Novel approach: Interest-free lending to poor surprises ‘the entire world’

Published: January 25, 2013
Akhuwat has shifted to the group lending model for the last one year. In this model, borrowers living in the same locality become each other’s guarantors, thus ensuring a high recovery rate. PHOTO: FILE

Akhuwat has shifted to the group lending model for the last one year. In this model, borrowers living in the same locality become each other’s guarantors, thus ensuring a high recovery rate. PHOTO: FILE


Microfinance, as we know it, can possibly be expensive in Pakistan, as interest rates charged by microfinance institutions hover around 30%. While the worldwide consensus tends to be in favour of lending to the poor through for-profit microfinance institutions, a novel microfinance model has worked successfully for over a decade in Pakistan that has baffled microfinance experts all over the world.

Based on interest-free lending to the people living below the proverbial poverty line to help them set up or expand their businesses, the non-governmental organisation, Akhuwat, has already disbursed over Rs3.3 billion to 231,335 families all over Pakistan since 2003.

“We met representatives from African countries in a recent conference in Dubai, who asked us to set up an interest-free microfinance institution in Africa. Poverty is an endless cycle, which gets worse because of interest-based lending,” said Abubakr Siddique, Chief Coordinator of Akhuwat, while speaking to The Express Tribune in an interview.

Akhuwat gave the first loan of Rs10,000 in 2003 to a woman in Lahore. She paid it back in instalments in six months instead of one year. That motivated Dr Amjad Saqib, elder brother of Siddique, to set up a fund under the banner of Akhuwat with the help of his friends and acquaintances, which lends money to the poor to help them become self-reliant.

Today, Akhuwat operates in 105 cities and towns across Pakistan through 153 branches. The number of its active loans is 104,600 while the outstanding loan portfolio is over Rs1.1 billion.

Many of Akhuwat’s 3,500 donors belong to the corporate sector, according to Siddique. But up to 90% of donors are individuals, most of them being part of the salaried class, he adds. The average size of a donation ranges between Rs1,000 and Rs5,000.

“We don’t accept donations from any international body. The concept of Akhuwat is that if the haves of our society help the have-nots, we can all prosper collectively,” he says.

The average loan size of Akhuwat is between Rs12,000 and Rs15,000 while the maximum loan limit is Rs50,000. Notably, the recovery rate for loans of Rs3.3 billion that have been disbursed so far is an astonishing 99.83%.

Siddique attributes the high recovery rate to the trust factor that Akhuwat develops with its borrowers through several means. For example, Akhuwat operates through places of worship – mosques and churches – which results in enhanced community involvement, leading to on-time payment of instalments.

Secondly, Akhuwat has shifted to the group lending model for the last one year. In this model, borrowers living in the same locality become each other’s guarantors, thus ensuring a high recovery rate.

For instance, if six people approach Akhuwat for micro-financing, three of them become borrowers while others become their guarantors. Once the loan is paid back, the guarantors become eligible to be borrowers while the first group of borrowers assumes the role of guarantors.

These borrowers need not necessarily take up loans for a joint business. Neither do they have to be family members or relatives to acquire micro-financing.

“The reason our recovery rate is so high is that we trust our borrowers. The rich may default on a loan. But the poor, who borrow to set up or expand their businesses, don’t ever default, unless there’s some unforeseen event,” he says.

The majority of Akhuwat’s borrowers is between 25 and 30 years of age, according to Siddique. Although the payback time is determined on the basis of the borrower’s business, it is generally between 12 and 18 months. With 81,681 borrowers, the percentage of female entrepreneurs is 35.3%.

“Akhuwat is taught at Harvard, Princeton and Tufts universities in the United States, and in Oxford University in the United Kingdom, as a case study. Two Harvard students come here every year to learn about Akhuwat,” he says, proudly. “Our interest-free lending method and a high recovery rate have surprised the entire world.”

Published in The Express Tribune, January 25th, 2013.

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Reader Comments (33)

  • Mirza
    Jan 25, 2013 - 1:58AM

    I am moved and speechless. That is how God fearing people can help poor and make a difference. There is a real religion and there are political exploitation of religion. Thanks for the news I am sure some of us would help the organization and consequently the poorest of the poor in Pakistan.


  • Asif
    Jan 25, 2013 - 10:47AM

    I and my family were also very impressed and moved by Akhuwat initially and we even became major donors to them. But soon we found that this is not what it is made to be. It is a bit of a scam and somewhat like a pyramid scheme. Not for personal gain but the pyramid scheme is in the giving setup. I fear that we are being set up for dissappointment. Sad because they are doing it in name of religion.


  • Saeed
    Jan 25, 2013 - 11:33AM

    This is wonderful news, may God bless the organization and its founders. Unlike other micro finance which are based on exorbitant interest charged to borrowers, rendering the very purpose moot, Interest free loans is truly the way forward, and these people deserve recognition for their good work. .


  • Kh
    Jan 25, 2013 - 12:07PM

    Please dont pass a judgement untill you can tell us how its a scam… Do u think harvard students will come to see the scams as case studies


  • BlackJack
    Jan 25, 2013 - 12:57PM

    Very interesting. Can someone help me understand how the organizational costs are managed if there is no interest earned from the loans? Or is part of the donated capital also invested in return-yielding instruments? Would be grateful for a reply.


  • Afzaal Khan
    Jan 25, 2013 - 2:07PM

    Nice to know another place I can donate to. All pakistanis if we can help other pakistanis we will all reap the rewards, don’t look at govt or any other just help each other out, do it for Islam, if not for pakistan, if not for your own community, whatever your reason be just help ppl.


  • Muhammed Usama Aziz
    Jan 25, 2013 - 3:12PM

    To all Shariah haters, this is what sharia can do if implemented in true spirit. Please have a good understanding of shariah laws before criticizing them!!


  • shariq
    Jan 25, 2013 - 3:30PM

    could you please elaborate further you may send me an email for your concerns please:

    [email protected]


  • Singh
    Jan 25, 2013 - 7:08PM

    Micro financing first started in BanglaDesh.


  • Z. Khan
    Jan 25, 2013 - 7:55PM

    Very interesting and amazing in current scenario of Pakistan. In fact according to real teachings of Islam this is the correct way and should be encouraged. Most probably it can serve as guide line for real Islamic banking in future. Might be for some it is news but let me share it that such a system is in practice since many years in international Ahmadiyya community, though at small scale and that too only amongst community members. Few non community members also get loan for studies and other purposes. Guarantor in all the cases is needed.
    Concept of Akhuwat is workable only where you posses high moral traits. The whole system works on trust, honesty and fairness. Pakistani nation has potentials in many fields provided these can correctly identified and channelized in right direction.


  • John B
    Jan 25, 2013 - 9:06PM

    It is a feel good charity with no long term continuity. The banking capital without protection against depreciation through inflation and default is the worst kind of lending capital. It is no more better than Alms and needs continued infusion of capital from donors, like a pyramid scheme.

    A non profit banking system based on donor capital and borrower interest against inflation with access to Central Bank’s discount window is the best.


  • A Khan
    Jan 25, 2013 - 11:14PM

    The emphasis here is on “interest free” as opposed to “micro-financing” @Singh:


  • Parvez
    Jan 26, 2013 - 1:26AM

    If the more fortunate lend money to help the less fortunate, who then pay it back…………then the more fortunate have received their ‘interest’ except its not in a monetary form. Does it always have to be about money ?


  • Razi
    Jan 26, 2013 - 1:28AM

    I met Dr Amjad some weeks back and he really is doing amazing work. The cynics would try to put down everything, but let’s not be taken in by the armchair naysayers.


    Akhuwat has two types of organizational streams running in parallel: ‘hired management’ and ‘volunteer management’. Hired staff runs the operations while volunteers too look after some operational aspects of the branches but also act as mouth piece and event organizers of Akhuwat. They have kept costs very low because they do not have plush offices or expensive human resource but operate from mosques, shrines and churches. This saves rental costs. The head office is very sparse and there is hardly any furniture; people sit on the floor. An important lesson is that volunteerism is a solution to high operational costs. There was once a 5% fee charged to clients only to cover operation costs but I am not sure if it is still charged. The organizational set up has been kept very simple. Legal aid is provided to the needy by a team of law students on a voluntary basis. The organization does not own any vehicles with staff using local transport or their motorbikes.

    Akuwat’s model is basically the welfarists’ model which recommends low financing cost or subsidised financing, but they have gone one step ahead and eliminated the cost of financing. The fear of erosion of funds, most frequently raised against the welfarists, is absent in this model as the repayment is about 99%. This approach has been rightly called “the Theory of Communal Vability”.


  • Raza
    Jan 26, 2013 - 3:51AM

    There are a lot of people speculating here without any knowledge; so my 2 cents to enlighten a bit. I am not a representative or employee of Akhuwat; but I have studied microfinance at college and have had the opportunity to visit Akhuwat HQ and meet a few of their reps to understand their model. As far as my understanding goes,
    1. Unlike most microfinance institutions (MFIs), Akhuwat does not keep field offices, but utilizes masjids in neighborhoods to do their weekly collection and client interactions; hence, their operating costs are significantly lower than other MFIs due to reduced premises/fuel costs.
    2. Akhuwat has a very high repayment rate of around above 99 % I believe; hence, it hardly ever has to put up with bad debts or its provisions, as is the case with standard financial institutions.
    3. Repeat: their loans are actually interest-free due to religious reasons. This is actually a pre-req for any Sharia-compliant financial model, regardless of whatever the cynics may proclaim. However, according to Akhuwat reps, the clients are welcome to give a gift once they’ve completed their installments (this is not necessary or fixed beforehand). As any student of Islamic finance will tell you, the fixed arrangement is prohibited, not the concept of time value of money.
    4. Since Akhuwat is non-profit, it really only needs to cover its operating expenses (which are relatively low from point 1); that is where the successful clients’ token gifts and donors’ donations come into play.

    Akhuwat reps can probably elaborate in greater detail, but as far as I was able to see, its authentic and successful. We should appreciate/support what is an innovative and needed system designed to actually help poor people instead of just making promises. For the skeptics, visit the Akhuwat website and see the annual reports. Its not a scam!


  • Awais
    Jan 26, 2013 - 10:52AM

    @John B:
    Your point is valid if you are talking about long recovery periods. Depreciation through inflation is usually not a problem in short term loans. The guaranters method of ensuring recovery (as stated) doees not require continuous infusion. Donors here are for expanding the capital to increase the number of beneficiaries as opposed to regular interest-based capital enhancement schemes.


  • ishrat salim
    Jan 26, 2013 - 11:22AM

    Good work…keep it yup..may Allah swt reward them…..


  • Toba Alu
    Jan 26, 2013 - 6:52PM

    Selling bread below the market price is very well possible if the oven is donated, the mosque provides the location free of charge to operate your oven and the seller is a volunteer. The donors have just created a revolving fund for charity and due to low operation costs and the high repayment ratio the fund will only slowly empty rather than quickly. New donations, mosques and volunteers are required some time in the future. If you want to grow your charity you simply need more donations. No magic at all. Wondering whether a collateral is required (heart of Islamic banking). I hope this NGO has checked whether all these donors have paid their taxes. As far as Islamic Banking is concerned there is not much of a difference, just changing names and a few other optical tricks. For those who don’t understand a small example. An Islamic bank loan for buying a car works as follows the bank buys the car for you and sells it at a higher-than-market price (loan) to you and the bank remains the owner until you pay the loan in full. What no interest? Btw there are other smart Islamic business models, just variations and certainly not charity. Who is fooling whom?


  • John B
    Jan 26, 2013 - 8:46PM

    @Awais: @Raza: and others:

    Microcredit (credit without collateral) is not a new thing and has been in vogue in various forms from churches, charity and private individuals. The present institutIonalization of microcredit is an alternative form of easy credit card in places where the system of tracking the borrower is limited. Traditionally the microcredit is operated by local money lenders and now the institutionalized microcredit institution are tapping into this market who offers credit at much lower interest rate (20-30%) than the local loan shark-basically credit card business without credit card.

    In the present form of no interest loan under discussion (friendly loans), once it is institutionalized (more than 50 borrowers) there is an inevitable need of overhead and as some sated above it runs into 5% at present. All volunteers are only good during inception time and after that a full time employee is needed and this is where the problem starts for it’s effectiveness.

    Even if the loan is only short term for 6 months, in a country where inflation is chronic, the money loses it’s effective purchasing power at the end of the day. I understand the sensitive issue of interest in Islamic society, but the fact remains that we live in a fiat currency world where inflation is part of the currency value and hence it has to be accounted for:- Interest or fee, which ever way one may call it.

    A non profit bank (credit union) with access to Central Bank discount window and charging a fee (interest) for loans to the shareholder borrower to meet the overhead is a better way for community development.

    Capital needs to be preserved or expanded for any system to survive. From what I understand that this system does not charge interest but charge the fee of 5% – essentially an interest. If the inflation is more than 5%, they are depreciating the capital from day one.

    I am not criticizing the effort but giving a suggestion for sustainability. I loathe the present system of euphemistically packaged microcredit financing system -modern day loan sharks.

    Microcredit is important for uplift of poor. It is done either by the state through social program or through private lending. Both the systems face the problem of inflation on a fiat currency world and both have overhead. Now how to account for these two factors- can any one honestly explain.


  • Raza
    Jan 26, 2013 - 9:03PM

    Islamic banking models are not charity; they’re real, tangible financial models, which you would know if you had actually studied them. The problem with random skeptics like you is that you dont actually bother to understand a system; you just look at the outer appearance and make conclusions. Islamic leases/loans may look like conventional ones, but it is Sharia-compliant for one simple reason: they do not have fixed interest charged. Removal of that interest component is the pre-req. Time value of money is NOT prohibited in Islam. Deferred sales for higher price is NOT prohibited in Islam. Go study Islamic finance before you just label it all as ‘optical tricks’.


  • Imran Ahmed (@IAgnikul)
    Jan 26, 2013 - 11:44PM

    @Toba Alu and your point is?
    All you have stated may be entirely correct but how does that take anything away from what Akhuwat is achieving which is helping low income businesses start or expand thus pulling some people out of the poverty trap while allowing willing donors to help society?
    Your second point about Islamic (actually Sharia compliant) bank loans is not relevant to this article or to Akhuwat. I do however agree with you on this one.


  • Shifa Shawk
    Jan 27, 2013 - 3:03AM

    @Singh: Grameen Bank in Bangladesh charged a much higher interest rate. For example, if normal bank rate was 15%, they would charge 20%. This lucrative model was replicated on a much larger scale in India by corporate sector and many farmers who borrowed from them committed suicide because they could not pay back.


  • Adnan
    Jan 27, 2013 - 5:31AM

    @John B, Without charging any interest, if the organization is receving 99.xx% of their money back, and keeping very little overhead, there is nothing stopping them to continue their operations. This is something the government ought to do, but fails to, and so private philanthropists jump in and help people. Akhuwat is a non-profit, and countless non-profit initiatives raise their own operating expenses separately.


  • Toba Alu
    Jan 27, 2013 - 6:06AM

    Islamic banking it is not charity, that is precisely what I said. Your own words: “They may look like conventional loans, but they are Sharia compliant.”. I don’t care whether they are Sharia compliant, just how much that loan costs me and on which terms. The difference between the market price of the car and the Islamic car loan is quite similar to interest in normal banking. You may call it differently but it is just playing with words and concepts. In other words optical tricks.


  • Toba Alu
    Jan 27, 2013 - 2:59PM

    @Imran Ahmed (@IAgnikul):
    Thks, my earlier reply to Raza has not been posted maybe lost in cyberspace. My point is very simple there is no magic in the Akhuwat model. In my view the article is suggesting at least to me that there is something very unusual and that some sort of a magic bullet (to help the poor) has been identified. Sorry that is not the case. It is just nice charity. Islamic banking is relevant because Akhuwat is doing their charity business on the basis of Sharia (suggesting that not asking interest is somehow better than western banking).


  • Imran Ahmed (@IAgnikul)
    Jan 27, 2013 - 6:39PM

    @Toba Alu:
    My views are almost identical to yours and I share your scepticism of “Sharia Compliant” as holding some magic higher morality or merit or even being synonymous with “Islamic” ; Akhuwat IS a nice charity which is doing good and should be encouraged while not hiding behind pious deceptions.


  • John B
    Jan 27, 2013 - 7:29PM

    You are not addressing the issue. The default of 0.001% is still a loss and without interest the capital is further depreciated against inflation. If an organization raises the operating cost separately then it needs continued infusion of funds for survival. So, in reality it is a charity and charity has an upper limit of reach and needs continued infusion of funds-a pyramid scheme, like any charity : it is not banking.


  • Jan 27, 2013 - 9:44PM

    I think in that model they are charging interest?
    In this case they are not charging any interest.


  • Jan 27, 2013 - 10:05PM

    @John B:
    Whether it is charity or a banking concept, till the time it helps the poor in an organized way , it is good . I think whatever loss happens because of so called depreciation/ or loss of interest, that amount is compensated with donation by other people. So this way I think they can continue their mission of helping the poor segment of the population.


  • Raza
    Jan 28, 2013 - 5:34AM

    @Toba, Imran
    I agree with you that the conventional and Sharia-compliant products may look similar, but there is one important difference (provided the Islamic FI is legit); the removal of an interest fixed component, which is not allowed as per Sharia. If that doesn’t matter to you, that’s totally fine. But it matters to some people; so for those people, it does have higher morality and it is better, even if it is priced similarly. Study Islamic finance; and you will see how the similarly-priced products become permissible as per Sharia due to removal of the fixed interest component (repeat: time value of money is permitted in Islam). As far as Akhuwat goes, they’re afloat as a result of excellent repayment rate, smart cost-cutting, and filling of the gap with donations (both clients and outsiders). So yes there is no magic bullet but they are staying away from the interest rate component which is an industry norm for micro-credit; which is commendable.


  • Toba Alu
    Jan 28, 2013 - 8:54AM

    Your point of helping the poor based on charity just maintains the status quo. If Pakistan wants to move in a different direction different models have to be developed tailored to your own diverse social-cultural, economic, and institutional setting. The western social security system before WWII was quite similar to that of Pakistan now. All based on charity, some on religious grounds some on humanistic grounds. The rich and privileged are throwing peanuts to the poor on their own terms and some hope that they will be rewarded in the afterlife for such good deeds, others do it just for a good feeling here and now. If you really like a structural change then the recipes are not so difficult to identify. The real problem is that the rich and privileged (and others) rather keep a charity based social system keeping labor costs low, prevent social change, keep everybody within their class boundaries. You can extend the last sentence with a lot more issues. I presume you are very familiar with all these issues. The list is long. Changing the status quo in a peaceful manner is difficult but up to Pakistanis only. In my view increasing charity is not part of it (raising taxes, rule of law, education, etc. etc. is). Btw foreign aid is having a very similar effect i.e. maintaining the status quo and should therefore be stopped (with the exception of emergency aid) in a structural model for change at least.


  • Abubakr Siddique
    Feb 1, 2013 - 1:08AM

    Dear All,
    Many thanks for all kind comments. Although you all agree about interest free concept of Akhuwat, but meeting operational costs is creating confusion into your minds.

    After its inception, initially for first two years very few loans were given to borrowers and their operational cost was being born by its BOD. But after its first financial audit, it was deduced that each loan costs around 7% to meet its operational need. So having still a doubt of charging interest, Akhuwat started charging only 5% as service charges i.e less than actual cost. At that time Akhuwat was operated by two accounts, one was credit pool (where all donations for interest free loans were being deposited) and second was operational pool (where 5% fee and donations for operational expenses were being deposited as Akhuwat has donors for operational expenses too). As number of loans increases, operational expenses increases too. Then Akhuwat BOD decided to find a better solution for not charging a single penny out of any loan. Atlast few years back, by the grace of Almighty Allah, Akhuwat stopped charging a single penny rather than charging only Rs.100 for application form just to ensure the seriousness of applicant for required loan.

    Now the main question arises, how Akhuwat manages its operational cost then? Before implementation of revoking of 5% fee,. Akhuwat started asking its borrowers whether they were satisfied with their living now, and everyone answered with joy that interest free loans had changed their lives 360 degrees and their businesses were going too good. So then Akhuwat team asked them, if they think Akhuwat is doing good so do they would like to donate Akhuwat as per their capacities to become its donors i.e a big respect to become donor for community well being. Everyone unanimously said “YES”. And now Akhuwat has an honor that its borrowers who are also its donors give donation of Rs.200 million per annum to meet its operational cost.

    Do ask if more info is needed. My email I.D is: [email protected].



  • Imran Ahmed (@IAgnikul)
    Feb 3, 2013 - 11:01AM

    @Abubakr Siddique:
    I stick to my point that Akhuwat is a highly recommended charity which can be a balm to the poor. The underlying problem to be addressed is the lack of a banking system for extending credit at fair terms to encourage development. The reader should ponder that Central Bank interest rate in UK is 0.5% USA 0.25% and in Switzerland 0.0% – should we be considering these rate usurious and riba? Pakistan’s rate is 9.5%.


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