KS1198 Case Number 2074.0

Akhuwat: Fighting Poverty with Interest-Free Microfinance

“As a philosophy, Akhuwat cannot fail; if the movement does not succeed, it will not be a failure of the principles and ideals that guide the organization. Failure could only stem from the waning strength of men and the weakness of their resolve but never from the lack of strength in the idea of Akhuwat itself.”

Dr. Amjad Saqib, Founder and Executive Director Akhuwat Pakistan

In July 2011, Dr. Amjad Saqib, head of Akhuwat, one of Pakistan’s largest microfinance organizations, sat on the carpet inside his office and looked outside the window towards the vast open sky, contemplating a decision that could potentially make or break Akhuwat’s future. In the last ten years, Saqib had led Akhuwat from being a philanthropic experiment to a fast growing non-profit microfinance organization with 70 branches across Pakistan. Now, Akhuwat had an opportunity to expand more rapidly than he had ever imagined.

“We had access to a large sum of money from the government and we wanted to double Akhuwat’s operations,” said Saqib.1 “I went to a very famous management guru, who also teaches at one of the world’s most prestigious universities, and told him that we want to go from 70 branches to 150 branches in three months. He told me that this was not possible and that we were preparing the perfect recipe for disaster: ‘You have managed to operate 70 branches in 10 years and now you want to double your size in three months? This is not possible,’ he said.”

But Saqib was convinced that Akhuwat’s unique business model had the ingredients for rapid expansion. He took a deep breath and started laying out a plan.

The Plight of a Widow

Akhuwat2 was created in 2001, out of the plight and desperation of a widow who had to nurture her four children without any support. Seeing no way out, she approached Saqib, who then worked with the Punjab Rural Support Program, which gave out small business loans in the rural villages of Punjab (a province in Pakistan). Saqib was deeply moved by the woman’s plight. Later as he met a group of friends over lunch, he expressed his desire

1 Author interview with Dr. Amjad Saqib conducted in July 2015 in Lahore. Unless noted, subsequent quotations from and attributions to Saqib come from this interview. 2The name Akhuwat is derived from the Arabic word “mwakhat” meaning brotherhood. This term took shape when the earliest Muslims and Prophet Muhammad migrated north from Mecca to the small town of Medina. The citizens of Medina formed an unusual pact of brotherhood wherein they willingly gave away half their wealth and property to the emigrants. This event is known as the “Mwakhat.”

This case was written by Ussama Ahmad Khan, HKS MPP 2016, in collaboration with Dick Cavanagh, Adjunct Lecturer in Public Policy, at the John F. Kennedy School of Government, Harvard University. HKS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.

Copyright © 2016 President and Fellows of Harvard College. No part of this publication may be reproduced, revised, translated, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means without the express written consent of the Case Program. For orders and copyright permission information, please visit our website at case.hks.harvard.edu or send a written request to Case Program, John F. Kennedy School of Government, Harvard University, 79 John F. Kennedy Street, Cambridge, MA 02138. for what would later become Akhuwat. During the conversation, it quickly became clear that one of the problems facing the poor was limited access to affordable finance. The solution was clear: easy access to interest-free loans.

Within a few days, Saqib went back to the widow and gave her an interest-free loan of Rupees 10,000 ($100) so that she could start a small business of her own. By successfully utilizing and returning the loan within a period of six months, she reinforced his belief that interest-free loans were a way to help people become self-employed and come out of poverty. Buoyed by the success of the first loan, Amjad collected donations from friends and family and soon their vision of interest-free microfinance started to take informal shape. Akhuwat was born with these friends forming the first Board of Directors and Saqib serving as the first Executive Director. Ms. Rehana and Ms. Tabassum were the first employees who were trained by Saqib and the three of them started working in a poor locality of Lahore.

In the initial years, Akhuwat was a philanthropic exercise to see how interest-free microfinance would fare. Over time, however, donations increased manifold with the momentum of the movement accelerating far beyond expectations. By 2003, donations to Akhuwat had reached Rupees 1.5 million ($15000). Consequently, Saqib decided to formalize the organization and registered Akhuwat under the Societies Registration Act of 1860. The first branch opened in the industrial area of Township in Lahore and soon operations began to expand.3

Akhuwat: The Context

By mid-2015, Akhuwat had over 350 branches all across Pakistan and had given more than Rupees 13 Billion in loans (US $ 130 m). It had over four hundred thousand active borrowers and was on track to give out its one millionth interest-free loan. One of Akhuwat’s notable achievements was the 100 percent loan recovery rate it had maintained throughout its 14-year operations.

By the end of June 2015, Akhuwat was the third largest provider of micro-credit in Pakistan with 405, 937 active borrowers, which was equivalent to 11.6% of market share. The largest micro-credit providers were the National Rural Support Program and Khushhali Bank with 589,807 (16.8%) and 492,950 (14.1%) active borrowers respectively. Among the non-government microfinance providers, Akhuwat was the largest in Pakistan with the highest number of active borrowers. The Kashf Foundation and Tameer Microfinance Bank Ltd. also had a significant percentage of market share in terms of active borrowers.4 Akhuwat however was unique as it was the only organization that did not charge interest.

In the micro-insurance sector, the National Rural Support Program and Khushhali Bank (both started by government) were the largest providers of micro-insurance with 896,963 and 539,854 policyholders. Akhuwat was the fifth largest micro-insurance provider with 405,937 policyholders, which was 9.7% of market share in terms of policyholders.

To date, many other organizations have started following in Akhuwat’s footsteps by providing interest-free loans but Akhuwat is the pioneer and largest organization that provides completely interest-free microfinance

3 Akhuwat, “What We Do,” www.akhuwat.org. 4 “MicroWATCH: A Quarterly Update on Microfinance Outreach in Pakistan,” Issue 36, Quarter 2, Apr-Jun 2015, http://www.microfinanceconnect.info/assets/articles/fd610dcd18076c879ec30ddb5c6bced2.pdf.

HKS Case Program 2 of 24 Case Number 2074.0 loans to consumers. (A list of some loan products of the two largest microfinance providers is provided in Exhibit 1.)

Dr. Amjad Saqib: The Story of a National Hero

Saqib was a medical graduate from King Edward Medical College, one of Pakistan’s most prestigious medical colleges. He entered the highly selective and prestigious Civil Service of Pakistan in 1985 and quickly rose to senior positions. Nearly 18 years later, in 2003 Saqib resigned, with the intent of dedicating himself to becoming a social entrepreneur and making a positive impact through Akhuwat–which had already been launched in 2001. His resignation sent ripples in the civil service community as such a decision had been unheard of. Saqib, however, was not afraid of taking such a drastic step in his professional career. For him, “it was all a part of a universal grand design that guided me towards the right decision.”

The salient feature of Saqib’s public service career–one that perhaps changed the course of his life–was his last assignment, a five-year stint as general manager of the Punjab Rural Support Program (PRSP) from 1998 to 2003. It is there that he had the opportunity to closely examine the various initiatives of poverty alleviation, education management, participatory development and conventional microfinance. And this made him realize that “something different had to be done.” The desire to do something more effective for the poor spurred him to conceive and introduce an interest-free microfinance model based on the idea of “Mwakhat” or brotherhood.

Saqib became a published author of six books including the “Journey of Akhuwat,” a memoir of his experiences through the different stages of Akhuwat’s development. An inspiring public speaker, Saqib has often appeared on television shows, seminars and has held a strong social media presence. Due to his charismatic personality and eloquence of speech, he has often been called in as a guest speaker to address large audiences. He was also appointed as Vice Chairman for Punjab Educational Endowment Fund (PEEF) by the Chief Minister of Punjab. PEEF is the largest fund created by Government ever to provide free education to poor students. In 2010, he was awarded the Sitara-e-Imtiaz (one of the three highest civilian awards) by the President of Pakistan on account of contributions made for social development and poverty alleviation in Pakistan.

Pakistan

Pakistan gained independence from British India in 1947. In 2014, as the sixth most populous country in the world, Pakistan was home to nearly 200 million people.5 An overwhelming majority of the population was Muslim (97%) followed by Hindus and Christians. Pakistan’s economy was mostly agrarian with a majority of the population living in rural areas. In its 68-year history, Pakistan saw multiple martial laws and dictatorships with the first civilian democratic government transition occurring in 2012. With weak infrastructure and lack of social safety nets, most low-income individuals turned to informal—and often exploitative—lenders during financial emergencies.

5 United States Census Bureau, U.S. and World Population Clock, http://www.census.gov/popclock/.

HKS Case Program 3 of 24 Case Number 2074.0 According to the Qur’an,6 charging interest on any loan transaction is forbidden. And according to most Muslim scholars, any premium on a loan is classified as interest regardless of the amount. The Qur’an describes a loan as a Qard-e-Hasan or the “beautiful loan” which means that a loan can only be given without interest. In essence, a loan cannot be used as an instrument to earn profit by the lender. There are other equity-based instruments available that can be used if someone wants to earn profit. Despite this Qur’anic injunction, most banks both at the state and the private sector in Pakistan charge and receive interest on loans. More recently, there has been a rise in “Islamic Banks” not only in Pakistan but other Islamic countries that offer equity-based financing such as Musharika (joint venture financing), Mudhariba (venture capital financing) and sukuk (Islamic bonds). (For a summary of major Islamic finance products, see Exhibit 10.)

In 2013, almost 12.5 percent of Pakistan’s population lived below the $1.25 per day poverty line and according the UNDP Multidimensional Poverty Index, 45.6 percent of the population was living in multi- dimensional poverty.7 With more than 40 percent of the population above the age of 10 and illiterate as of 2013,8 access to consumer loans was limited due to inability to open bank accounts and fulfill all legal requirements. Without a basic education, it was difficult for citizens to complete the necessary steps such as writing their name and signatures in order to open a bank account. In the absence of formal access to consumer credit, many individuals turned to private lenders who charged exorbitant interest rates. Unscrupulous lenders severely abused individuals who failed to pay back loans. There were numerous documented incidents of abuse, violence, and harassment including forced sex, child labor and physical torture by lenders in instances of failure to pay back the loans.9 According to a report by the 2014 World Slavery Index, there were as many as 2 million enslaved individuals in Pakistan. Most of this enslavement was in the form of bonded labor, which occurred when debtors were unable to pay their loans, and thus forced to do work for the lender. With weak law enforcement many of these crimes went unchecked. (For a map of Pakistan, see Exhibit 12.)

Akhuwat: The Idea

Saqib had seen first-hand the causes and consequences of poverty in Pakistan. Having worked for public and private sectors and having closely observed the lifestyle and social dynamics surrounding poverty, he concluded that being poor was not only limited to having a low or no income. “Poverty is not just the name of one thing,” Saqib said. “Poverty is much more pervasive and devastating. Economic poverty is when you do not have money. Social poverty is that you do not have friends and status. Political or moral poverty is that you do not have political rights and you cannot go to court. People also have spiritual poverty, which is a lack of good character. The Akhuwat model aims to alleviate all forms of poverty. By giving loans, we get rid of economic poverty. By making people sit together in all the important stages of the loan process, we alleviate social poverty. By giving them guidance we make them aware of their political rights, and coming into the mosque gives people spiritual enrichment and fulfillment.”

6 The Qur’an is the most sacred text for Muslims, which they believe to be the word of God revealed to Prophet Muhammad. 7 United Nations Development Programme, Human Development Reports, http://hdr.undp.org/en/countries/profiles/PAK. 8 Pakistan Social and Living Standards Measurement (PSLM) Survey 2012-13. 9 For instance see: Taha Siddiqui, “Extortion: Swimming with the Loan Sharks,” The Express Tribune, February 16, 2012, http://tribune.com.pk/story/337187/extortion-swimming-with-the-loan-sharks/.

HKS Case Program 4 of 24 Case Number 2074.0 The Akhuwat idea was based on four key principles: 1) Interest-free Loans 2) Use of Religious Places 3) Spirit of Volunteerism 4) Turning Borrowers into Donors. These four principles did not develop as a result of design or strategy, but rather through a process of action research, learning and improvement. “We did not design or plan to adopt these four principles,” Saqib said. “It seems everything was done under a grand universal design. For example, once it was very hot and we had to go to a woman's house to give her some money but she was not home. There were some 12-13 women with us who were the loan recipients for that day and we had nowhere to go. There was a mosque in front of the house and we asked the imam10 if we can sit inside and he said yes. So we sat inside and distributed the loans. That experience was very valuable, as we not only found a communal place to organize our meetings and disbursements; it was also completely free with a tinge of sacredness! Since then the use of religious places such as a mosque or a church became vital to our operations.”

Saqib’s ability to draw together people and inspire them towards the cause of Akhuwat has proved to be vital in helping Akhuwat develop into what it is today.

Use of Religious Places

Akhuwat relied heavily on the use of religious places to conduct events such as pre-loan meetings and the actual loan disbursement process. Loan disbursements at Akhuwat carried the significance of a ritual. Every month all the borrowers set to receive loans were asked to gather inside a mosque or a church. When the majority of the recipients were Muslim this event was conducted in a mosque and when the majority were Christian, in a church. (Exhibit 2 shows a typical disbursement event with Saqib leading the proceedings.) This event does not only act as social collateral but also gives an air of sanctity and spirituality to the whole process. Borrowers believed it their responsibility to work hard and return loan installments on time. According to Saqib this created other positive outcomes as well, “Sometimes we had problems when some people objected to non-Muslims being admitted into a Mosque. However, in most cases people were welcoming. We have conducted many disbursements with Muslims, Christians and people from other religions sitting together in a mosque. This has led to an increase in inter-faith harmony and fall in sectarianism as people started to know each other’s faith.”

Interest-free Loans

Akhuwat is based on a completely interest-free micro-finance model. This means that borrowers return, in absolute terms, the same amount of money that they borrowed from the organization. There is an initial application fee of Rupees 200 ($2) which acts as a screening mechanism to ensure only serious borrowers apply. This policy of charging no interest was based not only on religious law11 but also to correct deep-rooted inequity in the existing system. “There are two problems with charging interest,” Saqib said. “The first is religious: Our faith prohibits us from taking interest especially from a person who is very poor. The second is social justice: someone who is already rich pays only 10-12 percent to buy a Mercedes car and a person who is only to earn his bread and set up a food cart has to pay 30 percent at interest. What kind of a world is this?”

10 An Imam is usually the religious head of a mosque. 11 The Qur’an prohibits Muslims from either paying or taking interest on loans. Interest is defined as any pre-determined premium on a loan transaction. Traditionally, Muslims view both high and low interest as prohibited and see no difference between usury and interest.

HKS Case Program 5 of 24 Case Number 2074.0 A loan given on interest is profitable business and not assistance said Saqib: “In Islam it is much more virtuous to give Qard-e-Hassan (beautiful loan) to someone rather than charity or doles. Charity is rewarded ten times while giving a loan is rewarded eighteen times as remarked by Prophet Muhammad. When your brother or sister asks you to help them, you don’t charge them interest for it. You take back what you gave them. This is the spirit of brotherhood and compassion that embodies Akhuwat.”

Saqib believed that Akhuwat’s success was proof that conventional practices were faulty. By charging no interest, Akhuwat developed a bond of trust and sincerity with its borrowers. Borrowers did not get trapped in endless cycles of repaying interest and felt much more confident in returning their loans to Akhuwat. The organization saw interest as a barrier to widespread proliferation of capital. “Our borrowers are our inspiration,” Saqib said. “We believe that no one is short of ideas, only short of capital. Our borrowers have initiated more than 150 different kinds of business. These businesses earn a very high rate of profit for our borrowers. The billions of rupees that we have disbursed to these entrepreneurs has arguably resulted in multifold wealth generation allowing them to earn a dignified livelihood, send their children to schools, improve their health and live a better life.” (A list of the types of businesses started by borrowers can be seen in Exhibit 11.)

Spirit of Volunteerism

Akhuwat’s typical employee regularly worked extra hours without claiming extra compensation. Employees while paid for 40 hours also volunteered another 10-20 hours a week, on average. “This is how employees quench their thirst for volunteerism,” said Saqib. “This is what gives them strength that they are doing it for the sake of God.” Saqib himself represented this spirit of volunteerism; despite working full-time for the organization he has received no remuneration. His dedication and service for the cause of Akhuwat has motivated many people to join the organization and to dedicate their lives for the cause. “Sometimes we work on weekends, even on Sundays but we know this is helping us because we are doing something good and noble,” said Ali, an Akhuwat Employee. “We know that a poor widow will pray for us when we help her. This is also our compensation.”12

Saqib paid careful attention to training Akhuwat employees. Most offices displayed the four principles of Akhuwat to help employees remember what they were working for. “We tell our employees that their compensation is not only monetary,” said Saqib. “Wherever you go people treat you with respect. Widows and orphans give you their prayers. This is also a form of compensation. You are serving the people of God irrespective of distinction like caste, creed, color or faith. We tell them that every person says that society is becoming corrupt. So there should be someone who stands up and says ‘I am going to put an end to this.’ Someone has to make the sacrifice. If a generation sacrifices only then will they progress forward. This is not only a job, it is a responsibility and a way how we all can make this world a happy place to live in.”

According to Saqib, the spirit of volunteerism in employees is one of Akhuwat’s greatest assets. “If someone were to give us millions of Rupees and asked us to take out this spirit of volunteerism and turn Akhuwat into a

12 Author interview with Akhuwat employee Ali conducted in July 2015 in Lahore. Unless noted, subsequent quotations from and attributions to Ali come from this interview.

HKS Case Program 6 of 24 Case Number 2074.0 corporate business, we would simply say no. The spirit of giving and serving has no parallel. This cannot be traded against money.”

Turning Borrowers into Donors

Interestingly, Akhuwat turned its borrowers into donors. Even though no interest was charged on loans, Akhuwat encouraged borrowers to give something back to the organization. Giving back was strictly voluntary. If borrowers did not give anything back, it did not hinder their chances of securing other loans in the future. Borrowers were told to give as much as they were willing to help others in need. For example, once there was a local mechanic who had lost his property in a flood. He applied for and successfully secured a loan from Akhuwat with which he was able to restore his business. Later, he got a job in Dubai and moved there. He then donated a substantial amount to Akhuwat from his foreign earnings so that he could pay back the organization that helped him during his time of need. “Seventy percent of our borrowers are now our donors; they give something back to the organization so that they can help others too,” Saqib said. “Microfinance is not an end; it is a tool, a means towards an end. The end is a society that has brotherhood and solidarity between the haves and the have-nots. One section of society that has, helps the one, that does not.”

In this way the local branches of Akhuwat slowly started helping others. Local small business owners who did not need Akhuwat’s loans also began making contributions. According to Malcolm Harper, Emeritus Professor at the Cranfield School of Management UK, who studied Akhuwat’s model, borrowers, donors, volunteers and the paid staff at Akhuwat felt they were all equal. Although the loans were only made possible by the generosity of donors, there was no sense of obligation; all the stakeholders shared a common purpose.13

Loan Products

Akhuwat offered a broad range of loan products. The majority of loans were Family Enterprise or Business Loans, which accounted for 85 percent of all loans. Other forms of loans included the Liberation Loan for people already under debt and being exploited by loan sharks. Other loan products included Housing Loan, Education Loan, Marriage Loan, Emergency Health Loan and others. (A detailed breakdown of all nine types of loan products, their description, and features is presented in Exhibit 3.) For many people, Liberation Loan, is very unique and Lend with Care, a subsidiary of Care International, a UK based Charity already a partner of Akhuwat, is thinking to support its expansion.

Borrower Profile

Sixty percent of all borrowers were male while forty percent, female. This went against conventional micro- finance practice, which operated under the belief that women were typically more responsible borrowers than men. There was some evidence from countries such as Bangladesh, however, that lending to women rather than men led to a rise in domestic conflict as the men in the household felt threatened when the women took control of the financial affairs of the family. Akhuwat avoided this problem altogether by lending to an entire household. According to Malcolm Harper, “wives and husbands are required to sign loan agreements, or mothers and sons, or

13 Malcolm Harper, “Akhuwat: A Case Study,” http://www.akhuwat.org.pk/akhuwatcaseStudy.asp.

HKS Case Program 7 of 24 Case Number 2074.0 fathers and daughters, and the loans are known as family loans. Every member of the family knows that they have taken a loan, and this creates a sense of unity in the household and avoids conflict and duplication of loans in the same family.”14

Loan Process

The loan process at Akhuwat included the following steps:

1. The applicant approached the nearest branch. He or she filled the application in the Branch Office in front of the Unit Manager. Most loans were given in the form of groups, however, individual loans were also given in exceptional circumstances. 2. The Loan Officer visited the applicants at home and conducted a comprehensive appraisal which included both social and financial appraisal as well as interview of personal guarantees. 3. The Unit Manager prepared the case. The Branch Manager reviewed it and visited the residence or business place of applicant. The case was then submitted for approval to the Loan Approval Committee (LAC). The LAC had the authority to approve the loan 4. After approval of the loan, the Accountant in the Area Office prepared the checks. Two authorized signatories signed the check. 5. Signed checks were sent to the respective Branch Office, where the checks were handed over to the member in a religious place i.e. a mosque or a church. This event was arranged and used as an opportunity to build capacity and provide social guidance to the borrowers. 6. Borrowers paid monthly installments at their local branch office.

All applicants paid a mandatory Rupees 200 ($2) loan fee which amounted to 1% of the average loan size. Borrowers were also given the option of signing up for an optional Mutual Support Fund Contribution, which was also 1% of the loan amount. This Fund was used to write off the outstanding loan in case the borrower died and the family of the deceased was given Rupees 5000 ($50) to cover the cost of funeral and burial.

Organizational Structure and Set-up

Akhuwat, currently, is based in the historical city of Lahore, which is the cultural hub of Pakistan. A board of 9 members consisting of philanthropists, civil servants and prominent businessmen governs it. The head office is responsible for managing, planning and organizing different activities and projects of the entire organization divided into three national regions: North, Central and South. The Chief Credit Officer leads a team of three regional managers who are responsible for their respective regions. A Regional Manager leads 7-10 Area Managers who in turn are in charge of 5-7 Branch Managers. A typical Branch Manager is then responsible for 4-6 Unit Managers. Some Areas have a steering committee, consisting of 8-10 prominent individuals living in that area and two representatives from Akhuwat, generally the Area and the Branch Managers. The job of the committee is to oversee all the functions of the branch and also to mobilize funds in their respective areas. (The organogram can be found in Exhibit 4.)

14 Ibid.

HKS Case Program 8 of 24 Case Number 2074.0 The Board of Directors, including Saqib, charges no remuneration. The organization does not own vehicles and staff are expected to use local transport or their own vehicles, for which they are reimbursed. Akhuwat offices are small and simple. A typical office has no chairs or office desks. Employees and customers both sit on the floor, often on ordinary cushions or pillows facing a low-rise wooden platform, which is used as a desk. Often desks are shared by more than one employee. (See a typical office space in Exhibit 5.) Since most activities such as pre- disbursement meetings and actual disbursement ceremonies are carried out in mosques or churches, the organization has had no additional costs in conducting these regular activities.

Working with the Government

Saqib spent nearly two decades as a civil servant with the Punjab Government. During this time he built a strong network of friends and admirers who would later play an important role in Akhuwat’s success. In the mid- 1990s, Saqib was appointed as the Deputy Secretary to Shahbaz Sharif, the Chief Minister for Punjab–the most populous and most prosperous province in Pakistan. Saqib’s hard work and dedication left a deep impression on the Chief Minister. Soon after in 1999, however, PMLN was overthrown in a military coup in which General Pervez Musharraf declared martial law in Pakistan. Shahbaz Sharif was thrown into exile and Saqib, soon after, took leave from office to work with the Punjab Rural Support Program (PRSP). “In 2000, when I went to England I met Shahbaz Sharif when he was in exile. He remembered who I was and we spent some time together. We talked nothing but poverty. How can we help the poor and build Pakistan? He told me that when he came back to Pakistan, he would like us to work together.”

True to his promise, when Shahbaz Sharif returned to Pakistan in 2007 and became the Chief Minister of Punjab again, he asked Saqib to lead a program in Education. Saqib conceived the Punjab Education Endowment Fund (PEEF) and was appointed its vice chairman. PEEF was Pakistan's largest education program with funding amounting to $170 million. This organization has supported more than 100,000 poor but talented students to complete their education in best institutions of the country. His association with PEEF was also on volunteer basis.

Later in 2009, Saqib presented the idea of Akhuwat to Sharif who agreed to make a revolving fund solely for the purpose of giving out interest-free loans. This fund would belong to the government but Akhuwat was chosen as the service provider. In November 2011, Saqib’s efforts bore fruit and the Government of Punjab, through the Punjab Small Industries Corporation, set-up a revolving fund for Rs 5 Billion ($50 million). His next project was to get a similar initiative approved by the Government of Gilgit-Baltistan, a province in the north of Pakistan. Under this initiative, the government of Gilgit-Baltistan agreed to give out Rupees 210 million ($2.1 million) in May 2013.

Saqib then convinced the federal government of Pakistan to setup a similar revolving fund after meeting the Prime Minister, Nawaz Sharif the elder brother of Shahbaz Sharif. The federal government started a similar program and promised Rupees 336 million ($3.36 million). But instead of making Akhuwat the sole service provider, Saqib convinced the federal government to hire multiple service providers. He helped select twenty-six more organizations that would act as service providers for this program. (A breakdown of Akhuwat’s initiatives with the government can be seen in Exhibit 6.)

HKS Case Program 9 of 24 Case Number 2074.0 Putting It All together

Saqib was disappointed with the management expert’s less than optimistic view of the idea to double the number of Akhuwat branches, but he knew that the time had come to test the true impact of the philosophy of Mwakhat. “We told the management guru that the philosophy of our organization is mwakhat. This mwakhat will also be our growth strategy. Mwakhat means that one person adopts another person, one family adopts another family, and gives them the feeling of companionship and brotherhood rather than making them dependents and beggars.”

The plan was set in motion. Every existing branch was designated as the “ansaar” or helper branch and was assigned the task of making another branch just like itself, which would be called the “muhajir” or “emigrant” branch. Each existing branch was also made responsible for making a new branch in a new city or an uncovered part of the same city. Branch managers were tasked with hiring 5-7 new employees and training them for one month. These new employees were then brought to the head office and further trained for one month. Next, they were told to return to their new “muhajir” branches and their respective “ansaar” branch was tasked with assisting them in operations. Each branch had the target of setting up and starting operations for another branch over a period of three months. Saqib believed this task could not have been led from the head office.

If we did this from the head office, this would have meant a tremendous strain on our resources,” Saqib said. “But for one branch to make another branch utilize local resource and knowledge is not something difficult. The old branch acted as an incubator for the new branch for one year and would be responsible for all operational and motivational issues. This is how in three months we moved from 70 branches to 150 branches. To monitor, supervise and fill the gaps (in this growth), volunteers from the head office staff independently visited each branch and provided assistance in training wherever it was needed. We set up an independent body of volunteers who appraised the capacity and quality of new branches. So in just three months we doubled our program without any fall in our performance, loan recovery rate or any important indicator...

Between 2011 -2015, Akhuwat was able to achieve a seven-fold increase in the amounts of loans disbursed per year. Most of this growth came from its strategic partnerships with the provincial and federal governments of Pakistan. Akhuwat has also now moved from 150 to 495 branches using a similar growth and expansion plan. (For a detailed overview of Akhuwat’s growth, see Exhibit 7.)

Moving Forward

In December 2015, Akhuwat had 495 branches all over Pakistan and had disbursed a total of $208 million. It had a total of nearly 400,000 active borrowers and had reached a total of 1.1 million borrowers. Saqib envisioned reaching 3 million borrowers in the next five years. When asked how long it would take Akhuwat to reach this target, he responded:

HKS Case Program 10 of 24 Case Number 2074.0 We made a strategic plan by hiring PwC Pakistan. The targets that they predicted we would achieve in 2017, we achieved those in 2014. They often tell us that we cannot make any strategic plan for you. You break every rule. When God is helping then there is no end in sight. In the first seven years, we gave out a total of $5 million. Now every month we give out that much. We gave out $90 million in 14 years and $80 billion in one year alone. I can't tell you why we want to reach out to 3 million borrowers; it can be 5 million, but there should be some substantial difference.

In the past several years, Akhuwat branched out into many different areas of social impact including opening a business incubator, offering scholarships to 1,000 students, offering free healthcare and helping Internally Displaced Persons after the devastating floods in Pakistan made millions of people homeless. (A complete list of Akhuwat’s initiatives can be found in Exhibit 8 and Akhuwat’s progress indicators to date can be seen in Exhibit 9.)

Akhuwat was also working on building Akhuwat University which aims to provide interest-free education loans. According to Saqib, there are two types of strategies for poverty alleviation: short-term and long-term. He believed that although short-term poverty could be alleviated by giving small loans, long-term poverty could only be alleviated by educating people.

Microfinance is a tool and not the goal,” said Saqib. “If you give $200 to someone right now, he will be saved from hunger. In the long term, people can be empowered only through education. We want to build a college and a university and make it the best university in the region. If a loan can be without interest then education can be without fees as well. This is long-term Qarz-e- Hasan. If someone wants to get education and they don’t have resources, they can study at our university on interest-free student loans and return the money whenever they start earning.

Through Akhuwat University Saqib also wants to create the next generation of leaders for Akhuwat. He is a firm believer that those people who Akhuwat will help, will come back and serve the organization:

Those people who are in the streets and we adopt, help, and educate will come back to lead the organization. This is our succession plan. At the moment we have sponsored one thousand students who are studying in different universities. This is what we inculcate in them, that we are investing in you so that you can lead this organization in the future. God chooses people to serve His people. I don't know if my son will do it or not as this is not in blood necessarily. If you are more passionate than I am, then I am already waiting for you to come and get my place in the organization. Leadership is like a relay race. We will, one day, handover the light to someone ready to take it and fade away in the mist of past. We are preparing ten thousand people as our successors who will lead the organization tomorrow.

HKS Case Program 11 of 24 Case Number 2074.0 Exhibit 1: List of Loan Products

Source: Khushhali Bank Website, https://www.khushhalibank.com.pk/About-Khushhali-Bank; National Rural Support Programme Website, http://nrsp.org.pk/.

Exhibit 2: Saqib Addressing People in a Mosque at a Loan Disbursement Event

Source: Permission courtesy of Akhuwat.

HKS Case Program 12 of 24 Case Number 2074.0 Exhibit 3: Nine Types of Loan Products

Products % Description Product Features

1. Family Enterprise Loan 80 These constitute the majority of Range: From $ 100 to $ 500 loans offered by Akhuwat and are Duration: 10 - 24 months given for the establishment of a new Profit Rate: 0% business or the expansion of an Initial Application fee: Up to $2 existing one. Post Approval Application fee: None Mutual Support Fund Contribution: Optional 1% of loan amount

2. Liberation Loan 2 These loans are given to the persons Range: From $ 100 to $.1000 who have taken loans from Duration: 10-36 months exploitative money lenders to save Profit Rate: 0% them from undue interest rates. Initial Application fee: Up to $2 Akhuwat pays off the balance Post Approval Application fee: None amount to the money lenders in one Mutual Support Fund Contribution: go and in return borrower pays back Optional 1% of loan amount the principal amount to Akhuwat in easy installments. 3. Housing Loan 2 The purpose of the housing loan is Range: From $ 300 to $ 1000 to provide financing facility for Duration: Up to 36 months renovation of houses, construction Profit Rate: 0% of rooms, roofs, walls, etc. These are Initial Application fee: Up to $2 given to those poor families who Post Approval Application fee: None occupy a single room and their Mutual Support Fund Contribution: family size goes up to 8 or above. Optional 1% of loan amount

4. Education Loan 5 This loan is targeted towards families Education Level: Post Matriculation up to who are unable to send their Masters children to school without receiving Range: From $100 to $500 at least a partial subsidy for their Duration: 10 - 24 months education expenses and are utilized Profit Rate: 0% for paying school fees or purchasing Initial Application fee: Up to $2 books and other materials. Post Approval Application fee: None Mutual Support Fund Contribution: Optional 1% of loan amount 5. Health Loan 2 Health loans are given to poor Range: From $100 to $500 people suffering from serious Duration: 10 - 24 months illnesses and ailments and who do Profit Rate: 0% not have contingency savings. Initial Application fee: Up to $2 Post Approval Application fee: None Mutual Support Fund Contribution: Optional 1% of loan amount 6. Marriage Loan 2 Marriage loans are for parents who Range: From $100 to $500 face difficulty in arranging the Duration: 10 - 24 months necessary funds for the marriage Profit Rate: 0% ceremonies and dowries of their Initial Application fee: Up to $2 daughters. Post Approval Application fee: None

HKS Case Program 13 of 24 Case Number 2074.0 Mutual Support Fund Contribution: Optional 1% of loan amount

7. Emergency Loan 2 This product is for poor families Range: From $100 to $500 who face unfortunate events and Duration: 10 - 24 months emergencies, e.g. sudden losses in Profit Rate: 0% business, etc. Initial Application fee: Up to Rs, 200 Post Approval Application fee: None Mutual Support Fund Contribution: Optional 1% of loan amount 8. Education Assistance 2 The objective of the Akhuwat Education Level: Post graduation to Program Education Assistance Program is to Professional Education extend interest free loans to highly Range: Up to $1000 per year (depends upon deserving candidates who have the fee). exhibited excellent academic Duration: Post Qualification (grace period till results, belong to a low-income individual gets employment) background and are unable to pay Profit Rate: 0% for post-secondary education. This Initial Application fee: None program aims at inculcating social Post Approval Application fee: None responsibility in the lives of these Mutual Support Fund Contribution: students. Optional 1% of loan amount 9. Equip and Build the 3 This product is a loan targeted at Range: From $250 to $1500 School existing low-income private schools. Duration: Up to 36 months In order to equip these schools with Profit Rate: 0% basic amenities, Qard-e-Hasan will Initial Application fee: Up to $5 be provided for the following: Post Approval Application fee: None . Furniture and fixtures Mutual Support Fund Contribution: . Provision for construction Optional 1% of loan amount . Provision of clean drinking water . Provision of toilets . Provision of renovations of school premises, etc.

Source: Akhuwat Company Documents.

HKS Case Program 14 of 24 Case Number 2074.0 Exhibit 4: Akhuwat’s Organogram

Source: Akhuwat Company Documents.

HKS Case Program 15 of 24 Case Number 2074.0 Exhibit 5: A Typical Akhuwat Office

Source: Permission Courtesy of Akhuwat.

HKS Case Program 16 of 24 Case Number 2074.0 Exhibit 6: Public-Private Partnerships

The Chief Minister’s Self-Employment Scheme – Punjab November, 2011 By providing access to financial services, the CMSES seeks to empower low-income families to make their own choices and construct their way out of poverty in a sustained and self-determined manner. To this end, the Government of Punjab through the Punjab Small Industries Corporation has partnered with Akhuwat. Until November 2015, the initial grant of $50 million had been translated to over $150 million disbursed in 802, 969 interest-free loans.

The Chief Minister’s Self-Employment Scheme - Gilgit Baltistan, April 2013 The CMSES-GB has served over twenty-four thousand families with interest-free loans worth $ 5.5 million by November 2015. The CMSES-GB was launched in partnership with Ministry of Youth Affairs through a grant of $ 2.1 million given to Akhuwat.

The Prime Minister’s Interest-Free Loan Scheme, August 2014 The federal government has awarded $ 3.3 million to the Pakistan Poverty Alleviation Fund (PPAF) that in turn will work through partner organizations to provide interest-free microfinance to small entrepreneurs all over Pakistan. Akhuwat is one of the partners under the PM-IFL and has received $ 4.46 million.

The Governor of Khyber Pakhtunkhwa’s Interest-Free Loan Scheme for FATA October 2015 Under the leadership of the Governor of Khyber Pakhtunkhwa (KPK) an interest-free microfinance scheme was launched in the Federally Administered Tribal Areas (FATA) through a partnership with Akhuwat. It is the first microfinance program of this nature to be launched in the region.

TEVTA Interest-Free Loan Scheme October 2015 Recently the Technical Training and Vocational Training Authority (TEVTA) has partnered with Akhuwat to create a credit pool of $5 million that would offer interest-free loans exclusively to TEVTA graduates. The TEVTA Interest- Free Loan Scheme is being administered from all branches of Akhuwat in Punjab and offers interest-free loans ranging from $100 to $1000.

Source: Akhuwat Company Documents.

HKS Case Program 17 of 24 Case Number 2074.0

Exhibit 7: Growth of Akhuwat

Growth in Number of Loans disbursed per year 400,000

350,000

300,000 250,000 200,000 Number of Loans 150,000

100,000 Number Number of Loans 50,000 0

Growth in Value ($) of Loans disbursed per year 80,000,000

70,000,000

60,000,000 50,000,000 40,000,000 Value of Loans ($) 30,000,000

20,000,000 Value of Value of Loans ($) 10,000,000

0

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

HKS Case Program 18 of 24 Case Number 2074.0 Growth in Number of Branches

495

289 254

153 Number Number of Branches 77

22 36 11 18 20 1 2 4 7 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Number of Branches

Source: Akhuwat Company Documents.

HKS Case Program 19 of 24 Case Number 2074.0 Exhibit 8: List of Initiatives Sponsored by Akhuwat

Program Name Description 1 Akhuwat University Akhuwat Faisalabad Institute of Research, Science and Technology (FIRST). Program in biotechnology based completely on need-based scholarships. 2 Internship and Leadership Program for providing internship opportunities in multiple Program organizations in the development sector. 3 Volunteer Services Program for involving student and professional volunteers in Akhuwat’s operations. 4 Cloth Bank Program for collecting and distributing used clothes to poor individuals. 5 Akhuwat My Biz Incubator Center Business incubator for start-up companies. 6 Health Services Akhuwat subsidiary that provides affordable, efficient and effective health care services such as diabetes and gynecology clinics. 7 Khwajasira Support Program Program for empowering socially disadvantaged transgendered individuals. 8 AISEM Customized training and capacity-building facility.

Source: Akhuwat Company Documents.

Exhibit 9: Progress Indicators

PROGRESS INDICATORS (2015) TOTAL

Total Benefiting Families 1,137,043 Total loans disbursed to Males (60%) 679,287 Total loans disbursed to Females (40%) 457,758 Amount Disbursed $ 208 m Percentage Recovery 99.92% Active Loans 469,017 Outstanding Loan Portfolio $ 57 m Number of Branches 495 Number of Cities and Towns in Pakistan 276

Source: Akhuwat Company Documents.

HKS Case Program 20 of 24 Case Number 2074.0 Exhibit 10: Summary of Major Islamic Banking and Finance Products

Hibah: This is a token given voluntarily by a debtor to a debtor in return for a loan. Hibah usually arises in practice when Islamic banks voluntarily pay their customers a 'gift' on savings account balances, representing a portion of the profit made by using those savings account balances in other activities.

Ijarah: Ijarah means lease, rent or wage. Generally, the Ijarah concept refers to selling the benefit of use or service for a fixed price or wage. Under this concept, the bank makes available to the customer the use of service of assets /equipment such as plant, office automation, or motor vehicle for a fixed period and price.

Istisna: In an Istisna sale, the buyer asks the manufacturer to create a specific commodity with material from the manufacturer. The price is fixed after all parties give their consent and agree on all the necessary specifications of the commodity.

Murabaha: Murabaha is a sale with an agreed-upon profit margin.

Mudharabah: In Mudharabah, the customer provides funds to the bank, which then invests the funds into various investment schemes and financing.

Musharakah (Investments): Musharakah means “to share.” In a banking context, it indicates that all profits or losses are shared equally.

Qard: Qard transactions are loans without profit. The borrower is required to repay only the principal amount borrowed but may pay an extra amount as a token of appreciation at the borrower’s absolute discretion. Qard contracts can also be used to support current accounts, in which customers lend the money to the bank. The bank generates profit on this loan and returns the capital and some of the profit it has obtained.

Salam: Salam is a sale in which the seller supplies specific goods to the buyer at a future date in exchange for a price fully paid in advance. It is typically used to finance agriculture. The bank must take delivery of the commodity on maturity and it can enter into a parallel contract of Salam with another party to sell the commodity on the future date. (It is prohibited to sell the commodity to the original party.)

Takaful (Islamic Insurance): Takaful is an alternative form of cover that a Muslim can avail himself against the risk of loss due to misfortunes. Takaful is based on the idea that what is uncertain with respect to an individual may cease to be uncertain with respect to a very large number of similar individuals.

Tawarruq: Tawarruq is a finance method with which one can raise loan financing through buying installments in a local commodity owned by the bank. Applicants then authorize the bank to sell their share in this commodity, on their behalf, to a third party for cash and then deposit the proceeds into his account.

Sukuks: Sukuks are Islamic bonds that must be linked to an underlying asset. Banks cannot raise funds by issuing generic fixed or floating coupon-bearing bonds. Banks can securitize a stream of cash flows from Ijarahs or Murabahas and then issue Sukuks. The coupon cash flow for these Sukuks can be the cash flow from the underlying Ijarahs or Murabahas, for example.

HKS Case Program 21 of 24 Case Number 2074.0 Wadiah: In Wadiah, a bank is deemed as a keeper and trustee of funds. A person deposits funds in the bank and the bank guarantees refund of the entire amount of the deposit, or any part of the outstanding amount, when the depositor demands it. The depositor, at the bank's discretion, may be rewarded with Hibah as a form of appreciation for the use of funds by the bank.

Source: Islamic Banking Products and Processes-Key Regional Variations, http://www.oracle.com/us/industries/financial-services/islamic-banking-process-wp-1898554.pdf.

HKS Case Program 22 of 24 Case Number 2074.0 Exhibit 11: Major Categories of Businesses Started by Akhuwat Borrowers

Serial No. Categories of Business 1 Agriculture Inputs 2 Artificial Jewelry 3 Auto Workshop 4 Beauty Salon & Cosmetics 5 Butcher Shop 6 Clinics 7 Construction & Material 8 Crockery Business 9 Cycle Works 10 Dairy Industry 11 Decoration & Gift Item 12 Electronic & Services 13 Embroidery 14 Food Stuff 15 Furniture 16 Garments 17 Handicrafts 18 Home Appliances & Services 19 Home Industry 20 Leather Industry 21 Livestock 22 Lubricant Business 23 Mechanical & Engineering Works 24 Music & Instruments 25 Plastic Molding 26 Poultry Business 27 Scrap & Recycling Work 28 Sports Industry 29 Stamp Paper & Composing 30 Stationery & Printing 31 Transportation 32 Tuition Centre 33 Vendor

HKS Case Program 23 of 24 Case Number 2074.0 Exhibit 12: Map of Pakistan

Source: The University of Texas at Austin, Perry-Castañeda Library Map Collection, http://www.lib.utexas.edu/maps/middle_east_and_asia/pakistan_admin-2010.jpg.

Exhibit 13: Akhuwat Logo

Source: Courtesy of Akhuwat.

HKS Case Program 24 of 24 Case Number 2074.0