Illustration by Creative Unit.

During the course of a lecture tour in the United States, Dr Amjad Saqib was once asked, “How can your interest-free microfinance organisation [Akhuwat] be sustainable?”

As always, his reply exuded confidence.

“We started with one loan worth Rs 10,000 in 2001; 10 years later we have disbursed more than 200,000 loans amounting to over two billion rupees from more than 130 branches with a recovery rate of 99.85%. I am not sure how else you can define being sustainable.”

That was 2011. These numbers have multiplied since. Exponential growth, novelty in vision and operations and a relentless commitment to face all kinds of challenges, criticism and scepticism has made Akhuwat a pioneer in interest-free microfinance. In fact the organisation has become a case study about how to create a parallel economic system; one that can give small businesses a solid footing in difficult circumstances without being exploitative in any way.

Akhuwat’s interest free microfinance model has two key dimensions. Firstly, it provides an alternative to the orthodoxy of interest-laden banking and non-banking loans which have exploited the poor for so long. Secondly, it provides capital for small businesses without any cost of capital.

A journey of thousands, millions and billions!

It was 2001 when a poor widow asked Dr Saqib, a bureaucrat working for the government’s Rural Support Programme, for financial help to support her family. She was not asking for much – just a few thousand rupees in order to buy sewing machines and start earning. Instead of giving her charity, he and his friends decided to give her an interest-free loan worth Rs 10,000 with the promise that she would pay it back whenever she could afford to do so. She kept her promise and retuned the loan within six months. By the time she paid it back she had already been able to marry her daughter and earn a decent living.

A family was saved from the clutches of poverty and a journey had begun.It was a new concept; placing trust in a poverty-stricken family by helping them start a business with an interest-free loan rather than dole out the customary charity. The underpinnings of this model lie in the Islamic values of brotherhood which were most profoundly observed during the hijrat (migration) of the Muslims from Mecca to Medina in the time of the Prophet Muhammad (PBUH). The spirit of muwakhat (brotherhood) called for every affluent Muslim in Medina to support a migrant family from Mecca. This tradition became the inspiration for Akhuwat’s business model 14 centuries later. The model focused entirely on providing capital for small businesses.

Akhuwat has been able to achieve sustained growth by meeting its expenses through donations, keeping operational costs to a bare minimum. In its formative years, a small donation by one of Akhuwat’s previous borrowers proved to be a game changer, altering the course of the organisation. It added new dimensions to Akhuwat’s business model and also raised questions. Could beneficiaries become benefactors? Could they become a source of funding? These questions were quickly answered with more voluntary donations coming in from more beneficiaries who all wanted to help the organisation that had helped them, and they did this with newly found self esteem. In some cases the contributions were as little as one rupee a day, but they were sincere. The eureka moment for the Akhuwat team had arrived; they had found a sustainable way to keep providing capital to grassroots businesses. Today this completely voluntary donor pool is so huge, it helps cover most of the organisation’s operational expenses and thousands of loan disbursements amounting to billions of rupees are made, benefiting millions of people. This colossal inventive undertaking in business financing started with just one loan to one family.

Different yet sustainable

Is Akhuwat working differently and how does it remain on a sustainable growth course? What seemingly appears implausible is based on an unconventional sense of purpose and responsibility.

Keeping operational costs low requires innovation and simplicity and this is what is practiced in the hundreds of Akhuwat offices across Pakistan. Offices typically have floor seating for everyone. No furniture, no air-conditioning, no office vehicle pool (except for bikes for loan officers) and a bare minimum number of facilities characterise Akhuwat offices.

HR costs are kept low through a strong system of volunteers and a formal internship programme. While the operational expenses are met through donations, the credit pool grows though Qard-e-Hasna (a goodwill loan). It remains intact because of the very high rate of recovery (currently 99.85%).

Mosques and other places of worship – churches and gurdwaras – are used for most public activities, including loan disbursement ceremonies. These ceremonies are at the heart of Akhuwat’s vision. Attended by all qualified borrowers, their guarantors and Akhuwat representatives, they help imbue a sense of responsibility and social collateral. This relates to the concept of physical evidence – a key element of the extended marketing mix to manage and market services. Akhuwat’s microfinance facilities are available to all regardless of race, religion and ethnicity.

Akhuwat focuses on small businesses and urban communities with typical loan disbursements amounting to a few thousand rupees only, but enough to start a small venture. The appraisal process includes facilitating borrowers through professional advice about how to start and manage a business. The organisation remains strictly vigilant in terms of its expansion strategy vis-à-vis its capacity limitations. There is no leeway in the appraisals, as this could lead to high loan defaults which would add to the costs of the organisation. Another characteristic of Akhuwat is that there are no barriers in terms of allowing others to copy the model. In fact, the organisation encourages anyone and everyone to copy the model in their own field anywhere in the world. Remaining true to the instigating spirit is all that is required.

The impact

Today many destitute borrowers come to Akhuwat, take loans, start their business and repay their loan without interest. The contribution of this inventive social enterprise to the national economy and entrepreneurship may be undocumented but cannot be disregarded. Its impact on the livelihoods of thousands of small entrepreneurs is immense. A simple answer by a borrower speaks volumes. When asked what difference did a loan of Rs 10,000 make to her life, she replied: “Previously, my children could only eat one roti at night, now they eat two.”

Muhammad Talha Salam is a faculty member at the FAST School of Management, Lahore. talha.salam@nu.edu.pk