Strategic Financial Analysis & Design

Assignment # 3

Daniyal Mirza (63280)

SUBMITTED TO:
Dr. Arsalan Hashmi

PROGRAM: (MBA)
 AKHUWAT: Measuring Success for a Non-profit Organization

Q-1) What is a microfinance institution and describe its business model? Also explain its
origins.

Microfinance Institution

Microfinance institution is an institution that provide loans to the poor people who can’t afford to
take loans from conventional banks. Microfinance institutions are free from any physical
collateral, they are using an alternative method known as “social collateralization”. In this
method, MFIs provide loans to person by assuring a guarantee from someone of its community.

Business Model

In microfinance institutions, the loan application is first submitted by the applicant to the loan
officer of that institution. Afterwards, the loan officer conducts the community verification of that
applicant through various interviews in the applicant’s neighborhood. After the interviews, the
loan officer submits their report to the Loan Approval Committee (LAC). These loan approval
officers review the documents submitted and accepts the loan disbursed to applicant. However, in
case the business plan seems not viable or in case if the LAC is not satisfied with the verifications
of the applicants, the loan applications are rejected.

Origin of Microfinance

The concept of Microfinance came into being in 1983, when the first ever microfinance bank was
incorporated by Dr Mohammad Yunus in Bangladesh which was named as “Garmeen Bank”
whcich means village bank in Bengali. The objective of this Microfinance institution was to
provide easy loans on easy terms to underprivileged people so they could manage their own
financial affairs. These loans were given to the poor even to start a very small business like for
buying a vegetable or fruit stree cart, a single-sewing machine unit and so on for the period of 1-3
years. This microfinance institution became an inspiration to other similar MFIs in around 100
countries. For his services as microfinance institutions, Dr Yunus also won the Nobel Prize in
2006.

Q-2) What is Akhuwat? How is Akhuwat different from a conventional microfinance

Akhuwat microfinance institution is the first and biggest non-profitable microfinance institution
around the globe and is the first to provide interest free loans. Akhuwat was originated in 2001
which was founded by Dr Amjad Saqib. The objective of Akhuwat is to provide financial help in
terms of loans to the underprivileged people that would have to be repaid eventually but without
giving any kind of additional interest charges to the institution with easy installments.

Akhuat is different from other conventional microfinance institution as Akhuwat is a non-

The concept of Social Collateralization came into being when the very first microfinance
institution “Garmeen Bank” was incorporated in 1983 by Dr Mohammad Yunus. The term
collateralization is very common in financial institution, however social collateralization is a bit
different from the collateralization that conventional bank use. All conventional bank use the
concept of “Physical Collateralization” in which the people have to provide mortgage in form of
their personal asset in order to get a loan from bank. However, in Microfinance institutions, the
loans are provided on social collateralization. This method was introduced to facilitate the
underprivileged people who can’t borrow high loans from conventional banks. In social
collateralization, the loan officers hired by MFIs help people apply for the loans by facilitating
the creation of a group of borrowers. After giving a loan to a group member, the other members
provide the guarantee on behalf of the applicant. By making such group, each member of the
groups gets the responsibility to keep a check on the person getting a loan and in case a group
member fails to repay the loan, the whole group would be barred from getting any kind of loan in
future. This is how MFIs social collateralization method worked out since each group member
makes sure that the applicant is repaying the loan and that’s how MFIs recovery is very high.

Yes, social collateralization is a good alternative to the physical collateralization because firstly,
everyone is eligible to get a loan in this case, even those who can’t afford to take high loans. On
the other hand, the people getting the loans don’t have to worry about losing their assets by
providing it as a mortgage to banks. They all can get loans without going through any hard
process with easy installments.

Q-4) How was Akhuwat able to minimize its operational expenses but still maintain very
high recovery rates over the years?

Akhuwat’s operational expenses are very low as compared to other MFIs or conventional banks
because Akhuwat don’t have any kind of huge buildings and offices to spend their expenses.
Akhuwat is working in a very simple way. Apart from that, Akhuwat is not hiring very qualified
employees to work from them. Since, Akhuwat is a non-profitable and interest free organization,
they are hiring normal employees who are usually working on a low salary.

Apart from that, Akhuwat is working on a social collateralization due to which the recovery rate
of Akhuwat is very high. They have been managing a recovery rate of more than 99% since their
incorporation. Due to social collateralization, every group member keeps an eye on the borrower
due to which Akhuwat do not face any issues in recovery and their expenses don’t go higher.

Q-5) Why was Akhuwat criticized by financial experts for its business model?
The main reason behind financial expert’s criticism was because Akhuwat was working as a non-
profitable and interest free organization since its incorporation. All financial experts reject the
idea of Akhuwat’s business model thinking MFIs cannot work as an interest free organization.
Even Dr Mohammad Yunus who was the founder of first ever Microfinance institution rejected
the idea of Akhuwat’s business model saying that there is no alternative to charging overheads to
the clients.

Dr Saqib has been successively running the Akhuwat foundation since 2001 with the same
business model that all the financial experts were criticizing which consist of no interest fee on
borrowing of loans and no mortgage was taken from the borrowers as a guarantee. The mindset of
Dr Saqib was that poor people can’t even afford the living, so it was not possible for them to bear
the cost of operations. The same mindset of Dr Saqib proved all the financial experts wrong and
Akhuwat was formed as an interest free and non-profitable organization with a recovery rate of
more than 99 percent. The experts who said there was no alternative to charging overheads from
clients saw Akhuwat itself becoming the alternative.

Q-6) Is Akhuwat successful in achieving its vision and making the social impact desired by
its founder? Explain

Akhuwat is quite successful in achieving its mission which was poverty eradication. The purpose
of Akhuwat foundation was to provide loans to the people who do not have enough money even
to open a small business for themselves. Akhuwat did not only managed to help the needy people,
but is quite successful in earning the trust of the people. These people was so inspired by
Akhuwat that more than 99% even return their loans on a given time. Mr Saqib through his
foundation promoted the brotherhood by making the practice of social collateralization even
easier by lifting up the interest charges. Mr Saqib did make a huge impact not only in the country,
but also around the globe by becoming the first and biggest Microfinance Non-profitable and
interest free organization.