Dr. Malcolm Harper, a veteran of microfinance, talks about the innovative model of Akhuwat in this case study.

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Akhuwat – It Sometimes Makes
Sense to Break the Rules
Malcolm Harper1
icrofinance has come of age and has lost its
innocence. It is now coming to be seen as just
another business, which makes its profits as and
where it can. Microfinance is not the only business
to have chosen the poor as it’s preferred ‘market
segment’. The late CK Pralahad showed that there are many ways of
making profits at ‘the bottom of the pyramid’, and we do not criticise
Unilever for marketing shampoo in tiny sachets, or Colgate for its
profitable ten rupee toothpaste tubes. We assume that the people
who buy these products are satisfied with their purchases, and we do
not expect their producers to lose money on their sales to the poor.
Most microfinance institutions (MFI), at least until recently, were
started with public interest funds, and with welfare objectives, but
they have successfully ‘graduated’ from these limited sources of
support. Their promoters argue with some logic that they must make
high profits to access equity from profit-seeking investors. They must
have this equity in order to leverage commercial debt which they will
on-lend to satisfy the credit needs of the millions of poor people who
are presently not served by traditional commercial banks. These
institutions must also hire qualified and experienced managers; they
must also be able to offer competitive salaries, to replace the well-
meaning but un-skilled voluntary sector staff who may have started
the institution.
Microfinance practitioners have also learned many lessons (although
perhaps not enough), and a body of ‘best practice’ has grown up. Not
every institution adheres to every practice, but it is generally accepted
not only that they must be ‘sustainable’, that is profitable, in order to
1
Malcolm Harper was educated at Oxford, Harvard and Nairobi. He first worked in
marketing in England, and then taught at the University of Nairobi. He was Professor
of Enterprise Development at Cranfield School of Management, and since 1995 he has
worked independently, mainly in India. He has published extensively on enterprise
development, micro-finance and livelihoods. He was Chairman of Basix Finance in
India for ten years, and is Chairman of M-CRIL, the international microfinance and
social rating company. He is chair, trustee and board member of a number of
institutions in the United Kingdom, the Netherlands and India, and has worked on
poverty issues in Bangladesh and Pakistan, and in North, East, Southern and West
Africa, Latin America and the Caribbean, the Middle East and Gulf area, South and
South East Asia and China, and in the United Kingdom.
MThis paper is part of the volume
entitled ‘Exploring New Horizons in
Microfinance’ printed by Friends of
Akhuwat.
Opinions expressed by the authors
of the article do not necessarily
reflect those held by Akhuwat.
www.akhuwat.org.pk
For Further Information:
info@akhuwat.org.pk
House No. 382, Block-15,
Sector B-I, Township,
Lahore, Pakistan
Tel: +92-042-3512-2743,
3848-6894

2. 2
survive and to attract and retain investors, but that MFIs should lend through some form of
group mechanism, that they should lend mainly to women, and that they should make rather
high charges, not only to be ‘sustainable’ but also to discourage misuse of loans, to encourage
repayment and to ensure that their loans are not ‘hijacked’ by those who are not needy, as so
many subsidised goods and services are.
This paper describes some aspects of the operations of Akhuwat (meaning ‘brotherhood’), an
MFI which operates in Lahore and elsewhere in Pakistan. It was started in 2001, its present
portfolio is around two million dollars, lent to some 30,000 clients, and its cumulative
disbursements amount to about ten million dollars, which has been lent to almost one hundred
thousand clients, and it is growing quite rapidly.
Akhuwat is unique because it breaks just about all the generally accepted rules of microfinance,
but has nevertheless (or perhaps for that reason) survived and grown. In the present crisis of
opinion and reputation which is swirling around microfinance, not only in Andhra Pradesh and
India, but globally, Akhuwat is a lively proof that there is ‘another way’, which may also be a
better way.
Akhuwat is not as large as the largest for-profit MFIs, but it is large, and growing; it has long
passed the stage where it might have been dismissed as the dream of an idiosyncratic idealist. It
is a large going concern, reaching towards a client base of one hundred thousand people, and it
has also been widely copied.
WHY IS AKHUWAT SO SPECIAL?
INTEREST
First and most obviously, because its loans are interest free. There is endless debate about the
meaning of ‘usury’, or riba, which is condemned in both the Christian Bible and the Holy Koran;
does it mean ‘excessive’ or ‘unreasonable’ interest rates, however those imprecise terms might be
defined, or does it mean any kind of fixed interest charge, a cost for the use of the money, even
one which is levied to cover the bare administrative costs of the lender, or to compensate for the
loss in the value of money over time which is caused by inflation?
One way to avoid this dilemma is to adopt one of the profit sharing modes of Shariah-compliant
finance, such as musharaka, or mudaraba. Or, more understandably in the West, ‘venture
capital’, or ‘equity’ investing, where the person or business that has been financed shares its
profits with the institution which provided the finance. These methods are never easy; the
prospective profit shares of each party have to be negotiated at the time when the investment is
made, and the precise definition and calculation of the profit from a single transaction or from a
business as a whole, are complex and fraught with potential for disagreement.
There are many well-known venture capital investors, some of which have taken stakes in
microfinance institutions, but they rarely take stakes in start-ups, or ‘ventures’. They should
more correctly be called ‘development capitalists’, who invest substantial sums in business
which have survived their earliest years and have proved that they can make profits. The
‘transaction costs’ of such investments are high even in relation to the several millions of dollars
which are invested.
There have been a few isolated attempts to apply profit sharing methods to microfinance.i
These
have generally foundered, or have remained very small, because of the issues mentioned in the
preceding paragraph.

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Larger businesses do at least keep records of their profits, even if they are not always accurate.
Many of the micro-entrepreneurs who are served by microfinance are illiterate, they do not
separate their personal incomes from the profits of their tiny businesses, and it may even take
longer to figure out what their profits may be in the future, and are at present, and how to share
them, than it does for a multi-million dollar business with audited accounts. If the investment is
as little as $100, or even $1000, the transaction costs may exceed the amount invested. There are
other sharia compliant financing methods, such as mudaraba sale and leaseback, but I hope I
will be forgiven for my sense that these adhere to the letter of ‘no fixed interest’ but not to its
spirit.
Hence Akhuwat has chosen what may be the only totally genuine way of avoiding interest or
other disguised charges; they make no charges at all. Initially, Akhuwat levied a flat fee of five
per cent to cover some of its administrative charges; this was of course very low, except for short
duration loans, and it did not cover of all Akhuwat’s very low costs. After a few years,
management decided to be completely absurd, to stop levying any charges at all. This may
appear crazy, the antithesis of ‘sustainability’, but Akhuwat is still alive and well, when other
MFIs have disappeared, and many others may do likewise in the next few months, while
Akhuwat is growing, fast. How has this been achieved?
The answer lies in the name; Akhuwat, brotherhood, looking out for those who are less
fortunate than yourself. Even before Akhuwat abandoned the five per cent charge, some clients
had made voluntary contributions to its costs, in gratitude for their assistance. I myself met one
such person in Lahore. He was a small mechanic; a loan from Akhuwat helped to expand his
business, he used the profits to finance a trip to the Gulf, and had returned relatively well-off; he
felt that it was only right to contribute something to allow Akhuwat to do the same for others.
This system has now been formalized, and clients’ voluntary contributions cover about sixty per
cent of Akhuwat’s operating costs. The borrowers contribute what they can; those who have
been successful give more than those who have not, and some give nothing; there is no
compulsion, moral or otherwise, and clients who have made donations are treated no differently
from those who have not when decisions are being made about new loans.
For this reason alone, Akhuwat is unique, but there are many other features which make it an
ideal, and also a model from which others can and should learn, irrespective of their religion or
other motivation.
SOURCES OF FUNDS AND OF LABOUR
Akhuwat is the final link in a value chain of generosity. Its funds are donated, from all manner of
sources, large and small, rich and not so rich; those who give their money in this way clearly feel
that this is a more productive way of helping poorer people than giving them grants or doles.
The funds are recycled, the same sum can continue to help people forever, subject only to
inflation, and Akhuwat’s recovery rates are as high as any ‘normal’ MFI.
One major argument for charging interest, and high interest at that, levied according to the
period for which the loan is not repaid, is the fact that borrowers will obviously repay faster if
the amount to be repaid increases over time. What is more, they will be ‘economic women, and
men’; they will tend to repay the most expensive loans first, and to delay repayment of the
cheaper ones.

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Akhuwat’s performance gives the lie to this statement of obvious economic common sense. Its
loans are the cheapest, in fact they cost nothing at all, but they are still repaid on time. Its on-
time repayment record is about ninety-nine percent.
Conventional wisdom may be overturned in this case, but Akhuwat’s choice of sources for its
funds seems even more foolish. It might have been possible to raise some donations at the start,
but is it not irresponsible to build an institution on which its clients will depend on such an
unreliable and unpredictable source of funds? Experience so far suggests otherwise; Akhuwat
has until very recently taken no official foreign grants at all, and the only grant of that kind so
far has been a capital sum to finance expansion to a new area. Akhuwat has also avoided taking
‘official’ local funds; they have relied entirely on individual donations, large and small, from
clients, from well-wishers and from all manner of other sources.
Can this be ‘sustainable’? Will the funds keep on coming? Commercial loans and investments
are not themselves wholly reliable, as we all found in the recent financial crisis, and as many
businesses and individuals of the kind who are assisted by Akhuwat have always found.
But human generosity seems to continue. There are now over one hundred ‘micro-finance
investment vehicles’ or ‘MIVs’. Most of them are financed by wealthy individuals and
institutions who are not wholly profit maximisers, who want to ‘give something back’, who are
looking for below market returns in order to do more than make more money.
This sacrifice is in itself generous, and the managers of these funds are now searching hard for
effective ways to measure the social impact and poverty outreach of potential investee MFIs;
they want to reduce their profits in order to do more good.
These are investors who want to preserve their capital, and to receive a sub-optimal and modest
return on it if they can. They are already started on the slippery slope down, or perhaps up,
towards straight giving, even though some of them are in some sense embarrassed by their own
behavior, and are anxious to portray themselves as hard-nosed capitalists; ‘brotherhood’ lurks in
all of us, as Akhuwat has found.
The international aid world is embarrassed with funds, both private and public, and donor
agencies’ main concern is often to ‘move the money’, in order to achieve their spending targets.
There are many reasons why people donate to Christian Aid or to Islamic Relief, or willingly pay
their taxes to DFID or USAID, but we must not be too cynical. Generosity, brotherhood in the
broadest sense, has a great deal to do with it. People keep on giving, rich and poor people, NGOs
and governments, and the flow of such funds is probably as reliable as the flow of commercial
funds. Akhuwat has designed a unique value proposition for those who want to get the biggest
‘bang’ for their donated ‘buck’, and there is no reason why this should not continue.
It is quite easy to give money, even if you do not have very much, but it is much harder to give
time. Not an hour here or there to attend a committee meeting, to talk to a group of children or
to organise a fund-raising event, but regular time, just like paid time, except that it is unpaid.
Akhuwat has also successfully mobilized this source of support. This is in part due to the
remarkable example of Akhuwat’s founder, but it also comes from the same natural generosity,
the spirit of brotherhood, that encourages donors to give money.
Many of Akhuwat’s senior staff are volunteers, and most are paid far less than they could earn
elsewhere. Only the junior staff, who are mainly drawn from the same communities as the
clients, are paid the ‘market’ rate for their work. They too tend to work harder and for longer

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hours than they would elsewhere; they also become infected with the dangerous spirit of
brotherhood which pervades the whole institution. The market, for money, for labour and for
skills, need not always be the king.
THE CLIENTS, THE PRODUCT, AND ITS DELIVERY
Group intermediation is almost axiomatic in microfinance, outside Latin America and
Indonesia. The groups may themselves borrow and then on-lend to their members, as in the
Indian self help group model, or the groups may only be ‘social’ intermediators, as in the
conventional and widely replicated Grameen Bank approach, where the groups appraise and
approve each others’ loans, and assist with recoveries, and, in some cases, act as guarantors for
their fellow members’ loans.
Similarly, and for related reasons, microfinance is everywhere dominated by women. There are
good reasons for this; women are generally the poorest and most marginalized members of
society, and they can be ‘empowered’ to improve their situation through group membership and
by having some control over small sums of money. Women also work better in groups than men
do, and they are weak and have fewer options; it is therefore easier to put them and keep them
in groups, and to ensure that they repay their loans.
There are also some reasons why it may not be so good to work in groups, and exclusively with
women. Groups tend to discourage and even to crush individualists, and entrepreneurs are
above all individualists. Group guarantees are inequitable if some members want to borrow
more, or more often, than others; groups tend towards the lowest common denominator.
Women are more than half the population, and in most societies and activities their skills and
entitlements are woefully neglected. The family, however, is the basic building block for most
societies, and families include women and men. Discrimination in favour of women can have its
downsides; men may force their wives to take loans and to repay them, but then use the money
for liquor or other amusements, and the family disharmony can end in disaster. Anyone who has
seen a Bangladeshi woman’s face which has been foully disfigured by the acid which was thrown
at her by her frustrated husband will be aware that family unity should be enhanced, not
destroyed.
Men also tend to start more business that eventually grow and employ many others, than
women, but they also tend to take bigger risks, to be less reliable, and to fail more often. Both
sexes have their roles to play.
Akhuwat started with groups, and still uses them in some particular cases, but the main
customer unit is the household, the wife and the husband. Both co-sign their loans, and are
responsible for repayment, and the household also takes a guarantor, who is usually also an
Akhuwat client. The guarantors are themselves not allowed to borrow until the loans which they
have guaranteed have been fully repaid.
For this reason, some borrowers prefer a more traditional group system, and Akhuwat has
recently re-introduced group borrowing to satisfy them; prospective borrowers can chose
whether to take a guarantor, or to join a group.
Here again, Akhuwat’s practices fly in the face of accepted best practice, but they achieve good
results. Any MFI can learn from them, whether its goals are to make big profits, or to create a
‘big society’.

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Akhuwat has another unusual strategy which saves money and also strengthens commitment
and the sense of brotherhood. Loan repayment and disbursement takes place in mosques, or
churches, not in Akhuwat’s own very modest offices. Jesus Christ threw the money changers out
of the temple in Jerusalem, saying that they had made the house of God into a den of thieves,
and some of them may indeed have been money-lenders also. Akhuwat may be accused of being
foolish, although its results tell otherwise, but it is certainly not a thief.
These meeting places involve no cost, because they are not needed for worship at the times
when Akhuwat uses them, and they confer a sense of solemnity which surely enhances
borrowers’ commitment to repay. The priests and imams also welcome Akhuwat as a bridge
between people’s spiritual and secular lives. The Holy Koran says that money is given to us in
trust, to be used wisely and then handed on to others; a loan which has been received and
acknowledged in a place of worship is probably more likely to be viewed in that light than one
which is taken in a banker’s office.
THE PROCESS– ‘GRADUATION’ AND REPLICATION
Most MFIs are businesses, and businesses do not like to lose their best customers, or to
discourage them from buying more of what the business sells, and to keep on buying it. Hence,
MFIs encourage their clients to move up the ‘loan ladder’ to borrow larger sums, and to keep on
borrowing. Some MFIs even expel customers who repay a loan and then do not take another
within a set period, usually a month or so. They are permitted to ‘rest’, as the MFIs call it, for
this period, but then they have to get back into debt, or get out. This is a sensible business
practice, because non-borrowing clients are unprofitable.
Akhuwat adopts a very different policy. It is understood that clients are being helped to become
better-off, and that they should ‘graduate’ to regular banks as soon as they have outgrown
Akhuwat’s scale of lending. Akhuwat’s staff make every effort to introduce such clients to banks,
and to facilitate the transfer, and only a very small number of larger so-called ‘silver’ loans are
approved, for special cases.
In general, Akhuwat aims to ‘process’ its clients to ‘mainstream’ banking, not to retain them for
its own profit. It is a school which prepares people and helps them grow for larger things, not a
prison which retains them in perpetual indebtedness. Akhuwat has lent to 93,000 people in the
ten years of its existence, but now only 30,000 are borrowing. The remaining 63,000 have ‘flown
out’, that is, they no longer need credit from Akhuwat or they have ‘graduated’ to banks from
where they can borrow larger sums, or they have ‘dropped’ out, because they failed to repay on
time and were not allowed to borrow again. Brief visits to a sample of ex-borrowers suggested
that around one on five would like to borrow from Akhuwat again but cannot, and the
remaining eighty per cent do not need to borrow.
Most institutions of all kinds like to grow, as Akhuwat has grown and is still growing. Growth
enables more people to benefit from their products and services, it enhances the ego and
reputation of their founders and it also enables promoters and investors to make more money.
Growth is often hard to manage, and it involves losing the ‘personal touch’ which comes from
association with particular communities. But the mantra is that businesses must grow or die, so
grow they do, and sometimes die in the process.
Here again, Akhuwat is different. It has grown and is still growing in Lahore, its birthplace, but
it has adopted two different approaches to growth beyond Lahore. In some towns, local groups
are willing to sponsor new units. They are encouraged to do so, using the Akhuwat name, and

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Akhuwat works with them to show them what has to be done, it sends its own staff to assist
them in their initial efforts, but then they are encouraged to move forward on their own, to
develop their own approaches and solutions, to be local successes, rather than branded clones of
Akhuwat itself.
In other places, where suitably committed people do not come forward, Akhuwat grows in a
more traditional way, by opening its own branches. This dual track approach does not maximise
Akhuwat’s earnings, but it does maximise the extension of what Akhuwat is doing. Akhuwat’s
concern is not to grow as large as it can; it is to succeed in its mission, to bring its services and
its spirit of brotherhood to as many people as possible.
There are of course a number of challenges; some are similar to those which face any
microfinance institution, while others relate to Akhuwat’s unique business model.
Generosity is probably as ‘sustainable’ as the market, but it is not always as predictable, and this
makes it difficult to plan future developments. Because so many of the senior staff are
volunteers, the management structure is less hierarchical than is usual in South Asia; the
informal trusting culture of Akhuwat is in many ways more like that of a hi-tech start-up in
California, and some managers themselves find this difficult.
Clients often complain that Akhuwat’s loans are too small, and demand naturally exceeds
supply. This in itself ensures that clients are not encouraged to become over-indebted, which
avoids some of the difficulties which have caused so many problems in Andhra Pradesh in India,
and it also encourages clients to ‘graduate’ to banks when they have outgrown the scale of credit
that Akhuwat can offer. This is not always easy, but it is in Akhuwat’s interest to help its clients
to do this, so that Akhuwat’s funds can be used to assist clients who are further down the
‘ladder’ of growth.
In a very broad sense, Akhuwat is itself a paradox. It depends on the generosity of people who
have made their money in the ‘greed-based’ market system, but is at the same time promoting a
quite different model. If this model was universally adopted, there would be no surplus funds for
Akhuwat. This possibility is however somewhat theoretical, and very remote. For the foreseeable
future, Akhuwat should be able to access generous people’s funds, and skilled people’s time, and
to continue to grow and to demonstrate new possibilities.
CONCLUSION
Microfinance is becoming a mature industry, with set principles and practices. It is also moving
away from government and NGO into the hands of real businesses; it has been ‘Wal-Martised’.
Akhuwat is supremely important because it reminds us of what we set out to do, and why we did
it. Akhuwat takes us back to the early days of innocence, when poverty alleviation was what
microfinance was for, and this reminder is healthy, and necessary.
At the same time, however, Akhuwat is breaking the mould, and is one of the most important
innovators in microfinance, anywhere. Anyone who is setting up a new MFI anywhere, with
whatever motives, should at least question the accepted wisdom of working with groups, client
retention, focus on women, and approach to growth. The conventional practices may still be the
correct ones in some circumstances, but Akhuwat shows that there are other ways, which can
work equally well or better.

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Above all, however, and most significant in these market-driven times, Akhuwat demonstrates
that there is another way, that generosity and brotherhood can be equally powerful motivators
as profit maximisation. This conclusion goes far beyond microfinance.
NOTES
i
See Harper M, "Islamic Partnership Financing for Small and Microenterprise", Small Enterprise
Development, Vol. 5, No.2, 1996, and Harper M, Rao DSK and Ashis Kumar, Development, Divinity and
Dharma, The Role of Religion In Development Institutions and Microfinance, PA Publications, Rugby, 2008