Jan 14, 2010

Interest-free micro-finance is possible .... a lesson from Pakistan

While most of you were shocked to learn that the micro-finance insitutions (MFIs) are on a 'looting' spree, extracting their pound of flesh in the name of development, there were some (ostensibly involved in micro-finance business) who were angry with me for 'not understanding' the compulsions of their business model.

They feel they are doing a great service to mankind for lending small amounts to poorerst of the poor at an exorbitant interest rate of 24 to 26 per cent. And they have stories to share about the positive change the small loans have brought to the lives of the poor. After all, how can I be so cruel to them (by them, I don't mean the poor, but the real beneficiaries -- the people earning their livelihood from lending through micro-finance).

I am glad my track of what I consider as the micro-finance swindle has brought into focus a lot of hitherto little known facts. I have learnt a lot from the exchanges that followed, and without exception I have posted all the comments that I received. Meanwhile, here is a letter that I received from Pakistan that I am not only going to share with you, but I feel is the model of micro-finance that India needs to urgently adopt.

I hope the Reserve Bank of India (RBI) is listening, and so are our brand of young leaders. Please esnure that those who are unable to follow, and have problems shifting to this model, should be asked to quit the MFI sector. There should be no scope for entertaining any apology. After all, we are playing with human lives.

Dr Amjad Saqib provided a loan of Pakistan Rupee 10,000 to a widow for buying a sewing machine in 2001. She eventually set up a small home-based boutique and returned the entire amount in the given time. Her success and return of the entire amount within the promised time-frame led to the creation of a pool of money for the poor – then recovering it so to recycle indefinitely. The organization soon gained credibility and gradually people offered more donations and lent more money to more groups on a guarantee basis with monitoring and evaluation at regular intervals, ensuring accountability and support to the borrowers.

This was the beginning of a unique and true concept of micro-finance. "Akhuwat" -- as the micro-finance organisation is called -- has since then successfully opened 28 branches in 16 cities of the country. Its cumulative disbursement has exceeded PKR 600 million and the number of beneficiaries has exceeded 50,000 in the past eight years with a phenomenal recovery rate of 99.8% which adds to its tremendous achievements. You can know more from www.akhuwat.org.pk

Imagine, the poorest being provide interest-free small loans !

Sehyr Anis, a volunteer with "Akhuwat," has sent me this moving letter. I am posting relevant extracts:

Dear Mr. Sharma

This is in response to your letter dated January 05, 2010. addressed to Mr. Lokesh Singh. Let me first take this opportunity to appreciate your vision of a low cost or interst-free micro-credit system for the poor and needy, which shall pave a revolutionary path towards an economically and socially prosperous society.

It is highly unfortunate that micro-finance organizations all over the world have become a victim of capitalist practices where market principles dictate the objectives rather than principles of social welfare. Sky-rocketing interest rates, necessitated by the high transaction costs incurred in micro-finance, only hurl the poor in the vicious cycle of poverty rather than improving their minimum living standard. I believe, before the situation worsens, it is the right time to reflect if micro-finance as a business venture rather than a philanthropic endeavor can sustain for long. The only survival for micro-finance is to make it into an extremely low-cost or interest-free practice for all times to come and emancipate the poor from the clutches of exorbitant interest-rates.

I myself am associated as a volunteer at an interest-free micro-finance organization "Akhuwat", based in Pakistan, whose mission is in consonance with your ideals of micro-finance. Akhuwat provides an alternative, out-of-box solution to the on-going debate of exorbitant interest-rates now synonymous with MFIs around the world and has been able to successfully achieve what its critics have deemed as impossible. "Akhuwat" is the first of its kind and teh only interst-free micro-finance NGO, successfully operating and growing enviably and nearing sustainability.

It was formed in the year 2001 by Dr. Amjad Saqib, its founder and Executive Director (amjadsaqib1@gmail.com), and till now has successfully opened 28 branches in 16 cities of the country. Its cumulative disbursement has exceeded PKR 600 million and the number of beneficiaries has exceeded 50,000 in the past eight years with a phenomenal recovery rate of 99.8% which adds to its tremendous achievements.

The premise of Akhuwat is interest-free loans (qarz-e-hasna) and its vision has been to foster a sense of common ownership and community among the borrowers and donors. It is the spirit of philanthropy and volunteerism and not profit-making that is the raison d'etre of its growing success.

It all began with an interest-free loan (qarz-e-hasana) of Rs. 10,000 provided to a widowed woman who did not believe in charity and wanted to buy a sewing machine to start a small home-based boutique. Her success and return of the entire amount within the promised time-frame led to the creation of a pool of money for the poor – then recovering it so to recycle indefinitely. The organization soon gained credibility and gradually people offered more donations and lent more money to more groups on a guarantee basis with monitoring and evaluation at regular intervals, ensuring accountability and support to the borrowers.

Akhuwat offers a diverse loan portfolio which reflects the economic needs of the community. All transactions take place at the local mosque or church where loans are promoted to the community after prayers, given out and collected. However, it is important to mention here that Akhuwat is not a religious organization. Having a mosque or church-centered structure provides an avenue for community participation and awareness and also creates a sense of good-will amongst people. Most importantly, this cuts organizational costs.

I believe if Akhuwat can achieve its mission to sustain and expand an interest-free micro-finance organization, this model can also be replicated around the world to help the poorest of the poor to realize their dreams.

I would like you to visit Akhuwat’s website or contact me or Dr. Amjad Saqib (copied in this mail) for more details.

With Best Regards
Sehyr Anis

7 comments:

Hari Batti said...

I don't know as much about this as I should, and I didn't read your earlier posts. I think there is a role for micro finance. It's a good thing. I'm not convinced it's the answer to the larger problems faced by many. I saw an article the other day that suggested that the high repayment rates that micro finance boasts about may be enabled, to a degree, by the availability of higher interest rate loans; in other words, when people can't pay back their micro credit loans, they turn to higher interest rate loans to help them do so. That seems problematic. Here's the link:
http://online.wsj.com/article/SB126055117322287513.html?mod=WSJ_hpp_LEFTTopStories

Delly News Blog said...

FINO is into designing and implementing innovative technology solutions - systems, services and networks - that will enable a greater range of financial services to reach the un-banked masses at a lower cost. After an established presence in the domestic market Microfinance Service Providers FINO's vision is to venture out to overseas market where the opportunities to serve the unbanked is enormous.

Anonymous said...

Dear Devinder,
A honest 'thank you' to you for the posting. It is heartening to understand a real story. Your focus on the shortcomings of modern microfinance (micro-CREDIT, to be specific) is appropriate. May I now elaborate the learning into a few bullet points ?
A. The Gandhian model of volunteerism is a well-established historic custom. Poeple are doing this without any fanfare or publicity. On the contrary, microfinance (may I be more comfortable to say - microcredit?) is NOW a specific banking service. The history of many of the microcredit institutions are in fact Gandhian model (I give a part of what I have - money; human resources; connections et al).
B. Credit is a discretionary service - I mean money-on-credit cannot be generalised as a free money, right ?
C.Many microcredit practitioners I have interacted with, are eager to reduce their costs - that would reflect in lowering of the cost to the borrowers. May I tell you that the ONLY issue I have of dissent with you that your words reflect infancy in the cost structure of microcredit. I would suggest you please to learn from the array of poverty programs across the World to assess for yourself the cost of delivery, the efficient ones? (Nevertheless, this is not to desist you of your focus, that is very important to me too).
C. Where and how do the AKHUWAT get its money from ? The supply side of the great institution is not touched upon. Please extend your note to cover the supply side of the institution.
D. I hope you would at anytime studied the Karnataka institution SKDRDB ? We have great instances in our country too !
Devinder, I must confess that I have huge admiration to your focus. I have just now written the longest mail of this year!
Regards,
R K

Sehyr Anis said...

This comment below is in response to the comment posted by 'RK'.

We Thankyou for showing interst in Akhuwat model.Community has become a source of continuing funding for Akhuwat. Akhuwat over the years through its transparency and accountability has gained soild credibility. Our funding is coming from individual donors, institutional donors, borrowers (which have gained economic stability through our micro-credit schemes)and now the government of Pakistan; in particular that of Punjab, has also shown interest in partnership.
Kindly let us know in case you need more information. We would be delighted to hear your views.

Best Regards,
Sehyr Anis

Sanjay Raj Singh said...

Mr. Sharma,

A question persists in my mind. How does this MFI Akhuwat sustain itself? Is it just with the donations from some altruistic individuals that moves this organisation? If yes, then I fear you are pretty much in deep waters here.

1. Speaking sensibly, what incentives do the managers have to disburse the funds to the really needy rather keep themselves or distribute among kiths and kins?

2. Again a Moral Hazard problem crops up. What would make the managers regulate or take interest in finding the progress of those who have been given loan? Its not their money. Thay can tinker with records and still show you that it is 99% successful.

I have many other questions. But please address these...

A concerned individual

Devinder Sharma said...

You may address this question directly to MFI Akhuwat. His email is given in the text.

Devinder Sharma

shahid said...

In India also we have this type of model, such as sahulat microfinance credit society , janseva interest free microfinance, al khair cooperative credit society. They all are providing interest free loans to them, small businessman.