Name: Syed shehryar Ali zaid

ID: 63850
ASSIGNMENT # 3
SFAD
Q.1 What is a microfinance institution and describe its business model? Also explain its origins.
MFIs are organisations such as credit unions, downscaled commercial banks, and financial cooperatives
that provide financial services to the poor. These organisations might vary in their legal structure,
mission, methodology, and sustainability, but they all have one thing in common, they provide a broad
range of financial services such as deposits, loans, payment services, money transfers and insurance to
the poor and low-income households and their micro-enterprises at cheap and affordable interest rates

MODELS:

Grameen Bank Model : This is the leading and most popular model. The model operates on group based
lending where members of the group act as collateral by guaranteeing each other and therefore
minimising the risk of default .The most successful Shari’a compliant Grameen Bank Model is present in
Bangladesh.

Village Bank Model: The MFI establishes a village bank containing approximately thirty members, and
also injects capital for forward financing. The members of the village bank extend individual loans and
repayment of those loans is mostly on a weekly basis. After four months the village bank pays back the
capital along with profit to the MFI. Subsequent loans are subject to the repayment ability of the village
bank, while loan size is proportional to accumulated savings. Therefore, peer pressure works to shield
default risk as well as to persuade clients to save. The accumulated savings are also used for credit
extension. This may also lead the village bank to become self-sustaining by accumulating its internal
capital.

Credit Union: Credit unions are non-profit co-operatives formed by a group of people who have a
common bond. Members of the group/co-operative control the union by themselves and offer services
ranging from saving mobilisation to credit extension and their recoveries. However, credit unions are
generally linked to some apex body that supervises, provides them training, and monitors their
performance.

Self-Help Groups: As the name indicates, this model is group based where people belonging to similar
income brackets join together and forms a group. These groups are generally self-sustainable implying
that all members pool their savings and then this pool of saving is used to extend credit. These groups
can also seek external funding if they wish to. Members of the group decide among themselves about
terms and conditions of all products/services they have agreed to offer to each other through this
arrangement

Q.2 What is Akhuwat? How is Akhuwat different from a conventional microfinance institution?
Akhuwat Foundation is the leading microfinance institution in Pakistan which provides interest free
loans for small businesses to the poorest people of society. Since its launch in 2001, it has disbursed a
sum of -110 million to 1.9 million families without any collateral and with a recovery rate of 99.93
percent.

Akhuwat Foundation is a nonprofit organization based in Pakistan that works to create a poverty-free
society. By using interest-free microfinance as a tool for poverty alleviation, Akhuwat helps its
beneficiaries to become socially and financially included members of Pakistan's society
Q.3 Explain the concept of social collateralization? Is it a good alternative to the
collateralization practices used by conventional banks? Why?
The information gathered illustrates different styles of collateral frameworks – in terms not only of
eligible asset types, but also of other dimensions such as eligibility across lending facilities, haircut
policies, collateral management (earmarked or in a pool), etc. The observed diversity reflects differences
in local factors such as central bank legislation, financial market structure and state of development, and
whether there is a structural liquidity surplus or deficit in the relevant financial system. That said, there
are clearly some common principles underpinning these frameworks (eg transparency of eligibility
criteria, centrality of risk management measures).

Normal banks in the sample have modified their collateral frameworks over the past five years to
varying degrees. These modifications reflect changes in the operating environment and the lessons
learned during the global financial crisis – though not all modifications are direct consequences of the
crisis. Overall, central bank collateral frameworks today tend to be somewhat broader than in mid-2007,
accepting more asset types, including in some cases cross-border collateral. The haircut/initial margin
schedules today tend to be more granular, reflecting the information gained about the performance of
different asset classes over time, and particularly in stressed conditions during the crisis.

Q.4 How was Akhuwat able to minimize its operational expenses but still maintain very high
recovery rates over the years?

Akhuwat believes a lender-borrower relationship should be one of equals, their offices share the same
comforts as the homes of their borrowers. This means no airconditioning, no power generators, no cars,
and very limited furniture. We visited these offices in the hottest month of the year, and temperatures
outside reached . Sitting on rugs in rooms that were sometimes cooled with fans that operated
intermittently as a result of Pakistan’s load shedding issues, our meetings genuinely brought us back to
basics. Borrowers we talked to often commented on this aspect, and mentioned it reduced the
perceived barrier between lender and borrower, and increased their honesty and efforts to stick to
repayment policies.

Furthermore, these convenient offices and operations have not only reduced labor costs and costs, but
also forced Akhuwat to keep its lending structure simple and easy to use. It uses financial verification
procedures to track and collect loans and repayments, and use bicycle companies as the primary means
of transportation for officials who lend money. According to Dr. Amjad Saqib said, Akhuwat has tried to
reduce the cost of spending as much as possible "even if spending more coins is shifted directly onto the
shoulders of the poor."

Q.5 Why was Akhuwat criticized by financial experts for its business model?
Akhuwat is often criticized for having a financial model considered unstable in the financial sector. The
government can repay its loans at any time if it is not satisfied with Akhuwat's performance.
Furthermore, the fact that it used its own loans to meet its operating expenses was seen as an unstable
practice. Most financial and monetary company experts agree that Akhuwat should pay at least a
portion of its operating expenses to its clients.

Q.6 Is Akhuwat successful in achieving its vision and making the social impact desired by its
founder? Explain
There appears to be a missing link in key financial models for providing the goods their Muslims need.
For a strategy like finance to be truly successful in reducing poverty, its practices must be in harmony
with social and environmental issues and the "beliefs of the people it was trying to reach".