million rupees per month for their
services; not only that they don’t charge a penny but they also donate to Akhuwat. From my point of
view small loans, simple procedure and easy structure for instalment is the main reason of its high rate
of recovery. In addition the purity and devotion which is seen by Akhuwat mission is also entrusted by
its borrower.

QUESTTION-5

ANSWER

Why was Akhuwat criticized by financial experts for its business model?

Although Akhuwat is a successful institution but it also have to face criticism for an unconventional
business model. Moreover, the fact that it consumed its own lending base to meet. Its operational
expenses was seen as an unsustainable practice. Because it model can make it unstable any time if
there is a fluctuation occur in its recovery rate. Some financial experts also suggested that Akhuwat
must put some of its operational cost over its clients too. But Dr. Saqib remain unconvinced over this
suggestion.

Dr Saqib believed that Akhuwat could remain financially viable as long as the recovery rates were kept
high, operational expenses were kept low and enough additional funds were raised every year. As
Pakistan is a Muslim country which is actually based on the spirit of Akhuwat. So there is a great
inclination to help and support poor. This also a reason that Dr. Saqib believed that Akhuwat will never
has to face recovery problem. Mover over most of its clients are the donor too.

The concluding line of the above discussion are that although the business model of Akhuwat is working
very effectively but it has to face criticism due to its unconventional and unique norms of finance.

QUESTTION-6

Is Akhuwat successful in achieving its vision and making the social impact desired by its founder?
Explain.

ANSWER

Yes, definitely Akhuwat is very successful in achieving its vision with a remarkable recovery rate of
99.9%. And also making the great social impact desired by its founder as Dr. Saqib said that he felt
confident that Akhuwat had been successful in bringing about a positive economic impact.
Dr. Saqib was as much satisfied for the working of Akhuwat as he iterated the point:
I feel like I have succeeded to make Akhuwat less dependent on me. Obviously, I like to stay involved
just like a concerned parent, but I know Akhuwat will continue on the path to excellence even without
me.

He actually was not expected that tremendous growth of Akhuwat as he once said:
I am wondered how good economic assessments were when Akhuwat could not measure its real
intended outcomes, that is, happiness, hope, compassion, mutual respect and a spirit of volunteerism
and social support.