Abstract
This case describes how Akhuwat - an Islamic microfinance NGO, working in various parts of Pakistan on qardal-hasan basis, significantly reduced high operating cost through its innovative and Islamically charished process of benovelence and cooperation. In conventional microfinance models, high operating cost is usually considered as unavoidable cost and is ultimately transferred to the poor clients as direct credit supply cost. Akhuwat first channelized qardal-hasan to the poor and financially marginalized communities in Lahore region through technically viable, cost efficient, socially responsible and religiously compatible processes which distinguished Akhuwat model of Islamic microfinance. The scheme is now being replicated in other regions and by other similar organizations. This case explains how Akhuwat devised mechanism to minimize operating cost to increase the chance of provision of loans to the poor on sustainable basis while putting minimum financial burden on the organization.
Highlights
Unlike the banking industry, where cost of borrowing is considered as a major part of the total cost, operational cost of Micro finance Institutions (MFIs) is considered as a dominant part of total cost to the recipients
Operational cost of MFIs comprises 67 percent of the total cost of financing, which augments the cost of credit supply and are charged from the poor and financially marginalized communities in the form of high interest rates
Fee Zero Zero Rs. 100 - 200 per application Around 1% of loan amount. This case highlights a common problem faced by the microfinance institutions, i.e. high operating cost,and how an Islamic microfinance NGO-Akhuwat, devised mechanisms to reduce it to the maximum possible extant
Summary
AND BACKGROUND Unlike the banking industry, where cost of borrowing is considered as a major part of the total cost, operational cost of Micro finance Institutions (MFIs) is considered as a dominant part of total cost to the recipients. High operating cost is usually considered as unavoidable cost and is transferred to the poor clients as direct credit supply cost. Asan to the poor and financially marginalized communities in Lahore region through technically viable, cost efficient, socially responsible and religiously compatible processes which distinguished Akhuwat model of Islamic microfinance.
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