SUSTAINABILITY ISSUES OF ISLAMIC MICROFINANCE IN PAKISTAN: AKHUWAT CASE STUDY

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Sustainability Issues of Islamic Microfinance in Pakistan: Akhuwat Case Study

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SUSTAINABILITY ISSUES OF ISLAMIC MICROFINANCE INPAKISTAN: AKHUWAT CASE STUDY

FULL NAME: SOBIA EHSAN

AFFILIATION: NUST BUSINESS SCHOOL

NATIONAL UNIVERSITY OF SCIENCE AND TECHNOLOGY

H-12, ISLAMABAD.


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Sustainability Issues of Islamic Microfinance in Pakistan: AkhuwatCase Study

Abstract:

Islamic microfinance has emerged as a powerful weapon to fight against poverty in countries with

majority of Muslim population. From demand side t he 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 suchmicrofinance 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.


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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 1981 1990 2005

Nepal - 77 54.7

Bangladesh 44.2 49.9 50.5

India 59.8 51.3 41.6

Bhutan 47.4 51 26.8

Pakistan 72.9 58.5 22.6

Sri Lanka 31 15 10.3

Total 59.4 51.7 40.3

*Poverty Line is $1.25 per day

Source: Economic and Social Survey of Asia and Pacific 2010. ESCAP, UN.

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


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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:-


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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


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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.


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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
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to operate between survival and sustainability or 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
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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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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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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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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 w ith 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.


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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

Year

2001-

2002

2002-

2003

2003-

2004

2004-

2005

2005-

2006

2006-

2007

2007-

2008

2008-

2009

2009-

2010

No of

Loans 192 282 832 3,124 6,264 8,674 11,388 13,821 21,073

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


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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

Year

2001-

2002

2002-

2003

2003-

2004

2004-

2005

2005-

2006

2006-

2007

2007-

2008

2008-

2009

2009-

2010

No.of

employees 3 3 12 32 50 75 76 90 215

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.


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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

Financial Sustainability Indicators

2004-

05

2005-

06

2006-

07

2007-

08

2008-

09

2009-

10

Loan loss provision ratio (%) 0.57 0.54 0.90 3.06 0.42 0.55

Operating costs ratio (%) 12.00 12.89 13.77 14.63 25.61 15.39

Donation and grants ratio (%) 70.78 80.78 31.43 29.88 37.29 64.45

Operating self sufficiency (%) 91.69 85.78 69.05 99.03 76.84 94.88

Financial self sufficiency:

a. Return on Performing Assets (%) 11.31 11.18 9.51 14.04 11.80 12.88

b. Loan Recovery profile (%) - 99.95 99.50 99.50 99.37 99.50

Administrative Efficiency (%) 4.03 3.32 5.44 4.49 5.19 4.33

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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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-e-

Hasan. 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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Table 4.2: Market Sustainability Index of Akhuwat during 2004-2010

Market Sustainability Indicators 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Gross loan portfolio (million Rs.) 32.3 44.8 57.7 76.5 110.7 196.1

No. of offices 6 10 15 20 27 49

Rural clients/ members (%) 0 0 0 0 0 0

Female clients/ Borrowers (%) 46 39 30 30 30 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

2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

955 883 692 613 731 895 953 1041 1075

0.097 0.089 0.068 0.060 0.069 0.086 0.089 0.088 0.090

51 90 67 89 123 116 160 162 91

0.632 0.930 0.709 0.994 1.320 1.199 1.611 1.825 1.171 Amount Disb. per employee (Million Rs.)

Impact Sustainability Index for Akhuwat

Quality of services Indicators\Year

Cost per Loan (Rs.)

Cost Per Rupee Lent

Active Loans per employee


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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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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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6 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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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