Sustainability Issues of Islamic Microfinance in Pakistan: Akhuwat Case Study

SUSTAINABILITY ISSUES OF ISLAMIC MICROFINANCE IN PAKISTAN: AKHUWAT CASE STUDY

FULL NAME: AFFILIATION: SOBIA EHSAN NUST BUSINESS SCHOOL NATIONAL UNIVERSITY OF SCIENCE AND TECHNOLOGY H-12, ISLAMABAD.

Sustainability Issues of Islamic Microfinance in Pakistan: Akhuwat Case Study

Sustainability Issues of Islamic Microfinance in Pakistan: Akhuwat Case Study

Abstract:
Islamic microfinance has emerged as a powerful weapon to fight against poverty in countries with majority of Muslim population. From demand side the borrowers concern is its cost effectiveness whereas the suppliers perspective may be the failure of conventional microfinance to bring in the targeted results. In a competitive environment where conventional microfinance institutions are already struggling hard for their sustainability and social performance, the issue of sustainability becomes more critical for the Islamic microfinance institutions. Structuring Islamic microfinance institutions theoretically on Islamic principles of interest free financing the researchers claim that such microfinance institutions would be financially and socially sustainable. The researcher has assessed the sustainability issue of the Islamic microfinance in Pakistan by Akhuwat case study. Using various dimensions of sustainability the results of the study prove that Akhuwat is highly sustainable. On the basis of results the researcher has suggested other microfinance institutions not only to replicate this model but also to introduce innovative products and procedures to the Islamic microfinance other than Qarz-e-Hasan. Further scale and performance efficiency may be achieved by joining hands with the Islamic banking in the country. Key Words: Microfinance, Islamic Microfinance Institutions, Sustainability and Akhuwat.

Sustainability Issues of Islamic Microfinance in Pakistan: Akhuwat Case Study

1.

INTRODUCTION

1.1 Background: Poverty alleviation is the topmost target of Millennium Development Goals (MDGs) that aims to halve the proportion of people living below the poverty line during 1990 to 2015. In case of Pakistan, over the last many decades poverty alleviation has been a continuous source of concern for every government. However, there are many other factors that hinder the success of the efforts made by the policy makers to attain the inter alia MDGs in the country. For instance in the absence of political and economic instability, world economic crisis and natural calamities such as floods and earthquakes in the country the speed of poverty reduction would have been even faster. According to Human Development Index Report about 60.3% of the population in Pakistan is living below the poverty line of $2 per day and around 22.6% of the population is living below the poverty line of $1.25 per day. Following is the comparison of poverty figures with the other countries in South Asia region (Table 1). Table 1: Proportion of the population living below poverty line* in countries of South Asia. (%) Countries Nepal Bangladesh India Bhutan Pakistan Sri Lanka Total *Poverty Line is $1.25 per day
Source: Economic and Social Survey of Asia and Pacific 2010. ESCAP, UN.

1981 44.2 59.8 47.4 72.9 31 59.4

1990 77 49.9 51.3 51 58.5 15 51.7

2005 54.7 50.5 41.6 26.8 22.6 10.3 40.3

Though the poverty indicators are healthy, poverty is still pervasive and endemic in Pakistan. The main reason is unequal income distribution and growing disparity between the two extreme classes in the

Sustainability Issues of Islamic Microfinance in Pakistan: Akhuwat Case Study society. In the given context only around 6% of the GDP of the country has been contributed to poverty reduction expenditures during 2009-10 in Pakistan, while it was 9.7% in 2007-08. The social sector and poverty related expenditures from the government directly depend upon the GDP of the country. There are many other initiatives taken by the government to reduce poverty. These include various income support programs from the government, work programs to enhance working capacity by giving vocational training at micro level, health insurance programs, role of Baitul Mal, and Zakat etc. Among many other initiatives from the government to reduce poverty the most important is the microfinance. I.2 Microfinance in Pakistan: Microfinance is recognized as an effective intervention for poverty reduction; an important aspect of Millennium Development Goals (MDGs) (Setboonsarng & Parpiev, 2008). Microfinance is the provision of loans, savings, and other basic financial services (i.e. insurance) to the poor and the weaker strata of the economy. Accordingly a microfinance provider (MFP) is an organization that provides microfinance services. Being smaller in size and a limited range of products and services offered MFPs are the institutions that have different objectives from a typical financial institution. The literature supports that a traditional MFI has two basic objectives i.e., poverty alleviation and financial sustainability. In recent years microfinance has gained much attention as it is considered to be the only panacea to the under development. Microfinance is considered as a tool to empower people who are economically active but financially constrained and vulnerable (Japonica (2003) and Morduch and Haley (2002). Microfinance is relatively at its initial stages in Pakistan as compared to other countries in the region. The history of microfinance in Pakistan begins with the establishment of the Orangi Pilot Project (OPP) and the Agha Khan Rural Support program (AKRSP) in 1980s. For the first time a specialized microfinance NGO was established in the country with the name of Kashf foundation in 1991. In October 2001 State Bank of Pakistan enacted a legal framework to encourage private sector MFIs that fulfill specified criteria to transform into scheduled and regulated microfinance banks (SBP, 2001). At present the microfinance sector in the economy includes 5 major categories of microfinance categories on conventional side. These are:4

Sustainability Issues of Islamic Microfinance in Pakistan: Akhuwat Case Study i) Rural Support Programs (RSPs), work for the rural development initiatives. For instance health, education, and infra structure development. It has the largest infra structure network of microfinance providers in the country. ii) Nongovernment Organizations- Microfinance Institutions (NGO- MFIs), exclusively work on the microfinance development programs. iii) Microfinance Banks (MFBs), specialized banks licensed by the State Bank of Pakistan under Microfinance Ordinance 2001. iv) Commercial Financial Institutions (CFIs), provide micro financing services through a separate specialized department along with their other lines of financial services. v) Government owned Institutions are the financial institutions that provide range of services to the small entrepreneurs under government schemes along with their other financial services in the economy. I.3 Islamic Microfinance in Pakistan: A significant aspect of above mentioned conventional MFIs is the dependence on foreign grants, and to some extent from the government. Though interest based (conventional) microfinance providers are growing rapidly all over the world including Muslim population countries they are incapable to cater the needs of Islamic community on religious grounds. Therefore, Islamic microfinance has emerged as a powerful weapon to fight against poverty in countries with majority of Muslim population (Akhtar, Akhtar & Jafri, 2009). The concept of Islamic microfinance is guided by Islamic principles of interest prohibition and encouragement of trade and charity as alternates. Karim, Tarazi, and Reille (2008) argue that the increase in demand of Islamic microfinance could be due to religious or cultural reasons as well as the clients concern towards cost effectiveness. On the other hand, the demand of Islamic microfinance from a policy makers perspective may be because of the failure of conventional MFIs to bring-in the targeted results. The suicides of clients in Andhra Parades, suicides of MFI staff in Asasa Pakistan, and late night recoveries from the clients prove that conventional MFIs are often characterized with exorbitant interest rates, over indebtedness, cost inefficiency, rigid payment schedules and weak social impacts. Rahman (1999) reports that the conventional MFIs charge such a high interest rates with inflexible 5

Sustainability Issues of Islamic Microfinance in Pakistan: Akhuwat Case Study repayment schedule that often borrowers have to liquidate all what they have to pay back the usurious interest. According to Bhuyan (2006) the conventional MFIs have a self perpetuating character and the borrower seldom get rid of it. Sometimes the clients had to borrow from money lenders to repay the loan installment to corresponding MFI. Islamic microfinance has been sought as a solution to conventional interest based microfinance. Recently, CGAP studies give initiative to the Islamic microfinance challenge to channelize the Islamic microfinance in more regulated way. In Pakistan the idea of Islamic microfinance was practically implemented by Islamic relief in 1992. Akhuwat was established as Islamic microfinance institution in 2001. Meanwhile, SBP issued guidelines for Islamic microfinance business by financial institutions. With the passage of time many Islamic microfinance providers were included in the market e.g. KhwendoKor (KK)1, Muslim Aid2, Naymet3, Helping Hands4 etc. Centre for Women Cooperative Development (CWCD)5 Islamized their microfinance products and services in 2009. Islamic Microfinance network (IMFN) was established in 2009 for the promotion of Islamic microfinance industry with innovative Shariah compliant products to alleviate poverty. Incorporation of Farz Foundation in 2010 is a recent addition to the IMFIs in Pakistan. These few Islamic microfinance providers with a limited range of Shariah Compliant products and services aim to achieve the goals of poverty alleviation and the more equitable distribution of economic opportunities. I.4 Microfinance and Sustainability Issue: In recent literature sustainability of a microfinance institution is considered to be an important indicator of its performance. Sustainability institution requires a microfinance institution to be self sustainable. Where self sustainability means that the microfinance institution should be able to meet its long term goals. Self sustainability is measured in terms of i) financial sustainability, and ii) economical sustainability.
1 2

Islamic microfinance institution working since 1993 for women and children welfare in KPK province. UK based international relief and development organization for muslim countries. Involved in charitable activities since 1987. 3 Naziran Yousaf Memorial Trust, non-profit and non- government trust, established in 2004, working for entrepreneurial development in Pakistan. 4 Involved in relief and development through interest free microfinance i.e., Qard-e-Hasan, Murabaha, and Mudarba internationally. 5 Basically involved in business development, Education and health services. Islamic microfinance products are Salam, Istisna, Murabaha and Diminishing Musharika.

Sustainability Issues of Islamic Microfinance in Pakistan: Akhuwat Case Study Financial sustainability means that the profitability of the microfinance institution covers its costs and Economical sustainability is gauged in terms of microfinance institution impact on poverty and rural development. In a competitive environment where conventional MFIs are already struggling hard for their sustainability and social performance the issue becomes more critical for Islamic microfinance institutions. Kaleem and Ahmed (2010) develop a theoretical model of charity based Islamic microfinance institutions and argue that such MFIs would be financially and socially sustainable. They also opine that such MFIs are useful to minimize indebtedness and reduce unequal distribution of wealth in society. In present study, the researcher has assessed sustainability issue of Islamic microfinance institutions operating in Pakistan in terms of financial and economical sustainability. Using case study of Akhuwat an Islamic microfinance institution in Pakistan the researcher concludes that the Islamic microfinance is able to maintain sustainability with the passage of time. The study has a significant importance for the MFIs especially IMFIs in the country, the prospective borrowers, and the policy makers for making future guidelines and regulations for the microfinance industry in the country. After a brief introduction an overview in Section 1, literature survey on the topic under discussion is presented in section 2. Section 3 describes data and methodology of the paper. In section 4 data analysis is given. At the end results are concluded and discussed in section 6 along with necessary policy recommendations.

Sustainability Issues of Islamic Microfinance in Pakistan: Akhuwat Case Study 2.

LITERATURE SURVEY

In recent literature the issue of sustainability of MFIs is getting much popularity. Mostly MFIs are considered to be non sustainable as they fail to cover their costs from their profits. They still manage to operate due to subsidies available to them from government and donor agencies (Brau & Woller, 2004). Institutionalists argue that MFIs should be self sufficient that is transformed into sustainability and thus helps to achieve their long term goals of poverty alleviation. On the other hand welfarists consider the subsidies as equity investment from the donors who do not require high rates of returns. Thus contradicting the institutionalists they believe that sustainability can be achieved not necessarily by overcoming the costs but with the help of subsidies also. Morduch (2000) terms the differing arguments of the institutionalists and welfarists as the microfinance schism. While considering the institutionalists view of self sufficiency it is important to know that many MFIs are self sufficient as they tend to limit their credit to the borrowers who live in a given range of poverty line (Navajas et al., 2000). This evidence on self sufficiency gives that the MFI services are still out of reach of the poorest of the poor. As an example institutionalists see Gramen Bank as non self sufficient as even the flagship of MFIs, the Grameen Bank, depends on subsidies Morduch (1999). However, welfarists see it as real success as it reaches to the people who deserve it the most (Woodworth, 2000). More often non-profit organizations and MFIs are advised to expand their business and to become more self-sufficient (Ledgerwood 1999; Christen 1998) but unfortunately, there is no consensus to meanings of self sufficiency. Financial self-sufficiency is often defined in practice as income derived from operations divided by the operating expenses incurred, thus excluding revenue from subsidies (Vinelli 2002). Pollinger, Outhwaite and Cordero-Guzmn (2007) identified survival, sustainability, or self-sufficiency as three different modes in which MFIs usually operate. Organizations barely cover their monthly expenses while working under survival mode. Many of these organizations and programs eventually have to dissolve and explain the high organization and program mortality in the sector. Most organizations seem

Sustainability Issues of Islamic Microfinance in Pakistan: Akhuwat Case Study to operate between survival and sustainabilityor the ability of organizations to cover their annual budget through donations and other grants in addition to earned income from their lending operations.

The quest for sustainability and eventual self-sufficiency is widely regarded as a best practice in the microfinance industry. Vinelli (2002) offers five supporting arguments that explain why. First, sustainability helps ensure organization survival and the continuing provision of a financial service that is desired by many microbusiness owners. Further, defaults may increase if borrowers believe that a lender is not permanent or if they believe the lender will not punish them (Schreiner and Morduch 2002; Bhatt and Tang 2001; Gonzalez-Vega 1998; Bates 1995). Second, MFIs that price their products at market levels will be able to attract the target population of non-bankable (but potentially viable) borrowers who do not have access to cheaper products. Third, traditional lenders may be deterred from competing with organizations that enjoy large subsidies. Fourth, sustainability facilitates the ability to raise capital from a variety of sources. And, lastly, a focus on self-sufficiency could prompt MFIs to control costs. This may run up against other MFI goals, such as serving higher risk borrowers, the lending to which may lead to higher costs, but philanthropic donors should be more likely to respond to programs that understand their pricing and consciously manage costs.

In terms of increasing self-sufficiency, by targeting different segments of the microbusiness population, it is easier to generate value by lending to individuals with better credit records, due to their increased ability to handle debt and lower associated default rates. However, in doing so, an MFI must be careful not to subvert its mission. Vinelli (2002) suggests that mission drift can occur when a lender seeks profit not by working harder to make better and less expensive products but rather by searching for borrowers who are easier and cheaper to serve (Schreiner and Morduch 2002; Vinelli 2002).

Regarding pricing and self-sufficiency, Gulli (1998) suggests that institutions must charge sufficient interest rates to cover their costs. Bhatt, Painter, and Tang (2002) suggest that one reason for continued institutional dependence on subsidies is an unwillingness to charge the maximum legally allowable 9

Sustainability Issues of Islamic Microfinance in Pakistan: Akhuwat Case Study interest rates and fees that would allow programs to cover as much expense and risk cost as possible from operations. Bhatt, Painter and Tangs survey revealed that the average MFI interest rates in California of 11 percent were significantly beneath legal and regulatory constraints, which vary from state to state.

Self-sufficiency is seen as an appropriate mechanism for achieving the long-term viability of the microfinance sector. First, available resources and subsidies are too small to provide microfinance to all who might benefit from it. Second, a focus on self-sufficiency can lead to decreased costs through increased efficiency. Third, leverage is more easily attained by organizations that generate the means to repay debt. Finally, reliance on subsidies might alter a firms incentive structure in ways that could increase the likelihood of a negative event.

In case of Islamic microfinance the issue of sustainability is of relatively higher importance. Dusuki (2007) reviewed various microfinance schemes and discuss how Islamic banks can participate in such endeavor without actually compromising on the issue of institutional viability and sustainability. Parveen (2009) evaluated the sustainability of interest free microfinance institutions by following case study of Rural development scheme of Islamic bank Bangladesh Limited in particular. The research applies qualitative and quantitative measures of sustainability as suggested by Yaron et. Al (1998) and Schreiner M. (1999). The results of the study confirms the sustainability of the aforesaid interest free MFI.

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Sustainability Issues of Islamic Microfinance in Pakistan: Akhuwat Case Study

3.

DATA AND METHODOLGY

Akhuwat, an Islamic microfinance institution providing specialized microfinance services in Pakistan is taken as a sample for the current study. The data used in the research is of secondary nature as it has been collected from various reports, websites and published articles. However, a significant number of variables remain unreported in various years the researcher has been restricted to conclude the results upon the available information. Trend analysis technique is applied for assessing the sustainability issue. For measuring sustainability of the sample institution the researcher has chosen a) Institutional sustainability indicators, b) Market sustainability, c) Legal and Policy environment sustainability indicators and d) the Impact sustainability indicators for this study. Data analysis is mostly qualitative. However quantitative data analysis has been made where needed with the help of basic statistical tools e.g., average, percentage, ratio etc. The Institutional sustainability indicators include those dimensions of the organization, which deals with the internal environment of an organization. It may include MFIs a) Mission sustainability, b) Program sustainability c) Human resource sustainability and d) Programs financial sustainability. Mission sustainability refers to the strategic plan of the organization is well aligned with its mission statement and all activities thus carried on are in order to achieve the long term goals as stated in mission statement. If changes are brought about in the mission statement, it would be through a pre defined and participatory process in the organization. Program sustainability occurs when the program remains client supported and no externally subsidized support is sought. Human resource sustainability means that the MFI is able to recruit, induct, train and maintain well-qualified staff that is capable of delivering the services as required. Financial sustainability means that the MFI is able to meet its operating costs, its financial costs adjusted for inflation and costs incurred in growth. It can be measured through a various indicators. For instance some of financial sustainability measures used in the study are i) Loan loss provision ratio, ii) Operating costs ratio, iii) Donation and grants ratio, iv) Operating self sufficiency, v) Financial self sufficiency and vi) Administrative efficiency.

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Sustainability Issues of Islamic Microfinance in Pakistan: Akhuwat Case Study Market sustainability deals with demand and supply of Microfinance. It deals with issues relating to the different types of the clientele, their differing types of needs, and designing products that suit the needs of this clientele. Servicing these needs in the most client friendly manner will lead to the sustainability of the demand. A sustainable supply of resources will need that the MFI is financially self-sufficient and meets all its costs from operations and has access to resources raised from the clients and from external sources at commercially viable rates of interest. The indicators used in current study that measure market sustainability are gross loan portfolio, no. of branches, range of products, target cities, proportion of rural clients, proportion of female clients and cost per loan. Legal and policy environment sustainability would deal with issues relating to legal forms of organizations, interest rates, savings mobilization, and resource mobilization from capital markets, from overseas commercial sources, etc. Impact sustainability is the positive changes that occur in the life of the poor family have to be sustained over the long term for the family to gradually emerge out of the state of poverty.

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Sustainability Issues of Islamic Microfinance in Pakistan: Akhuwat Case Study

4.

DATA ANALYSIS

4.1 Institutional Sustainability of Akhuwat: As already discussed institutional viability indicators include those variables that are related to the organizational characteristics and its environment it is important to know about the background of the sample Islamic microfinance organization, Akhuwat. 4.1.1 Background: Akhuwat with an objective of providing interest free microfinance in the society purely on Islamic Shairah compliance basis in order to enhance the standard of living was established in 2001. As the objective states that the operations of the organization revolve around the motive of provision of loans it is ensured that the loans are completely on Islamic principles. Therefore, Akhuwat offers only Qarz-e-Hasan loans to the poor and seeks no interest over it. The disbursement of loan in the form of Qraz-e-Hasan is mostly followed by guidance, support and empowerment to enhance capacity building of the poor. Another significant feature of the organization is its attachment with various religious places. The rationale of this kind of activity is to inspire people on religious grounds not only for voluntary fund raising but also to increase their sense of responsibility and repayment intentions. Another deviating feature of Akhuwat from conventional microfinance is to motivate the borrowers to donate for the others. This could be only possible for an institution if its recovery rate is about 100%. Akhuwat is registered under the Societies Registration Act of 1860. 4.1.2 Mission sustainability of Akhuwat: Akhuwats operational objectives are well aligned with its mission of alleviating poverty by empowering socially and economically marginalized families through interest free microfinance and by harnessing entrepreneurial potential, capacity building and social guidance. Over the last decade of its operations Akhuwat has been successful in expanding its loan portfolio on interest free basis to the poor individuals as well as families not only for the entrepreneurial objectives but also for consumption smoothing and life sustenance. 13

Sustainability Issues of Islamic Microfinance in Pakistan: Akhuwat Case Study 4.1.3 Program sustainability of Akhuwat: Regarding program sustainability it is observed that over the last decade the clientele base of Akhuwat has been increasing. The program of providing interest free loans has gained popularity among not only those who were earlier deprived of the microfinance due to non availability of interest free microfinance but also among the users of conventional finance. Evidence on the program sustainability of Akhuwat is its innovative approach toward converting borrowers to the donors that is possible only when the recovery rates are around cent percent. Further, Akhuwat is also offering to extend its support and guidance to other MFPs who are interested to replicate Akhuwats microfinance model, which is another evidence of its program sustainability. Table 4.1.2: No. of active loans by Akhuwat each year during 2001-2010 2001Year No Loans of 192 282 832 3,124 6,264 8,674 11,388 13,821 21,073 2002 20022003 20032004 20042005 20052006 20062007 20072008 20082009 20092010

Source: Pakistan Microfinance Network

4.1.4

Human resource sustainability of Akhuwat: Human Resource sustainability means that the MFI is able to recruit, induct, train and maintain well-qualified staff that is capable of delivering the services as required. The guiding principle of the Human resource in case of Akhuwat is the volunteerism. From the top level executives to the unit manager (field officer) every staff member is guided by the sense of responsibility and volunteerism. The second variable includes the number of employees that the MFI is able to recruit. Akhuwat has well defined recruitment policy in which intake is made as interns. Vacant positions are filled with suitable candidates possessing requisite qualifications. The academic level required for Unit Managers is Matriculation or Intermediate, for Branch Managers Bachelor in Commerce or equivalent degree is required. The new hires are given 3 month training during internship period. Well defined policy manual on every area of operation is designed to guide the 14

Sustainability Issues of Islamic Microfinance in Pakistan: Akhuwat Case Study employees on various steps. The increasing number of employees every year in Akhuwat indicates that the organizations human resource sustainability occurs. Table 4.1.3: No. of employees in Akhuwat each year during 2001-2010 2001Year No.of employees 3 3 12 32 50 75 76 90 215 2002 20022003 20032004 20042005 20052006 20062007 20072008 20082009 20092010

Source: Pakistan Microfinance Network

4.1.5

Programs financial sustainability of Akhuwat: In order to measure financial sustainability of Akhuwat the researcher has used following measures.

i)

Loan loss provision ratio: Indicates provisioning requirement on loan portfolio. The formula of Loan loss provision ratio is Loan loss provisions divided by average performing assets. This ratio is desired to be decreasing over time. In case of Akhuwat the overall trend is decreasing with exception of 2005-06.

ii)

Operating costs ratio: it is the key indicator of efficiency of lending operations of an MFI. MFIs are expected to lower this ratio to achieve efficiency over the time. It is the ratio of operating expenses to the average performing assets. The operating cost ratio exhibits a mixed trend in case of Akhuwat. This means that sometimes it is able to decrease its operating cost ration and sometimes fails to do so.

iii)

Donation and grants ratio: the purpose of this ratio is to show dependency of institution on outside funding for its operations. Generally decreasing trend is desirable as it shows less dependency on external funding and more on its net profit margin or internal resources. In case of Akhuwat initially the only source of income was the registration fee paid by the members. But over the years the organization is able to get donations from its borrowers on voluntary basis. In case of Akhuwat this ratio is also not unidirectional. 15

Sustainability Issues of Islamic Microfinance in Pakistan: Akhuwat Case Study iv) Operating self sufficiency: It is the indicator of efficiency of the organization. The financial income is divided by financial and operating costs plus loan loss provisions to get this ratio. This is a measure of ability of MFIs to cover the costs of operations through internally generated income. An increasing trend is desirable to show increasing operating self sufficiency. Though the trend analysis of Akhuwat shows that self sufficiency decreased during 2006-07, and 2008-09 it managed to revise in 2009-10. However overall the self sufficiency indicator is showing a high ratio. Table 4.1.4: Financial Sustainability Index for Akhuwat 2004Financial Sustainability Indicators Loan loss provision ratio (%) Operating costs ratio (%) Donation and grants ratio (%) Operating self sufficiency (%) Financial self sufficiency: a. Return on Performing Assets (%) b. Loan Recovery profile (%) Administrative Efficiency (%) 11.31 4.03 11.18 99.95 3.32 9.51 99.50 5.44 14.04 99.50 4.49 11.80 99.37 5.19 12.88 99.50 4.33 05 0.57 12.00 70.78 91.69 200506 0.54 12.89 80.78 85.78 200607 0.90 13.77 31.43 69.05 200708 3.06 14.63 29.88 99.03 200809 0.42 25.61 37.29 76.84 200910 0.55 15.39 64.45 94.88

v)

Financial self sufficiency: It is further measured by a) Return on Performing Assets: As the name suggest it is the financial income of the MFI divided by the Average performing assets. It indicates the financial productivity of the advances made by Akhuwat. In case of Akhuwat the only financial income is the registration fee paid by each member when application is put for the credit. The trend

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Sustainability Issues of Islamic Microfinance in Pakistan: Akhuwat Case Study analysis of this ratio exhibits a weak performance during 2005-06. Otherwise overall the performance is improving. b) Loan Recovery Profile: the recovery rate of the MFI is an important indicator of its financial performance. The loan recovery rate remained around 100% in case of Akhuwat. vi) Administrative efficiency shows the ratio of administrative expenses to average outstanding loan portfolio plus average outstanding loan portfolio. The lower ratio is a positive trend. Akhuwat is able to achieve a very low administrative efficiency ratio that means a positive trend. 4.2 Market sustainability of Akhuwat: As described earlier the issue of market sustainability deals with demand and supply of Microfinance. In Pakistan the market for microfinance is well developed and regulations are also given by the central monetary authority of the country (SBP). In case of Akhuwat being a unique type of Islamic microfinance providing institution almost no competition is faced in the market. Although there are various Islamic microfinance providers in the country e.g., CWCD, Islamic relief, Muslim Aid and Naymat etc. but Akhuwat has its specialized feature of non participatory mode of financing that is based on only Qarz-eHasan. Various loan products are introduced by Akhuwat on Qarz-e-Hasan mode of financing with zero interest rate. Gross loan portfolio indicates the volume of loan amount disbursed that is increasing tremendously over the time. No. of offices shows the network expansion of the MFI. Akhuwat is expanding its network by opening its offices in different cities as well as allowing other MFIs to replicate Akhuwat microfinance model. Unfortunately its clients are non rural. That means it has limited outreach. The table shows proportion of rural clients to the total borrowers is zero. Proportion of female clients remains around 30%.

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Sustainability Issues of Islamic Microfinance in Pakistan: Akhuwat Case Study Table 4.2: Market Sustainability Index of Akhuwat during 2004-2010 Market Sustainability Indicators Gross loan portfolio (million Rs.) No. of offices Rural clients/ members (%) Female clients/ Borrowers (%) 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 32.3 6 0 46 44.8 10 0 39 57.7 15 0 30 76.5 20 0 30 110.7 27 0 30 196.1 49 0 30

4.3 Legal and policy environment sustainability of Akhuwat: Akhuwat enjoys tax exemption granted by the Commissioner of Income Tax under section 2(36) of the Income Tax Ordinance 2001. Akhuwat is also registered with Pakistan Centre for Philanthropy (PCP) and Pakistan Microfinance Network (PMN). 4.4 Impact sustainability of Akhuwat: Though the impact should be measured in terms of number of clients that moved from hard core poverty level to the average poverty line or escaped from poverty line with the help of microfinance of an institution in absence of any such measure the researcher has used the cost per loan, cost per unit currency lend, and clients per credit officer to assess the quality of services provided to the clients. Table 4.2: Impact Sustainability Index of Akhuwat
Impact Sustainability Index for Akhuwat Quality of services Indicators\Year Cost per Loan (Rs.) Cost Per Rupee Lent Active Loans per employee Amount Disb. per employee (Million Rs.) 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 955 0.097 51 0.632 883 0.089 90 0.930 692 0.068 67 0.709 613 0.060 89 0.994 731 0.069 123 1.320 895 0.086 116 1.199 953 0.089 160 1.611 1041 0.088 162 1.825 1075 0.090 91 1.171

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Sustainability Issues of Islamic Microfinance in Pakistan: Akhuwat Case Study 5 CONCLUSION AND DISCUSSION

The research paper mainly covers sustainability issue of the Islamic microfinance institutions taking Akhuwat as sample. The researcher has used four different dimensions namely institutional sustainability, market sustainability, legal environment sustainability and impact sustainability to assess the sustainability. All measures prove that Akhuwat is highly sustainable. In terms of institutional viability Akhuwat is focused to its objectives of providing interest free loans and other supports to capacity building of the clients. The provision of Islamic finance (non-participatory mode) is highly encouraged by the clients. The loans are provided for establishing new business or expanding an existing one, for repayment of loans taken from money lenders on exorbitantly high interest rates, Education purpose, health care and emergency purpose, housing, and marriage. Akhuwats Mutual Support Fund has been created to support its clients and their families during extreme events like death or permanent disability. The increasing range of products offered by Akhuwat is a positive program sustainability measure. On the other hand human resource sustainability indicators are also improving over the time. The number of employees is increasing over the time. Moreover, employees recruitment plan is well defined along with induction and training design. Overall financial sustainability index of Akhuwat is indicating that the program is able to improve over the years in terms of its operational and financial self sufficiency. Akhuwat has a unique model of collecting donations and grants. It doesnt depend on any one significant donor for donations and grants rather the donations are gathered from a large number of donors. The amount of donation may vary from tens to millions. The grants and donations received each year are also increasing. Akhuwat has a characteristic to motivate their clients to donate voluntarily. This is also contributing to increase the income of Akhuwat. The loan recovery profile is also excellent. Administrative efficiency indicates that Akhuwat is able to spread its administrative expenses over large outstanding loan portfolio which is most desirable to achieve financial efficiency. The market for the Akhuwat programs holds big opportunity for her. The competition is very low and the clients are more inclined to borrow from an Islamic microfinance institution in case of Pakistan. Thats why the gross

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Sustainability Issues of Islamic Microfinance in Pakistan: Akhuwat Case Study loan portfolio, no. of offices and no. of loans disbursed each year is increasing over the years. But unfortunately the rural outreach is zero. That is a major setback of the institution. However, it maintains around 30 percent of women clients with respect to total borrowers. Akhuwat enjoys a legally protected and sound environment. The impact sustainability as measures in terms of quality of services provided to the clients is also improving over the time. The cost per loan is very low as compared to other conventional MFIs in the country.

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Sustainability Issues of Islamic Microfinance in Pakistan: Akhuwat Case Study

RECOMMENDATIONS

On the basis of the current research the researcher recommends that as a future policy objective Akhuwat should offer variety of financing modes other than Qarz-e-Hasan. There is dire need to introduce innovatory products including participatory mode of Islamic financing like Musharika, Mudarba or product based financing like Murabaha, Bai-salam, etc. according to the needs of poor to increase the earning capacity of the poor entrepreneurs. Akhuwat should allocate some funds to the survey and research for the client needs and should develop the products accordingly. The program is mainly focusing Punjab Province. It should also go beyond the province to cater the needs of the poor. The rural outreach is very low. Regardless of cost inefficiencies it should expand its network to rural areas and target the hard core poor. The proportion of women clients is around 30% over the years. Akhuwat should motivate women clients to get benefited from the loan and increase their earning capacity. Akhuwat can also give the vocational training for their capacity building purpose. An independent survey must be conducted to measure the impact of the operations each year. This will be indicating the number of poor who managed to get out of poverty by Akhuwats interest free microfinance. Savings of the poor and vulnerable is a huge potential that can be utilized by Akhuwat only if it gets scheduled IMFI under SBP regulations given for Islamic microfinance institutions to get savings and deposits from the poor. Transformation of Akhuwat into Islamic microfinance bank will be a great measure to reduce all sorts of scale and performance inefficiencies. On the other hand researcher suggests that other microfinance institutions should also replicate the Akhuwat model with necessary innovations. Islamic banking and Islamic microfinance not only share the belief and concept theoretically but the modes of finance are also same. Therefore, Islamic banks operating in the country must also extend their cooperation with Islamic microfinance institutions not only to assist them in improving their scale and performance efficiency but this could also be business area for them also. This would help them to raise the micro deposits which if properly channelized have great potential of capacity building.

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Sustainability Issues of Islamic Microfinance in Pakistan: Akhuwat Case Study 7 LIMITATIONS AND FUTURE RESEARCH

The researcher had to limit the sample of the case study and restrict herself on the availability of data from various database resources. Many figures for various years remained missing. Therefore, some alternate variables have been used to measure sustainability dimensions. A future research on comparative and/or cross country analysis on sustainability issue of Islamic microfinance institutions is a potential research area.

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Sustainability Issues of Islamic Microfinance in Pakistan: Akhuwat Case Study

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Sustainability Issues of Islamic Microfinance in Pakistan: Akhuwat Case Study

Parveen J.A (2009), Sustainability issues of interest-free micro-finance institutions in rural development and poverty alleviation: The Bangladesh perspective. Theoretical and empirical researches in urban management number 2(11)/ May 2009. Pollinger, J. Jordan, Outhwaite, John and Cordero-Guzmn, Hector (2007), The Question of Sustainability for Microfinance Institutions. Journal of Small Business Management 2007 45(1), pp. 2341 Rahman A (1999), Micro-credit Initiatives for Equitable and Sustainable Development: Who Pays? World Development, 27, (1), p. 67-80. Schreiner, Mark and Jonathan Morduch (2002), Opportunities and Challenges in Replicating Microfinance in the United States. Eds. J. H. Carr and Z. Y. Tong. Washington, DC: Woodrow Wilson Center Press 1961. The MIX Market, www.mixmarket.org accessed in 2011. Vinelli, Andres (2002). Financial Sustainability in U.S. Organizations, in Replicating Microfinance in the United States. Eds. J. H. Carr. and Z. Y. Tong. Washington, DC: Woodrow Wilson Center Press, 137165. www.akhuwat.org.pk Yaron et al. (1998), Promoting Efficient Rural Financial Intermediation, The World Bank Research Observer, 13 (174), Washington, DC, World Bank, 1992b.

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