Professional Documents
Culture Documents
Submitted To Dr. Arsalan Hashmi: Strategic Financial Analysis and Design Assignment#3
Submitted To Dr. Arsalan Hashmi: Strategic Financial Analysis and Design Assignment#3
Submitted To Dr. Arsalan Hashmi: Strategic Financial Analysis and Design Assignment#3
ASSIGNMENT#3
PROGRAM MBA
COURSE ID 1 105897
STUDENT ID 6606
1. What is a microfinance institution? Describe the origins and business model of
a conventional microfinance institution.
Microfinance, also called microcredit, is a type of banking service provided to
unemployed or low-income individuals or groups who otherwise would have no other
access to financial services. While institutions participating in the area of
microfinance most often provide lending—microloans can range from as small as
$100 to as large as $25,000—many banks offer additional services such as checking
and savings accounts as well as micro-insurance products, and some even provide
financial and business education. The goal of microfinance is to ultimately give
impoverished people an opportunity to become self-sufficient.
The microfinance system gave loans to the poor for starting small businesses,
such as a single-sewing machine stitching unit, a fruit and vegetable street cart, a
bicycle rickshaw for a period of 1–3 years.
Microfinance allows people to take on reasonable small business loans safely,
and in a manner that is consistent with ethical lending practices.
These loans were repayable in small monthly instalments.
Given that most microfinance clients could not offer any physical collateral
against loans, MFIs used an alternative method called ‘social collateralization’.
The method of MFIs employed ‘Loan Officers’ who helped people apply for
microloans by facilitating the creation of a group of borrowers and providing
trainings on the application process, including the MFI’s rules and regulations.
For each loan extended to a group member, the remaining group members
provided guarantees.
Microfinance Supports Educating Entrepreneurs.
In case a group member failed to return the loan, the entire group would be
barred from future lending.
The model worked as an alternative to physical collateral to MFIs as the group
members kept each other under check for the return of the loan and misuse of
funds.
MFIs borrowed most of their capital from financial institutions in order to
generate loans. In some government organizations would set up consortia of
financial institutions that would facilitate the provision of capital to MFIs.
MFIs would add their operational costs to the interest charged by these lending
institutions that would result in subsequent higher interest rates charged by the
MFI.
2. What is Akhuwat? What are the similarities and differences between Akhuwat
and a conventional microfinance institution?
Akhuwat was established in 2001 to help the poor and financially marginalized
communities through virtue-based approach to poverty alleviation derived from the
Islamic history of mawakhat¯ e Madina, a cooperation arrangement suggested by the
Prophet (PBUH), acting upon which the well off Ansaar of Madina shared their
physical and financial resources with Makki emigrants to support their livelihood and
help them earn with dignity (Babar et al., 2011).
SIMILARTIES:
Microfinance institutions
Provide micro finance with some collateral security to the poor section of the society
Provide financial assistance to the poor people.
DIFFERENCES:
Given that most microfinance clients could not offer any physical collateral against
loans, MFIs used an alternative method called ‘social collateralization’.In the
conventional banking system, ‘collateral’ is usually taken to mean the pledge of an
acceptable (generally solid and redeemable) asset as security for a loan or credit. But
in the different philosophical setting of Islam, where people matter and man plays the
central role, a different value system is practiced. Here, ‘collateral’ is understood to
stand for attainment of certainty and security based on the solid foundation of the
transaction and good performance of the undertakings to minimize the risk to return
on the capital. In this context, the word ‘collateral’ is generally replaced by the phrase
‘sufficient security.’ The security needed here has much to do with proper utilization
of the code of ethics combined with the intellectual property of the applicant – which
has rarely.
5. Why was Akhuwat criticized for its financial model? How was Akhuwat able
to
perform and grow exceptionally well despite these criticisms?
Despite of the success of Akhuwat , it was often criticized for having a financial
model that was deemed unsustainable in the microfinance industry. The government
could recall its loan at any time if it was not satisfied with Akhuwat’s performance.
The fact that it consumed its own lending base to meet its operational expenses was
seen as an unsustainable practice. Most experts on banking and finance
recommended that Akhuwat should charge at least some portion of its operational
expenses to its clients. It was still able to grow well despite of such criticism because
of the patience, hard work and dedication of Dr. sahib , ‘the founder and CEO of
Akhuwat and his team. Dr Saqib believed that Akhuwat could remain financially
sustainable as long as the recovery rates were kept high, operational expenses were
kept low and enough additional funds were raised every year.