How Skepticism is Overcome in a No Interest, No Collateral Loan Program

Feb 10, 2023
10 min read

2021 Ramon Magsaysay Awardee, Pakistan

Despite giant leaps in technology and socio-economic advancement, mankind has still been unable to tackle one of the most ancient ills - poverty. In Pakistan alone, the 5th most populous country in the world, one in four people live in poverty and they are deprived of the basic necessities including food, water and shelter. This is the quest that gave rise to Akhuwat’s philosophy and pursuit towards creating a poverty-free society, to provide these individuals with an improved quality of life, a reignited sense of hope.

Eradicating poverty requires a collaborative effort on the part of the state, civil society and non-profit sector. In essence, Akhuwat’s efforts hope to question current economic notions of “doing business with the poor” or seeing the poor as high-risk borrowers and charging them exorbitant interest rates as high as 40%. Its objective since its inception remains to create a poverty-free society built on the principles of compassion and equity by using interest-free microfinance as the primary tool to bring that vision to life.

Contrary to the skepticism on part of the economists, academics and pedagogists who have tried to defy Akhuwat’s model by using logic and economics as a metric have been proven wrong given the remarkable success of Akhuwat. Today Akhuwat by the grace of God, is the world’s largest interest-free microfinance organization having disbursed loans amounting $800 million (PKR 200 billion) to over 5.5 million individuals across Pakistan.

Microfinance as a tool for poverty alleviation

At present, one of the most effective approaches to poverty reduction in the field of development is the use of microfinance. However, one of the setbacks of the most prominent microfinance and finance institutions was undeniably the charging of hefty interest rates and in the case of banks, expecting the poor to be able to pay collateral against a loan they wanted to acquire from the bank. The charging of interest proved to be a barrier for two main reasons in Pakistan;

First, under Islamic law, interest or riba is prohibited and therefore a sin in the eyes of most Pakistanis. Secondly, even those who receive interest-based loans were unable to return it because of the increased burden of interest, which ironically, further trapped them in the vicious cycle of poverty.

The story of Akhuwat

Akhuwat’s model derives itself not just from practical experience, but also the Islamic faith that forbids interest. While Akhuwat is proud of its interest-free microfinance operations, in the end, it is, for us, a means to an end and not an end in itself. The end goal being a society where all the ‘haves’ form a bond of brotherhood with all the ‘have nots.’ The philosophy and vision of Akhuwat are derived from the teachings of the Holy Quran, Islam’s Holy book and the life of Prophet Muhammad (PBUH). The four guiding pillars on which the organization has been built are: Iman (faith), Ihsan (to do beautiful things), Ikhlaas (sincerity in intention and action), and Infaq (giving in God’s way). These pillars ensure transparency, compassion and accountability at each level of the organization and are the essence of what Akhuwat is. All these pillars combined make Akhuwat (or Ikhwa) which is the bond of brotherhood.

What sets Akhuwat apart from other microfinance organizations is that it provides Qarz-e-Hasan (beautiful loan) i.e., interest-free loans to its beneficiaries. These loans encompass the spirit of 'Infaq' which is giving in the way of the Almighty without expecting any material reward in return. Thus, through these interest-free loans, beneficiaries have the ability to establish their small-scale businesses without having to incur any interest. The interest-free loans given by Akhuwat range from $100 to $1000.

The following unique points of Akhuwat aid in erasing the doubts in the minds of the skeptics while also giving them a chance to witness Akhuwat’s extraordinary success come to life:

  1. Qarz-e-Hasan: Benevolent or interest-free loans from $100 to $1000.
  2. Family loan: Loans are given to the household; both male and female members from the household co-sign the loan and are jointly responsible for repayment. The Akhuwat model empowers female members of the borrowing household as a decision-maker yet adopting an element of respect for the local culture and tradition.
  3. Use of religious places: Using religious places for social guidance, training and disbursements of loans is a distinctive feature in Akhuwat’s practices. This provides an avenue for transparency, participation, accountability and awareness amongst local communities.
  4. Converting borrowers into donors: To create reciprocity and a virtuous cycle, our borrowers are encouraged to donate whatever amount they can to Akhuwat or any charity of their liking.
  5. Revolving credit pool: Sustainability through creation of a permanent revolving credit fund.
  6. Public-Private partnership: Resources are given by state, philanthropists and corporates and the program is implemented by a civil society organization.
  7. Volunteerism: Inculcating a spirit of volunteerism in its staff, workers and volunteers alike who carry forward the message of Mawakhat.

Akhuwat’s interest-free products aims to alleviate poverty by providing loans for different purposes. Thus, there are 8 loan products that are offered by Akhuwat, each of which serves a different purpose with the intention of solving a different root cause of poverty. These products include:

  1. Enterprise Loan: To establish and grow small-scale businesses.
  2. Agriculture Loan: Given to farmers or tenants working on a small scale.
  3. Liberation Loan: For those borrowers who have been caught in debt and need to be relieved from loan sharks.
  4. Housing Loan: For the renovation, construction and repair of the houses of deserving individuals.
  5. Education Loan: For highly deserving students with great academic results belonging to low-income and deserving families.
  6. Health Loan: For those belonging to low-income families, suffering from serious ailments or health crises.
  7. Marriage Loan: For families parents who cannot afford to arrange funds for their children's marriage.
  8. Emergency Loan: For families that are in need of financial assistance as they have undergone a crisis.

Despite the varying loan products Akhuwat offers, 85-90% of Akhuwat’s beneficiaries opt for the enterprise loan for their small-scale businesses. This is largely because the poor and needy primarily rely on entrepreneurial ventures and small-scale businesses as a source of income as they are easy to initiate and operate given their lack of academic or skill-based expertise.

A response to the skeptics

Akhuwat has often been subjected to skepticism and termed too idealistic in its approach. Akhuwat’s philosophy does not follow any economic teaching, nor is it easily justifiable through the lens of logic and reasoning. It is rather built on the goodwill of its donors, the trustworthiness of its beneficiaries, the spirit of volunteerism of its staff and above all on a resolve to make this world a happy place to live.

As per the principles of market economy and modern-day economics, people are considered as inherently self-interested individuals. On the organizational front, the aim is to maximize market share, profit and growth against the backdrop of ruthless competition. In stark contrast, Akhuwat’s philosophy is that of an economy of solidarity and reciprocity. Where self-interest is replaced by selflessness and sacrifice. It is based on the model of brotherhood and on the assumption that every individual has the capacity to care for and uplift others alongside themselves. On the micro level, current economic models see the poor as inherently risky borrowers, and therefore deserving of higher interest rates against greater levels of collateral. Akhuwat challenged this by arguing it was actually the poor who ought to be charged zero interest as they are already trapped in the vicious poverty cycle and had the least amount of disposable income to pay back the interest, let alone the loan itself.

Through its model’s success, and its extensive loan process (exhibit 1), Akhuwat has not only been able to successfully help 5.5 million individuals, but also maintain a repayment rate of 99.9% through timely monthly installments. With more than 800 branches in 400 cities across the country, Akhuwat has around 700,000 active loans at the moment. The values and organizational culture have been crucial in maintaining and sustaining the organization over the years. This is an ode to the power of Mawakhat, of trusting the poor, and creating a product that suits their needs.

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Exhibit 1

One of the points raised was that without earning through interest, Akhuwat wouldn’t be able to cover its operating costs. However, these doubts were also disproven. Through creating a culture around brotherhood and selfless giving, Akhuwat was able to extensively engage in volunteers which cut down its operational costs. Additionally, religious places were used as disbursement centers for loans with minimal infrastructure and furniture for which reduced costs and helped in connecting better with the borrowers by adopting a modest approach. Thus, the doubts that were in the minds of those skeptical of Akhuwat’s sustainability were cleared as Akhuwat envisioned a model beyond the realm of logic and economics.

The following table explains how Akhuwat meets its operational cost:

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Furthermore, the sustainability of the organization had also been questioned because of its investment model which is based on a revolving credit pool. Over the years Akhuwat has established a loan processing system that allows no loopholes, thus maintaining a recovery rate of 99.9%. Moreover, almost 60% of our borrowers are also active donors that carry forward the cycle of reciprocity. When it comes to donations, the borrowers donate money out of the spirit of brotherhood without any compulsion. Lastly, Akhuwat disburses loans to a family. Both the female and male heads of the household are required to be signatories while receiving the loan. This maintains transparency with accountability but at the same time empowers the household as a family unit and empowers female members as the decision-making entity.

What lies ahead

Akhuwat is not just an organization or a microfinance institution but a marvel of empathy, compassion and entrepreneurial spirit. We, as entrepreneurs try to find new solutions to existing problems, by challenging existing paradigms and norms and venture into the road less traveled and envision a new and improved world. In a world where placing trust in the poor and taking a risk on them is worthwhile. Akhuwat placed its faith in humanity and in the power of giving. At its core, Akhuwat is a trust-based model. By giving non-collateral loans to individuals considered high risk and with a return rate of 99.9%, Akhuwat has been able to convert the vicious cycle into a virtuous cycle.

How is it possible to plant the seeds of love and reap hate? Love begets love. Simply put, we believe that happiness comes from giving and helping others. The end goal being to create a beautiful world in which every person is given his/her rights and carries out responsibilities with beauty and sincerity.

Akhuwat proves that economics or logic is not what drives service to humanity but rather compassion, selfless service, and above all, empathy for the poor. Every journey starts with a single step and every action makes a difference. We are blessed and honored to say that Akhuwat has proved to be that spark of hope for millions of people across Pakistan. With time, Akhuwat is hopeful that this torch is carried further and shines brighter with the days that are to come impacting more lives and liberating the poor from the chains of poverty not only in Pakistan but the entire world.

MUHAMMAD AMJAD SAQIB is a visionary who founded one of the largest microfinance institutions in Pakistan, servicing millions of families. He received the Ramon Magsaysay Award, Asia's premier prize and highest honor, in 2021 for his "intelligence and compassion that enabled him to create the largest microfinance institution in Pakistan; his inspiring belief that human goodness and solidarity will find ways to eradicate poverty; and his determination to stay with a mission that has already helped millions of Pakistani families."