Interest Free Microfinance

A potential step for inclusive growth and empowerment

Sahulat Microfinance Society

F. A. 18, Ground Floor, Near Ankur Public School,
Thokar No. 4, Abul Fazal Enclave, Jamia Nagar, New Delhi-110025
Phone no +91 11 29940031/32
E-Mail: sahulat2010@gmail.com Website : www.sahulat.org Sahulat Microfinance Society
 Interest Free Microfinance
A potential step for inclusive growth and empowerment

Sahulat Microfinance Society

F. A. 18, Ground Floor, Near Ankur Public School,
Thokar No. 4, Abul Fazal Enclave, Jamia Nagar, New Delhi-110025
Phone no +91 11 29940031/32
E-Mail: sahulat2010@gmail.com Website : www.sahulat.org Sahulat Microfinance Society
 Interest Free Microfinance
a potential step for inclusive growth and empowerment

Sahulat Microfinance Society

1
Any part of this report may be used with an acknowledgement of the source. For details
about the research studies or their further use please contact Sahulat Microfinance Society.
Information about where the report has been used will be useful for us.

Publisher: Sahulat Microfinance Society

First Edition: August, 2013

Conceptualisation: Arshad Ajmal and Mridu Kamal

Written and Edited by: Mridu Kamal

Cover Design: Stuti Kamal and Kishor
Layout and Designing: Kishor
Production Coordinator: Azim Hussain and Mridu Kamal

Printed by: Drishti Printers

For copies contact:

Sahulat Microfinance Society
F. A. 18, Ground Floor, Near Ankur Public School,
Thokar No. 4, Abul Fazal Enclave
Jamia Nagar, New Delhi-110025
Phone no +91 11 29940031/32
E-Mail: sahulat2010@gmail.com
Website: www.sahulat.org

Suggested Contribution: Rs. 150

2
 Preface

Microfinance, a phenomenon in the field of developmental economics,

conceptualized within the framework of equitable access to and just distribution
of financial services to address the issue of poverty. It has been implemented
with various approaches by many institutions across the globe especially in
the developing countries. The critique of microfinance in relation to its impact
on poverty alleviation too grew along with its popularity. A good amount of
research has been done on the microfinance industry encompassing both its
pros and cons. However, Interest-free Microfinance, its emerging variant, has
found very less space in academic literature as well as policies and almost
negligible space in practice.
Al-Khair Charitable Trust piloted this idea of Interest-free Microfinance
through Al-Khair Co-operative Credit Society Ltd. at a micro level in Bihar.
Sahulat Microfinance Society emerged out of this initiative to advocate for
an enabling policy and to implement the idea in other marginalized regions
of the country. As part of their advocacy efforts, Sahulat organized a National
Consultation in pursuance towards mobilizing support for the formulation of a
National Policy conducive to Interest-free Microfinance through Cooperatives,
in India.
This advocacy document comprises various aspects of the proposed
alternative model of Interest-free Microfinance Institutions, its experience
from the Al-Khair Co-operative initiative, the ways in which it addresses the
issues of conventional microfinance, challenges and limitations and the scope
of this model in the present Indian context.

3
 Acknowledgement

It is my pleasant duty on behalf of Sahulat Microfinance Society, to acknowledge

the gracious presence and valuable contributions of iconic Professor
M.S. Swaminathan, Member Rajya Sabha and Dr (Mrs) Syeda Saiyidain Hameed,
Member Planning Commission. We are grateful to the distinguished participants in
the consultation who shared their experiences with us and have helped us in visioning
the actualization of Interest-free Microfinance in India. This advocacy document has
been possible due to their efforts. We specially acknowledge the participation of
United Nations Development Programme (UNDP), Food and Agricultural Organisation
(FAO) International Co-operative Alliance (ICA), National Co-operative Development
Corporation (NCDC), National Cooperative Union of India (NCUI), Indian Farmers
Fertiliser Co-operative Limited (IFFCO), BASIX and Deepalaya.
In the backdrop of this endeavour, it was the continuous encouragement extended
by Hon. President of the society Prof. K. A. Siddiq Hassan who kept tracking various
developments during the preparatory stage of the consultation with utmost patience
that made the program possible and successful. We missed him in the Consultation
due to his illness, which is still prolonging. We pray for his full and speedy recovery.
We are grateful to Mr. Shashi Bhushan for providing us with his report titled “Small
Credits & Institutional Financing Gap” which has helped us in the formulation and
conception of this document. We also acknowledge Ms. Tahura Zia for her project
report “Viability of Microfinance in the Indian Economy using Islamic financial
instruments”. We are particularly thankful to Al-Khair Co-operative Credit Society Ltd.
for its constant assistance.
We acknowledge the contribution of Mr. Najmul Hoda, who was earlier with Sahulat
as Director, Research and Training.
For organizing the event we would like to acknowledge the support of
Mr. Pareethu Bava Khan and Mr. B.R. Nair, who took the pain to visit Delhi a couple of
times from Kerala for the same. Their ability to plan and accommodate every single
requirement made the National Consultation possible.
Our staff members under the leadership of Mr. Azim Hussain, Manager Operations and
Research, also worked relentlessly. I would like to mention their names individually,
Ms. Tahmina Laskar, Mr. Usama Khan, Mr. Sadiq Shabibi, Mr. Arshad Ali, Mr. Shiraz.S.
Poovachal, Mr. Fisal K P (intern).
This document is due to the effort of Ms. Mridu Kamal who gladly agreed to document
the proceedings of the National Consultation into a report, read a lot and develop
a sound understanding on Interest-free Microfinance to develop this advocacy
document. We are thankful to Ms. Stuti Kamal for the beautiful cover design. Last but
not the least we are thankful to Mr. Kishor for his tireless efforts to design and layout
the document with the best packaging.

Arshad Ajmal
Vice President

4
 Table of Contents

Preface

Acknowledgement

Introduction 7

Section I 9
Advocacy for Alternative Model:
Sahulat Microfinance Society

Section II 12
Interest-free Microfinance Model on the ground:
Al-Khair Co-operative Credit Society

Section III 21
Innovative Possibilities:
National Consultation on Interest-free Microfinance
Key note address: Professor M. S. Swaminathan
The Chief Guest’s Address: Dr Syeda Saiyedain Hameed
Deliberations of distinguished Speakers
Suggestions and Recommendations by Prof. Swaminathan

Annexures 43
List of Participants
Issues of Discussion by Dr. Ausaf Ahmad

5
6
 Introduction

This advocacy document acknowledges the fact that a lot has already been
written about the context and need for financial services in India, and thus
does not talk about the matter from the scratch. The performances of various
microfinance service providers, with respect to their mandates have also
been evaluated time and again by the Government institutions, INGOs and
NGOs with critical reflections on its structure, policies and functioning. This
has opened up the latent debates on alternative models and approaches to
microfinance which has a potential to address the issues of both formal and
informal financial services.
As mentioned in a study by SIDBI on interest rates and costs of Microfinance
Institutions (MFIs), 2011, concerns have been highlighted about (i) lack of
transparent pricing information on the interest fee and other fees charged to the
client (ii) the quality of governance of MFIs which became a matter of concern
since the mission drift was discernible in some of the MFIs. In certain regions,
aggressive competition among MFIs also resulted in (a) excessive financing
to clients (b) inadequate due diligence in client acquisition and financing (c)
lowering of disciplinary standards and (d) coercive recovery practices.
Microfinance is addressing only those who are much above subsistence level,
thus defying the idea of alleviating poverty. According to the Rural Finance
Access Survey 2003 (RFAS)1 conducted by the World Bank, 21% of rural
households have access to credit from a formal source. The implications are
predictable – impoverishment, distress and migration sometimes leading to
extreme conditions. The SHG model for microfinance has been studied by a
women’s organisation called Nirantar2 and the findings turned the tables on the
idea of inclusiveness and women’s empowerment through SHGs. It stated that
although SHGs provide opportunities for women to have access to loan money,
they certainly do not ensure women’s entitlement to the use of resources the
money provides. It rather burdens the women with the repayment of loan. It
also brought forth the fact that women from most marginalised sections of
society, due to various reasons could not benefit from this model.
Given the above mentioned conditions, microfinance services have been
effectively accessed by broadly the income groups which have been able to

1
https://openknowledge.worldbank.org/bitstream/handle/10986/8311/wps3646.pdf?sequence=1
2
Nirantar; Examining SHGs: Empowerment, Poverty Alleviation and Education-A qualitative Study

7
repay on time, deposit assets to secure credit facilities, wade their way through
the lengthy process to secure micro credit that too mainly for investment
purposes. The lower income groups which have tried to access these services
have also faced various circumstances in the face of inability to secure these
services, deposit assets, inability to repay etc. The Malegam Committee Report
clearly stated the dire need to make provisions of micro credit for borrowers
from low income groups, requiring small amount of loans without collaterals for
both income generating activities consumption purposes for shorter period.
In the light of above reflections and recommendations, MFIs could possibly
start mobilising micro-savings for generating micro-credits for productive
purposes. However, a portion of loanable fund might also be utilised for
genuine consumption needs, like education, asset creation, health etc.
Microfinance activities might include micro-insurance and money transfer at
a later stage. These are the most important financial services needed by the
poor. The secondary services might include enterprise credit, pension, equity
transaction and leasing. MFIs should have a clear goal to reduce economic
disparity in society instead of only financial inclusion. To achieve this goal,
MFIs should be very clear on two counts:
First, it should work for economic inclusion of marginalised sections of the
society. In the Indian context, marginalised section means primarily Dalits,
Muslims and Adivasis.
Second, it should work on the basis of participatory finance with stress on
interest prohibition. Moreover, it should work on self-sustained basis in
utility model3
This document rather takes up from this point onwards where Sahulat
Microfinance Society, an organization working on microfinance with an
alternative approach, explores the viability of an alternative model to MFIs
addressing the inherent identified issues within the existing models and
approaches. The document has three broad sections. The first section
introduces Sahulat Society and elaborates on its vision and approach towards
Interest-free Microfinance. The second section is a case study of the Al Khair
Cooperative Credit Society and its experimental intervention on Interest-free
Microfinance. The last section is the report on the National Consultation to
advocate this model followed by recommendations and suggestions by Prof.
M.S. Swaminathan for its sustainability and viability.

3
Stiglitz, Joseph; Joseph Stiglitz wants to bring banks back down to sub-state size; http://demandsideblog.
blogspot.com/2009/12/joseph-stiglitz-wants-to-bring-banks.html

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 section I

Advocacy for Alternative Model: Sahulat Microfinance Society

Sahulat Microfinance Society is a voluntary, non-political and non-profit social
service organization committed to economic development of underprivileged
and weaker sections of the society especially the Muslim community. Born
out of the idea to upscale the Al-Khair’s Intervention (this will be discussed
in details in the next chapter), the society aims to provide Interest-free
Microfinance (hereafter referred as IfMf) options for removing socio-economic
disparities and achieving justice and equity for sections of society that face
multiple marginalization. One of the mandates of Sahulat Society is to work
essentially in the areas where 25% of the population is Muslim.
Established in 2010, its main function is to facilitate organizing and developing
institutions, more particularly co-operatives, at the grass root level with the
aim to provide IfMf to the people with whom it works. With this approach it
aims to emerge as a complimentary model in microfinance towards alleviating
poverty in Indian context. This approach is in sync with the recommendations
of the Malegam Report which states that, “given the imperfect market
in which the sector operates and the small size of individual loans, high
transaction costs are unavoidable. However, when communities set up their
own institutions, such as SHG federations and cooperatives the transaction
costs are lower.”
The society advocates and aims to establish microfinance units across the
country on a model based on interest free Co-operative Framework and
principles, targeted at those just above the subsistence level.
It was recognized that in order to achieve the ultimate goal of establishing
IfMf units across the country, an in-depth understanding of the issues and
challenges in the practical implementation would be necessary. Hence, a
pilot at a micro level was done by the Al-Khair Co-operative Credit Society
(hereafter referred to as AKCCS) in 8 towns of Bihar and Uttar Pradesh. The
effective outcomes and impact of the intervention by AKCCS suggested that
this could be implemented at different locations in India with the most poor
and marginalised communities, with special focus on Muslim community.

9
Interest-free Microfinance
Another chief characteristic of Sahulat model of development is that it pleads
for Interest-free finance. Although the International Monetary Fund (IMF) and
the World Bank researches have already dispelled the myth of impracticability
of interest-free model, Sahulat model also addresses the scepticism around
the non-viability and non-feasibility of the idea.
On a theoretical plane, Interest free finance has established the much-talked-
about linkages of social responsibility with the commercialisation of the
financial sector. Interest free financial institutions have also demonstrated
inherent strength and soundness, in the face of the recent massive economic
crisis. Another importance of Interest-free model emanates from the fact that
it addresses several issues of existing microfinance operations i.e. high rates
of interest charged to the borrowers, multiple lending, and high handedness
in loan recovery. Thus, interest-free microfinance prospers under co-operative
mode with the trait of socially responsible financial activity.
Regarding its viability at the operational level, the resources coming from
members may be used in a manner where profit or income earned through
these deposits/investments is shared with the members/investors in a pre-
agreed ratio. Thus interest free doesn’t merely mean cost-free or return-
free. The major activity of the IfMf institution on the asset side would be to
finance income generating activities which could replenish the resources of
the institution in various forms.

The Cooperative Framework

A Sub-Committee to the Malegam Committee recommended that a NBFC-
MFI may be defined as, “A company (other than a company licensed under
section 25 of the Companies Act, 1956) which provides financial services
pre-dominantly to low-income borrowers with loans of small amounts, for
short terms, on unsecured basis, mainly for income generating activities,
with repayment schedules which are more frequent than those normally
stipulated by commercial banks and which further conforms to the regulations
specified in that behalf.” The cooperative model advocated by Sahulat and
experimented by the Al-Khair Credit Society abides by the above mentioned
recommendations. The cooperative approach to development recognises the
importance of internal factors which is extremely useful for microfinance as
it generates loanable funds from within. By internally generating loanable
funds, it is able to address chief criticism against microfinance institutions that
their executives function as mere disbursement officers. Here the members

10
Members engaging in financial transactions at AKCCS‘ Phulwarisharif Branch

own the enterprise, take and implement decisions as well as benefit from
the enterprise. Sahulat Microfinance Society has chosen to adopt cooperative
approach for this reason besides its democratic functioning and peoples’
participation.
Cooperative societies, being a member based and democratically managed
legal entity, cater to various mutual economic needs of members covering
production, finance, and marketing etc. This is, therefore, an ideal form of
institution to undertake the task of interest free transaction with effective
control of the members without causing any major threat to the smooth
functioning of the system. It is a good fortune of co-operatives in the country
that the Central Co-operative Societies Act (Multi-State Co-operative Societies
Act 2002) as well as the liberal State Co-operative Societies Act does not
contain any obligatory provision for payment of interest either on deposits
mobilized from members or on loans given to borrowers. This is conducive to
Interest free model.

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 section II

Interest-free Microfinance Model on the ground: AKCCS

Initiated its work in the heart of Bihar state, in few pockets of Patna district,
the trust owns the credit of creating an enabling environment for easy
access of micro credit to the marginalized population (especially the Muslim
population) through a cooperative model. Based on the principle of providing
livelihood opportunities for the poor, Al-Khair facilitated the formalization of
credit transactions without interest.
The Al-Khair charitable trust started its work in a few slums on education,
health, income generation and general awareness. The population coverage
during its intervention was around 3.50 lakhs. Besides, the hinterland villages
linked to Al-Khair supported programmes which increased the number
to around 50 thousand. But in terms of households, the outreach was
around 65,000. While working on income generation, the trust made a
few interventions like direct financial help, providing interest free loan and
providing capital (rent) for landless labourers to acquire cultivable land.
However the magnitude of help required particularly in the field of small
credit turned out to be so enormous that Al-Khair on its own began to think
of initiating an exclusive programme for small credit availability in its service
area on interest free basis.
With its understanding of class and caste dynamics in the area, the trust
conducted an exhaustive survey by
the title “From Center to Periphery” Al-Khair’s Profile
in the Phulwari Shareef area to assess
• The authorized share
the financial needs of the poor. The
capital of the society is
findings from the study highlighted a Rs. 1 Crore
few significant points given below.
• Paid up share capital in 2011
About 70% people were in specific was around 18.97 lakhs.
need of credit support • Membership in 2011 was
The small credits were short term 4145 and is open to all
credits. The stipulated duration individual.
for small amounts of Rs. 2,000 to • Every member has to sub-
5,000 was four months, even for scribe at least 10 shares.
interest based lending.

12
 Unavailability of relatively big size credit to eighty percent (79.17%)
demands clearly emerged as a critical gap.
In about 10% households at least two parallel borrowings were found
to operate involving the borrowers in a permanent debt-trap losing
substantial earnings and assets in interest repayment.
Almost all lending networks in the area were operated by people whose
tough, insensitive and aggressive ways were well established in the
society.
Due to inadequate outreach of formal financial institutions in the area,
16% small borrowers conceded to be in perennial need of small credit
losing substantial part of their earnings to money lenders.

Inadequate Access to Institutional Savings

Commercial Co-operative Gramin Post Other deposit Non
Banks Banks Banks Office Scheme Banking
43.90% 2.43% 1.63% 2.43% 4.86% 4.88%

The Trust registered its interest free credit intervention as Al-Khair Co-
operative Credit Society (AKCCS) under the Multi-State Cooperative Societies
Act, 2002 (MSCS, 2002). AKCCS is a pioneering organisation for successfully
implementing IfMf in 10 towns of Bihar and Uttar Pradesh and also for being
the inspiration for Sahulat to upscale the model in different parts of India.

Structure and Working of AKCCS

AKCCS was established with certain basic features - Functioning under the
cooperative mode adhering to 7 point cooperative principles; IfMf experiment
within the economy of the poor people; Deliberate avoidance from external
funding and minimizing the role of donation in Interest-free micro credit
management; Experimenting the viability of IfMf with nominal service charge
slab through cross subsidization from profit bearing transactions.
At the apex is the general body which consists of all the members of the
cooperative except those who stand disqualified under the bye-laws of
AKCCS. Below it is the Board of Directors who are elected by the members
in the general body meeting from among themselves for a term of 5 years.
The board meets for at least 4 times (quarterly) in a year and reviews the
progress of AKCCS and amends the policies as required. The model functions

13
in a way to address the issues of multiple borrowing, ghost borrowing and the
formation of vicious circle of debt trap.
There are three structures having three different kinds of roles and
responsibilities given below.
Structure for Policy Making: This consists of the Board of Directors and
the Standing Committee at the base of the pyramid who report to the
Chairperson who is accountable to the General Body.
Structure for Execution of Policies: In the descending hierarchy are the
Board of Directors, Managing Directors, Head Office, Branch Incharge and
Staff Members.
Structure for Loan Policy Disbursement: In the descending hierarchy are
the Board of Directors, Loan and Admittance of Members Committee
(LAMC) President, LAMC, Branch Incharge, Marketing Executive and Daily
Collector and then the Loanee (members who demand loan).

Membership
There are two types of membership in the Society. One for the Ordinary
members and another for the Nominal members.

Ordinary Members.
(i) Any person who resides within the area of operation of the Society, who
genuinely needs the services provided by the Society and whose interest
does not conflict with the interest of the Society.

Nominal / Associate Members.

(i) Society may, in the interest of promotion of its business, admit a person
as nominal member or associate member on payment of fee of Rs. 100.
(ii) Provided that such members shall not be entitled to subscribe to the
share capital of the Society.
(iii) They will not be allowed to have any interest in the management of the
Society including right to vote, contest election as Director of the Board
or participate in the General Body meetings of the Society.

Products and Services in AKCCS

The Society offers many types of products and a few services to enable the members
to access them during their requirements both for consumption as well as business.
Given below are the products in the Society.

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(I) Share
Every member has to subscribe to at least ten shares. The face value of each
share is Rupees 10 only. No member is allowed to hold more than one-fifth
of the share capital.

(II) Deposit
Deposits are raised without any liability for payment of interest or other
charges. There are two types of deposits-one is Call Deposit and the other
Time Deposit.
Call Deposit : It forms the backbone of the Society with 94% of total
deposit. Usually those institutions which have provisions for micro
deposits block these deposits. Thus when the depositors need cash they
are unable to access it easily. The interest payment on such deposits is
also not attractive. These issues have been addressed in this product to
make the micro deposits available to the depositors.
Daily Deposits, Monthly Deposits and Special Daily Deposits: Daily deposits
are recurring account. It is being collected from the doorstep of depositors
by the collectors of the society. Profile of recurring depositors is the
underprivileged section of the society. A good number of them are those
who earlier used to deposit their savings in interest based instrument.
Time Deposit: There are two Time Deposit instruments i.e. Sahyog
(Cooperation) and Earmarked Fund. A few others are are Amanat and
Child account. Amanat account is like any saving account sans interest.
Sahyog Account, launched in the initial stage of the society, targeted at
well-off people, who can deposit maximum amount of Rs. 10,000 without

Deposits
• Deposits are raised without any liability for payment of interest.
• Two types of deposits – Call Deposits and Time Deposits
• Call deposits – unblocked amount, easily accessible and especially
for underprivileged sections of the society. They form the base of
the Cooperative society i.e. 94% of total deposits.
• Time Deposits – targeting the economically well-off people for
deposits of larger amounts for longer periods. These help in
providing loans to the needy members.

15
 interest for a period of six months to three years. In the initial few months
this helped in raising money for providing loan.
Earmarked Fund account is a special account which gives an opportunity
to a depositor to willingly provide loan to any other person in need. For
this the depositor deposits the loan amount in this account and identifies
the person to be given loan. The Society assesses the situation of the
identified person and proceeds accordingly. The Society also collects
repayment of the loan during which the EMF account is blocked.

(III) Loans
Loans are granted to members only who are entitled to a loan amount of ten
times their paid-up share capital. There are four loan instruments
Demand Loan (DL)
Short Term Business Loan (STBL)
Mid Term Business Loan (MTBL)
Cost Plus Finance (CPF)
The DL and STBL are the main compenents of the Society and CPF aims at
making the Society viable.
Demand Loan is provided on one time processing fee which is variable on
different amount slab. The DL is the cheapest and most popular form of loan
extended by the Society. The maximum amount given under DL is Rs. 20,000.
It can be used for multipurpose needs. Some members use this loan for their
non-business or consumption needs like Abdul Razzaque and some others use
it for their income generation or business needs. This decision lies with the
members instead of the Society. DL formed 83% of the total loan disbursed in
the year 2009.
Short Term Business Loan is provided to small businessmen on profit sharing
basis. It is usually given to older members of the Society to start a short
duration business not exceeding 3 months. The maximum amount provided
is Rs. 50,000. 10-30% of the profit is shared by the Society on different loans.
Mid Term Business Loan is an effective option for businessmen to expand their
business on a large scale. This is provided to older members for a duration
exceeding 3 months. The maximum credit limit is Rs. 1 lakh. The profit or loss
is shared in the ratio of 30:70 between the beneficiary and Al-Khair.
Cost Plus Finance is provided for consumer durables. The Society purchases
goods on wholesale price and sells it on retail price to its members. The

16
difference between the two is earned
as profit. The maximum amount varies
from Rs. 35,000 - 40,000. The beneficiary Abdul Razzaque, 45 years
needs to make a down payment of 25% old, resident of Neora village
within 6 months and the rest in regular of Patna district, has been a
installments. member of Al-khair Cooperative
AKCCS also offers services like draft since its inception in his village.
making, issuing cash at par cheques and He presently owns a tailoring
submitting telephone and electricity shop in the village. He has been
bills. a recipient of the loan from the
society, thrice. The first loan of
How loanable funds are generated? Rs. 3000, in 2011, was taken
for the purpose of marriage of
Al-Khair has primary relied on developing a relative. This was repaid by
the habit of micro savings among the him within six months. A year
poor. It has been experienced that the later, he got another loan of
poor can be motivated to deposit their the same amount to purchase
micro savings if they are provided deposit a new sewing machine for
facilities at their doorsteps which is secure his shop which he repaid in 5
and which can be withdrawn easily. Due months. In 2013 he took a third
to this the Call Deposit Scheme for small demand loan of Rs. 5000 for
amount forms the highest i.e. 94% of getting his children admitted
the total deposits of the cooperative. It in the school and paying the
particularly helps the most marginalized school fees. He is in the process
section among the members, as it does of repaying it.
not lock the amount. Out of these micro
deposits, it is possible to generate
interest free loanable funds to the extent
of around 25% of total annual deposits,
maintaining liquidity without delaying
the withdrawal needs of depositors.
There are Time Deposits too which
target bigger amounts deposited for
longer periods without interest. There
are two types of Time Deposits – Sahyog
and Ear Marked. As the names suggests,
the former is to make revolving funds
available to other members and the
latter is to ear mark loan in the name of
a particular member as desired by the

17
depositor. The cooperative facilitates the availability of loans to the member
as well as facilitates the process of repayment.
The graph below provides the comparison of the three key ratios (growth
in total assets, in loans and in saving deposits) of AKCCS. The growth rate
for all the years (except in 2008) has stayed proportionate. Loan and deposit
growths have kept pace with the growth in total assets, thereby maintaining
profitability (Evans 1997). This shows that AKCCS has the potential to grow
and make profits in near future.

Years 2007 2008 2009 2010 2011 2012

In Total Asset 11.45% 70.99% 49.28% 83.65% 26.19% 49.52%
In Savings Deposit 9.30% 71.02% 53.00% 86.87% 17.13% 49.50%
In Loans 46.33% -28.97% 19.39% 49.85% 10.33% 49.80%

Opportunities and Possibilities through AKCCS

For Muslims living in the area, the establishment of AKCCS has been a great
opportunity. The economic situation of Muslims is worse than other Socio-
Religious Communities (SRCs) and they are further excluded from the financial
services and development processes.
To quote Justice Rajinder Sacchar Committee Report on Social, Economic and
Educational Status of Muslim Community in India.
(i) The access of Muslims to bank credit, including the Public Sector Advances,
is low and inadequate. The average size of credit is also meager and low
compared with other SRCs both in Public Sector Banks and Private Sector

18
 Banks. The position is similar with respect to finance from specialized
institutions such as SIDBI and NABARD. The 2001 Census shows that the
percentage of households availing banking facilities is much lower in
villages where the share of Muslim population is high. One of the reasons
for such an outcome could be non-availability of banking facilities in these
villages. The financial exclusion of Muslims has far-reaching implications
for their socio-economic and educational upliftment.4
(ii) The Committee reports that the access of Muslims to bank credit is low
and inadequate. The average size of credit is low compared with other
SRCs. The 2001 Census shows that the percentage of households availing
banking facilities is much lower in villages with high Muslim population.
Some banks have identified a number of Muslim areas as ‘negative
geographical zones’ where bank credit and other facilitates are not easily
provided. The average amount lent per account to Muslims is about half
that to other Minorities, and one-third of “others”. 5
This is due to the two pronged problem - Banks not appropriately providing the
targeted services to the poor Muslims and Muslims refraining from borrowing
loans on interest due to religious obligation. As one of the principles of AKCCS
is the provision of Interest free financial services, many Muslims are attracted
to AKCCS, have opened up accounts and have borrowed money from the
organization.
An internal study showed that Phulwari Shareef branch (oldest branch) of
AKCCS has the highest market share among Muslims having the income
level of Rs. 12,000 per month with 46% Muslims having their accounts in
AKCCS followed by Sahara Microfinance whose share was 26%. An important
reason for this is Call Deposit facility that AKCCS provides unlike any other
bank or MFI in the area. This implied, for the founders of AKCCS, that Call
Deposit has remained untapped when about 50% of India’s GDP comes from
the unorganized sector. This was seen as a very big market, which could be
converted into Call Deposits.

Challenges for the organization

Initially the Cooperative Society faced the limitation of sources of funds for
loans and operating costs. Revolving fund, deposits from members and service
charges on Demand Loans helped to meet these requirements. The recent

4
Social, Economic and Educational Status of Muslim Community of India (A Report);2006 Chapter VI; Page-136
5
Summary of Sachar Committee Report; Priya Parker; 2006

19
 challenges regarding implementation
and sustainability are non-literacy of
A 55 year old business members, non-availability of competent
woman, Dhanmatia Devi has staff, non- availability and feasibility to
been a regular interest-free bear the cost of competent staff, felt
loan beneficiary of Al-Khair. need to build capacities of the Board of
Initially running a bangle Directors in order to maintain and sustain
store, eventually expanded the liquidity and unmet requirements of
her business to various other corpus fund for future.
products. This was due to her AKCCS has recently started investment
association with the Al-Khair
portfolio which comprises Business
from where she took her first
Loan and Growth Fund. Growth Fund is
two Demand Loans of Rs. 3000
micro-equity in which members can buy
to establish her business in a
units of Rs. 500 each, and the money
fixed shop. Later she asked for
will then be invested in businesses with
the ‘Mid Term Business Loan’ of
profit motive. The profit accrued will be
Al-khair, which is based on profit
and loss shared in the ratio of
shared with the investors in 70:30 ratio
30:70 between beneficiary and in which AKCCS’s share will be 30%.
Al-Khair. For this she proposed This gives the more well-off members
to invest Rs. 5000 in her shop an opportunity to let their money grow
during the marriage season and just like in a mutual fund. The two
earn a profit of Rs. 1500 to 2000 investment portfolios were specifically
after 4-6 months. She refunded designed to invest money in businesses
the loan amount of Rs. 5000 to make profit from it which could be
after 4 months with Al-Khair’s used to subsidize the service charge
share of Rs. 500 (approx. 30% on DL (called as a “cross-subsidization
of profit), and earned a profit stage”) to cover up the losses incurred
of Rs. 1700 for herself. by AKCCS and then to make a reserve.
The founder member of AKCCS feels
that it is the absence of the ethical
line that has led conventional MFIs to
fail in addressing the issue of poverty
alleviation, adequately. In his words,

The issue here is not of

legal or illegal, it is of just or
unjust. We need to change
the frame of reference.

20
 SECTION III

Innovative Possibilities: National Consultation on IfMf

The above mentioned pretext of Al-Khair Cooperative Credit Society and
Sahulat Microfinance Society finds a place in the foundation stone of the
alternative microfinance model that Sahulat argues for. After a consistent
work on the experimentation of the model the society holds a position to open
up this dialogue in the public realm among the eminent persons related to
the concerned sector. Thus Sahulat organized a National level Consultation
on the challenges and opportunities of Interest-free Microfinance Institutions
through cooperative model. The purpose of the consultation was to elicit the
views of eminent participants from various sectors and provide a platform to
discuss the prospective challenges and opportunities within the concept.The
consultation was a rich discourse where various ideas, potentials, challenges
and concerns related to Interest-free Microfinance Model were tabled and
discussed.

Highlights of the consultation

Prof. M.S. Swaminathan, the Father of Green Revolution and member of
Rajya Sabha was the Key Note speaker in the consultation. Dr. Syeda Saiyidain
Hameed, Member, Planning Commission, Government of India, was the Chief
Guest of the evening. It was attended by other distinguished participants6
who contributed multi-dimensional views on the Interest-free Microfinance
model.
The deliberations in the consultation were spread over the aspects of
historical as well as the present context of credit issues in India, differential
requirements of credits, the potential of IfMf in the present context and
cooperatives as implementing institutions for IfMf. The modus operandi of
the model was suggested and the concerns and challenges regarding the
IfMf cooperative societies were highlighted. The consultation concluded
with a way forward to identify windows through which this model could be
contextualized for specific regions and could be successfully implemented to
alleviate poverty.

6
The participants list is attached as Annexure I

21
The consultation began with the welcome address by Mr. Arshad Ajmal, the
Chief Executive Officer and Vice President of Sahulat Microfinance Society.
He introduced Sahulat as one of the facilitating agencies for Interest-free
Microfinance through Cooperatives. He shared the vision and the long term
goals of IfMf with the speakers as well as other participants.
Mr. Ajmal began his address with reference to a statement given by Prof.
Swaminathan in Chennai in 2010 on the issue of farmer suicides in Andhra, in
which he had said that this issue can be addressed with an approach similar to
the approach of Islamic finance which does not charge interest on the amount
that it lends. Interest-free Microfinance draws its linkages to the essence of
this statement, said Mr. Ajmal and this consultation is a medium to delve deep
into this concept with Prof. Swaminathan and Dr. Syeda Hameed together
with other eminent and knowledgeable people who ranged from officials
from the National Cooperative Union of India (NCUI), National Cooperative
Development Corporation (NCDC), Railway Land and Development Authority
(RL&DA), International Cooperative Alliance and corporate sector to IfMf
activists, development economists, practitioners of IfMf and people from
organisations working on microfinance like Basix.

The Context and Objectives of the Consultation

Dr. Ausaf Ahmad, Board Member, Sahulat Microfinance Society, introduced
and sketched a contextual background of the origin of Al-Khair Co-operative
Credit Society and Sahulat together with the idea of IfMf Cooperatives7 and

7
The paper presented by him is attached as Annexure II.

22
he shared the objectives of the National Consultation which aimed to focus
on the following:

Objectives
Steps to overcome the practical hurdles in registration process of IfMf
Cooperative societies all over the country and mechanisms of suitable
cooperative structure.
Insights on the feasibility of interest free business model in the context of
a plural and democratic society like India.
Ways to achieve the objective of financial inclusion, socio-economic
upliftment, self- employment and reduction of poverty through Interest
free cooperative societies.
Development of marketable, ethical and socially responsible products
of IfMf with higher chances of sustainability in the Indian context and
mechanism for improving the service quality.
Methods of establishing and sustaining Interest free credit cooperative
societies in India under the Central/State Acts. The stress is on overcoming
hurdles involved in the process
It has been noticed that in development of sciences and models, there
is an inherent bias towards urban concentrations. Since most of the
microfinance activities shall be concentrated in the rural areas, there is a
need for a rural restatement of these theories.
Most of the Western societies are singular societies. Their conversion into
plural societies is a recent phenomenon. By comparison, Eastern societies
have been plural societies since the time immemorial. India is a case
in point. Therefore these theories mostly handle the situations arising
out in singular societies. This aspect of economic theory also needs our
attention.

23
Key note address
Professor M. S. Swaminathan addressed
the participants in his key note speech
by introducing the participants to the
historical and present context of credit
issues in India. He gave an overarching
perspective on the relevance of the
Interest-free Microfinance model in the
present context and how it can be made When the onion harvest had
operational. taken place the market had
collapsed and two months
But before that he congratulated Sahulat later when the onion had
Microfinance Society for taking the passed the farmer’s hands,
initiative to organize such a consultation prices rose. Same thing
and create a platform for such a discussion. happened with cotton this
He said, “When I heard about this meeting time, as soon as the cotton
I was quite excited because the country moved past the farmers’
as a whole is searching for the methods hands, immediately export
by which the poor would have access to prices went up. “It is almost
credits at affordable rates and especially like what Muhammad
the women because today there is a Yunus said. If banks are not
strong gender differentiation within the poor friendly, many of our
issue of farmers or poverty elimination.” practices are also not farmer
He substantiated this by sharing that friendly and that is the real
very small percentage - about 1 or 2 % of difficulty in our country.”
NABARD’s credit cards have been given to
women farmers. This is mainly because – Prof. Swaminathan
they do not have patta (land ownership
papers) for the land therefore the bank does not give them credit.
Being a member of Rajya Sabha, he was part of a discussion on the problems
of drought affected areas mainly in Karnataka where both the kharif and rabi
crops have failed, and similarly in Maharashtra. The overall analyses of the
situation by the members, clearly articulated the cause that farmer stake loan
for various purposes and the inability to repay it leads to social ostracism
and other forms of harassment, due to which many of them finally commit
suicides. This reiterates the fact that varied methods have to be devised and
tried out by which the poor can have access to credit.
Prof. Swaminathan agreed with Dr. Ahmad that Interest free does not mean
cost free or return free, else it will be ‘philanthrophy rather than credit’.

24
“The need of credit will increase with the increasing problems of droughts and
extreme weather events as an effect of climate change”, said Prof Swaminathan.
In the light of this statement he raised a concern on the expectation with the
people to take loan on high rates of interest and repay them on time. He said
that even in colonial days the first requirement was to waiver off either the
loan or the interest on the loan, or postpone the recovery period in the face
of weather uncertainties or non-repayments. These have been the methods
by which credit once given can be obtained or recovered but not immediately
in the same year.
He was concerned that “If these practices do not continue, where will the
Vidarbha farmers go?“ He said that the farmers invest very high amount
of money in cotton, BT cotton and other crops, as even the seeds are very
expensive. They do not have the coping capacity to meet the problems of crop
failure due to drought, insects etc. Their limited coping capacity becomes the
reason why they are not able to withstand the shocks of continuous pressure
from the disbursers of non-institutional credit or loans.
Talking about the credit policy, Prof. Swaminathan highlighted the credit
allocation in a bill recently prepared by Mr. Pranab Mukherjee and passed
by Lok Sabha. In that Mr. Mukherjee allocated upto Rs 5, 75,000 crores for
organized institutional agricultural credit during 2012-2013, which is 1 lakh
crore more than the last year. Though the figure looks very impressive, Prof.
Swaminathan said that when analysed, what trickles down to the farmers is
a very small amount. The journey of this credit amount, stations at a number
of Institutions related to the agricultural credit system like NABARD, RIDF
(Road Infrastructure Development Fund), subsidies to fertilisers etc. before it
reaches its destination - the farmers. All of these are put together in the bill as
‘agricultural credit’ out of which a very small amount is directly lent to farmers
which is an issue. That is why more and more non-institutional credit becomes
important particularly for poor farmers who lack access to resources.
With regards to the approach and methods for microfinance and microcredits
Prof. Swaminathan quoted Muhammad Yunus, the pioneer of bank of credit -
the Grameen Bank, and said, “The poor are not considered to be credit worthy
by the banks and the banks are not people worthy.” Prof. Swaminathan said,
“I think that was this conviction that led to setting up of Bangladesh Grameen
Bank. The same is with Ela Bhatt in our country who started the Self Employed
Women’s Association.”
He is of the opinion that there are various examples of a number of credit
methods which have been adopted in India and which can be useful for
cross-learning. He traced IfMf through the Islamic Banking which already

25
gives interest free loans based on the compassionate approach in Islam. And
therefore their origin is from compassion and compassion is the root of the
whole idea of Interest free loan. The Chinese too give Interest free loan to
their farmers where they do not charge interest on the loan they give.
He mentioned about the need for timely credit for agricultural
purposes, for all farmers of drought affected areas of Karnataka
and other states. “From experience I know the areas which have
drought now will have heavy rains in a couple of months but
farmers will not have seeds then, they would have already eaten
the seeds or the seeds will not be available. Unless the seed
banks are developed and the farmers get timely availability of
inputs it is not possible for them to sustain.”
In India the National Commission on Farmers chaired by Prof. Swaminathan,
went into great details of the credit issue with the former Chairman of NABARD,
who was also its member, and designed recommendations on bringing down
the interest rates to around 4%. It came down to 7%, and later to 4%. He said
that they did not propose 0%, but the consultation may show a way by which
sustainable Interest-free microcredit can be operated. It has to be sustainable
otherwise its objective will be lost. “I think Sahulat’s association has already
shown that it is possible to operate”, he said.
Referring to the concept paper presented by Dr. Ahmad, he said cooperatives
are structured on a principle of win-win for every member. There are no losers
in a cooperative. If it is a successful cooperative everyone shall be a winner
otherwise cooperatives also will not be sustainable.
Prof. Swaminathan said, in India the power of cooperative societies has been
shown by Dr. Kurien and his colleagues at Anand. We are now world’s largest
milk producer. Where we were producing 20 million tons 35-40 years ago, this
year we have produced 120 million tons of milk. He interestingly remarked,
“I am a crops man, I know it is easier to increase yield of wheat but to get an
increase in milk is a very big achievement and our target is 200 million tons of
milk by 2020 which probably will be achieved.”
The other area that requires a lot of credit and support is the horticulture
which involves the perishable commodities like onion, tomato, egg or meat.
The people require credit because they have to sell these commodities as
soon as they are harvested. It is important to link horticulture and animal
husbandry to credit for productive purposes. Thus the IfMf should encompass
the needs of credit-linked market-driven enterprise on one hand and credit-
linked insurance on the other hand.

26
On the need to link IfMf to the insurance system, he said that National
Commission of Farmers has developed a very low cost insurance which
combines compensation for crop loss as well as for health purposes. In the
unorganized sector, the provision of old age pension shall also be included
to help the people in the sector to survive. He thus emphasized the need to
design the provisions of credit linked to the market and marketable products,
to avoid the IfMf to get into purely credit recycling.
Revisiting the engagement with the “The World Bank largely under
issue of Microfinance, the world over, Ismail Serageldin, who was the
he gave examples of Microcredit Vice President then, had started
Summits organized by the World Bank Microcredit Summits with the help
and contrasted it with how there have of Muhammad Yunus and Ela Bhatt.
been many microfinance societies So there is a lot of interest in the
which have come to a standstill during world as a whole on microcredit”,
the last one or two years. says Prof. Swaminathan
He thus stated that when microcredit becomes very exploitative due to high
rates of interest like 25%, 30%, 35% then survival becomes a challenge. The
increasing incidents of suicides as a result of the microfinance, by farmers
of Andhra Pradesh, triggered a whole soul-searching on what is wrong with
microfinance which was thought to be the answer to many problems.
Lot of ideas sprung up in the last one year and the Microfinance societies
themselves have realized that purely borrowing of credit and then giving it
at a higher rate to someone else won’t solve the problem. It is only credit
recycling. The credit will have to be used for a productive purpose as the
Chinese do what they call the ‘Township Village Enterprises’.
With reference to the Chinese model, Prof. Swaminathan said, when they
started their ‘agricultural revolution’ or ‘rural revolution’ they had a 2
pronged strategy – a) to improve non-farm productivity and profitability by
small farmers (more than 50% of their farmers have land around one hectare
or less) and b) to improve opportunities for viable non-farm employment
through the Township Village Enterprise. He said, “As far as I know it is the
only country which has no landless labour, all have work. It is not only the
question of land but some asset. It can be a land as an asset or a productive
job as an asset. So it is an asset building approach and not purely providing
loans. But how can we build assets? People do it through farm or non–farm
employment. We must have methodology by which it can be done.”
Prof. Swaminathan shared a vital information with the participants that 35
districts have been identified as Agrarian Distress Hotspots by the Government

27
which face agrarian distress due to drought with high rates of farmer suicides.
He suggested that it would be useful to take up these 35 agrarian hotspots to
start Interest-free Microfinance entities.
Interest free would be useful because In a state like Kerala, 5 districts
credit is the key as many people suffer have been identified as Agrarian
because they do not have access to Hotspots – Kasaragod, Pallakad,
inputs. Today in the Karnataka model Wayanad, Kuttanad and Iduki.
it is said that the earliest evidence of Many other areas particularly tribal
agrarian distress during drought is areas, tribal belts, districts in Orissa
seen when the farmers start selling have been identified as agrarian
their cattle because livestock and hotspots.
livelihood are very closely related in
our country. When they find that they can’t maintain the animal they sell
it. This is why cattle camps are important. Regarding methods of feeding, he
said, fodder may not be available but all the agricultural residues can be used
as fodder. “There are methods I mentioned in the Parliament today, where
one can create a fodder bank consisting of agricultural residues quantified by
urea and molas, it becomes complete food.” He suggested, “When this whole
movement evolves we can try it out in some of the agrarian hotspot areas
where the present approaches of government are obviously not working.
There are problems which are more deep seated. So it is important to try to
link up with credit linked insurance on one hand and a sustainable Interest-
free Microfinance on the other.”
His speech concluded by emphasizing on the fact that even IfMf needs to be
engendered. He gave an example of one of his centres in Vidarbha particularly
working with wives (Mahila Kisans) of farmers who have committed suicide.
There are also opportunities to help them with the credit insurance
technologies and the whole market-driven approach. “I feel we need a
farmer’s divorce to end economic distress” said Prof. Swaminathan.
He said that though IfMf is not the only approach, it is certainly a very
important approach to deal with the above mentioned problems. “I personally
have no doubt about its viability and sustainability but one has to gain by
experiences as many problems crop up with time because agriculture is the
riskiest profession in the world. You may have rain, you may have flood, you
may have pest or the market uncertainties.”
He expressed his desire to listen to the experience rich opinions of the Chief
Guest and the other speakers. He felt it is necessary to have many approaches
to a problem.“We can have different methods but the key point is whether it
is the farmer or artisan or anyone who is taking the credit, their well-being,

28
their viability, their ability to repay the loan in the given period of time must
be the bottom line. We cannot really help them individually, which means we
need to provide some support services also.”
He complemented Sahulat Society to initiate in the National Capital, a serious
debate on viability or desirability of Interest-free Microfinance. And he
stressed on the fact that “in this kind of an approach, one root has to be
compassion and concern for the poor and that is what Muhammad Yunus
also said that it is not purely a business transaction it has to be business for
economic viability but nevertheless its success requires more than a business
model. It requires feeling for fellow human being.”

29
The Chief Guest’s Address
Dr. Syeda Saiyedain Hameed, in her
speech offered her remarks and
observations on the points highlighted by
Prof. Swaminathan and gave her views on
the concept of IfMf.
She said it is extremely difficult to follow
Prof. Swaminathan because his scope
is so immense that he is well-suited for She sadly expressed, “The
commenting on this very innovative model agents of recovery bring all
that is being proposed. She remarked that their wherewithal, the scene
everything that Prof. Swaminathan spoke is so tragic because everything
hopefully resonated with the audience as in the house goes. There is
it resonated with her. nothing, except a relentless
She congratulated Sahulat Microfinance pursuance of women or
Society for having taken this important anybody for that matter but
initiative. Appreciating the word ‘Sahulat’ in particular the women who
she expressed that everyone in their feels responsible, feels the
lives look for sahulat and the more burden. There is relentless
underprivileged, the more deprived and pursuit of the women to
the more marginalized one is, the lesser recover the loan.”
access one has to sahulat. She was glad – Dr. Syeda Saiyidain Hameed
that the society was called by this name as
the very word inspires a lot of confidence.
The other point that she made was to draw upon Prof. Swaminathan’s remark
on IfMf cooperatives where he talked about compassion in Islam. She says,
“I am sure that everyone, sitting here can relate to the fact that it is from
the compassionate understanding in Islam (also true for all religion), of the
Prophet and the Fuqaha and all the great interpreters of Islam; that this idea
of Interest-free Microfinance been taken to establish a model.”
She was convinced that anytime anyone says anything which is very different
from what prevails in our society, that person is immediately marginalized
and it becomes very difficult to operate. But it is important to be able to
express what one feels and what one can prove. The fact that Sahulat has
been engaging with IfMf for a few years in an earlier avatar goes to prove
that they are collecting their statistics, facts, hard data which could convince
others of the viability of IfMf.

30
She shared that even after being the member of planning commission for
8 years, one problem which is completely and totally intractable is how to
facilitate the poor to get access to finance. The fact is that it is very difficult for
a poor tribal woman from backward districts like Bastar etc. to even cross the
threshold of the bank, leave alone to get any kind of relief. On the other hand
it has also been demonstrated by SEWA Bank in Ahmedabad that a women’s
self-owned institution can be viable.
Even women are so overburdened that, together with the farmers’ suicide we
have also become tragically aware of suicides by women farmers who have
not been able to cope up with the burdens of microfinance.
She referred to the process of writing the XIth five year plan document,
of which Dr. Devika Jain was also a part, when many Non-Governmental
Organizations, especially the ones engaging with the issue of microfinance
had suggested them that they should have a high level committee to enquire
into the gaps in the policy on microfinance. They raised a pertinent question
that when microfinance was supposed to be facilitating the poorest of the
poor, then why the exorbitant rates of interests are driving the women are
being to desperation because they cannot repay.
Agreeing to Dr. Swaminathan, about selling livestock and of relationship
between livestock and livelihood, Syedaji shared that even children are sold;
body parts, kidney and blood are sold too. “When one thinks of it the face of
poverty becomes very horrific due to the burden of finance of having to repay
the loans.”
She expressed her anxiety to learn that even in a state like Kerala, 5 districts
have been included in the agrarian hotspots. She felt that IfMf is an excellent
idea and particularly in the districts which have been impacted by the naxal
terror attacks. She said that this naxal movement has led to the formation
of an Integrated Action Plan by the government in which certain amount of
funding is made available for the development of the affected districts to get
people into the paradigm of development while addressing at the same time
the real problems of the tribal people - access to Jal, Jungle and Zameen.
She thinks that the agrarian hotspots that have been identified are potential
areas where compassion can sink its roots. She also suggested that there are
90 Minority Concentrated Districts (MCDs) and in the XIIth plan there will be
more minority concentrated districts where there is a scope of working with
the IfMf model. She shared a concern that though Sahulat has selected these
MCDs because these are dominated by Muslims, she thinks they can widen
their target group as she says “a poor and an unfortunate human being,

31
whether it is a Muslim or a tribal or a Dalit or Scheduled Caste, Islam feels for
every human being. The compassion is a universal compassion.”
She referred to the concept note by Dr. Ahmad in which there
was a reference to the issue of credit being ‘gender neutral’. She
said, “I read the word gender neutral and I would just like to
flag it because whenever it is the question of credit and we talk
about farmer suicides in Vidarbha and we have known about
farmer suicides in Orissa we have seen a lot of farmers suicides
in Punjab, there is an increasing identification of women with
poverty and women with being victims of microfinance which
places an alternate burden on women. I think Sahulat has to
highlight and profile the women who are at the very front and
centre in this.”
She felt that the work being done by Sahulat resonates with the sectors for
which she works, as also mentioned by Mr. Ajmal while introducing her. She
added, “I look after women and children and children are equally important
because lots of children today in our country do child labour whether it is for
carpet weaving, basket weaving, making fire crackers, working in chai shop,
domestic help etc. I also look after the minority sector and health sector. I
think health is one of the potent reasons why people become indebted. When
it is a matter of health it is a matter of life and death and then informal credit
becomes the last resort and all the informal engines of credit get going. I look
after the handloom sector and handicraft sector and the handicraft artisans
and handloom weavers are very much the face of element of poverty.”
Dr. Syeda concluded by saying that Sahulat is experimenting with a very
interesting model. She equally felt that it is definitely worth trying it out in
some of the agrarian hotspots that Prof. Swaminathan referred to. Though
Sahulat works in the Minority Concentrated Districts, they can try to expand
the scope of their work. She remarked “It is very important to think out of the
box and I think what Sahulat has done is to think out of the box. I wish you
well.”

32
Deliberations of distinguished Speakers
The Chief Guest’s address was followed by deliberations of a few distinguished
speakers who contributed their views to the idea of IfMf.
Mr. J.N.L Srivastava, Member, IFFCO Foundation seconded Prof. Swaminathan’s
articulation of ‘Compassion with Sustainability’ to be the hallmark of
any microfinance initiative in order to ensure elimination of poverty and
empowerment of women through IfMf. He appreciated the objective of the
concept as well as highlighted a few concerns.
He emphasized that the enterprise that will be initiated by the poor as a result
of accessing Interest free credit, should be viable. To ensure that, credit shall
be accompanied with availability of training, technology and market.
To meet the demand for credit as well as to bear the inevitable costs (like the
establishment cost) in the IfMf institution, it is important to think through the
strategies to mobilise various kinds of resources and capital. Dependence on
an external agency for this may further complicate the process. He also stated
the importance of enumerating the mechanisms for profit sharing as well as
management.
Referring to the existence of various Informal credit systems floating in the
market, that take loan at 2% and lend it out at a higher rate of interest, he also
felt the need to develop mechanisms to address these informal systems. He
stressed on the importance of working out strategies for unforeseen issues
before scaling up the model.
Dr. Devaki Jain, a feminist economist and a development activist, thanked
Sahulat Society for inviting her to the Consultation. She traced the idea of
Interest Free loan transactions as being part of women’s culture in the form of
thrift societies, long before the concept of microfinance had arrived.
She appreciated the idea of Sahulat to work with urban poor that usually lack
attention of the development policies in comparison to the rural poor. At the
same time she also brought to the notice that this needs to be cogitated more
deeply as the Reserve Bank of India has an entire structure for Urban Cooperative
Banks which presently are operating not better than family fiefdoms. In the
face of this existing structure, it is important to look into whether the proposed
IfMf Cooperative Societies will be legitimately recognised or not.
She also drew the attention of the participants towards an additional challenge
to Cooperative Society with the introduction of a ‘new cooperative bill’ in the
Parliament which will soon become an act. The bill proposes the cooperative
societies to be slid from being liberal societies to department controlled
cooperative societies. Many people, including Dr. Devaki Jain moved a letter

33
to the government in protest of this bill as they believed that these societies
are vital to support self-sustenance. Thus she said it is important to follow
up on this bill, to prevent Sahulat’s dream of a free cooperative society from
being shattered by a new act.
She specifically mentioned her appreciation for the idea of Sahulat Business
Cooperation Groups (SBCGs) in the proposed framework of IfMf. She said
that SBCGs had the potential to be viable with a lot of support from the
existing government schemes. As an idea she threw, that even the SHGs can
be potentially transformed or integrated into SBCGs. She thus requested
the government officials present in the consultation, with a special mention
to Prof. Swaminathan to look into the possibilities of such integration or
adoption of the idea. She particularly mentioned that the idea of SBCGs as self-
sustaining poverty alleviating institutions shall be incorporated in the chapter
on urbanization in the XIIth 5 year plan. Finally she said that it is noteworthy
that there will be a number of bottlenecks in registering the cooperative and
Sahulat needs to chalk out appropriate strategies to deal with them.
The Regional Director, International Cooperative Alliance, Dr. Chan Ho Choi
made a few critical and crucial points about the concept of Interest-free
microfinance through cooperatives. His emphasis was on understanding the
essentials for a cooperative and to give a framework based on which the IfMf
model could be revisited and re-analysed for its feasibility and viability.
He felt that the IfMf model should provide certain business opportunities to
the members. He believed in the feasibility and viability of the model but at the
same time also laid a great emphasis on the clarity of its objectives. Wherein
he said that if the Interest free model aims to establish a cooperative then it
should be linked to certain business rather than just for the disbursement of
loans. That business, he underlined as one of the mandates of cooperatives,
should be a business by a group of people rather than an individual.
Based on his rich and varied experience with Cooperatives he remarked
that generally the business, enterprise or entity shall be equally shared by
its members so that they can govern and manage it. Giving a flavor of the
fundamental belief of cooperatives, Dr. Choi said that every person has the
ability to create or produce something for which that person may require
capital or credit. Thus he stated that credit should be provided based on
the demand for it to produce something. That can be useful for ensuring its
viability and returns.
Regarding the management of profits, he opined that every cooperative
has surplus capital earned due to bulk purchasing or bulk lending, even if it

34
does not earn profit per se. The cooperatives are supposed to locate certain
portion of their surplus as reserve for delinquent situations. He made a very
fundamental point that the members of the cooperatives must be rewarded
for the investment made by them where the surplus could be used for their
training and capacity building.
His concluding remark read that though not a very smooth road, a careful and
strategic approach shall help to sustain the model. He welcomed the initiative
as a significant one in this ‘International year of Cooperatives’.
Dr. Chitra Kasana, Vice Dean of Student Affairs, Symbiosis International
University, gave her views on the viability of Interest-free microfinance which
she explained by analysing money as a ‘medium of exchange’ as well as
‘money as a product’.
Money as a medium of exchange, she said, is linked to the issue of value and
fluctuations in the value which gives rise to the concept of interest. She also
mentioned that the value is also dependent on the fiat currency that does
not remain constant and is the medium of exchange worldwide. If money is
understood as a product in the model then, she articulates, that it becomes
very easy to have IfMf model as buying and selling of products involves profit
which in this case becomes acceptable. Therefore in this case profit will not
be associated as something that will exploit the masses in terms of interest.
It will just be, as a matter of fact, a give and take relationship, which will help
to sustain this model.
According to Dr. Kasana, interest becomes an integrated factor in the loanable
funds. She questioned the idea of using surplus to create surplus to the extent
that everyone associated with the IfMf model can come above subsistence
level.
She also raised a pertinent question that mostly people save to get interest
on their savings. So if they want interest then the borrower needs to pay high
rate of interest and thus the borrower gets trapped in the vicious circle of
credit. She also suggested looking into the possibility of IfMf model to be able
to divert people in disguised unemployment towards non-farm activities and
make them more productive.
Dr. B. K. Sahu, Assistant Professor, Indian Institute of Foreign Trade shared his
concern about the concept of IfMf. Based on a study conducted by him on
microfinance and its operations in India, he said that there exists extreme
scarcity of credit or limited access to credit irrespective of its source - formal
or informal. People do anything irrespective of the terms and conditions of
the credit to meet their needs.

35
With such a high demand, he suggested, that it is important to figure out as
to what will be the terms and conditions on the Interest free loan. He also
essentially linked provision for credit to the creation of credit absorption
capacity in order to enhance credit utilization. He articulated another issue
that when credit is introduced without insurance, the possibility of its misuse
and non-repayment increases by more than 50 percent. Thus he proposed
the idea of linking credit with Insurance which has worked well in the states
of Kerala, Karnataka and Tamil Nadu.
Addressing the stress of repayment, he said the idea of ‘group collateral’ partly
works with the groups that are dynamic but where the group is not dynamic
or homogenous, tremendous stress comes on individual members to repay.
He asserted on the need to have very specific group as well as region specific
strategies in order to achieve the objective of IfMf cooperative societies.
Mr. Fuad Mahmood, IRAS, RL&DA, spoke mainly on the idea of Interest free
model to enable the poor people to break out of the vicious circle of credit.
At the same time he also raises a concern on the concept of ‘Interest free’
which according to him loses on the sincerity and discipline of the borrower’s
perception to repay. He advocated for a credit on a moderate rate of interest
that will ensure discipline and sincerity to repay.
Mr. G.K. Gangopadhyay, Chief Director, NCDC, shared that one of the NCDC’s
major work is to assist infrastructural development. Since Interest free credit
needs to be associated with other business enterprises which can cross
subsidise the interest free loaning activity. These business enterprises could
be linked to NCDC for their Infrastructural development. He assured that
NCDC will assist these enterprises.
Dr. Naveen Anand, Microfinance Community Solution Exchange, UNDP,
responded to the proposed model as being a wonderful initiative because he
felt it will create a culture of thought among the poor people that there can be
interest free loans as well. He also cited a few examples in the world of IfMf
which prove that it is feasible. He emphasized that it is necessary to have a
portfolio of activities listed down on order to ensure ways in which IfMf will be
subsidized. He suggested a few activities which could be part of the portfolio.
The first thing, he suggested, shall be savings – not only mandatory but also
voluntary savings, which otherwise do not form part of any of the mandates of
Microfinance institutions. He gave Micro-leasing as another emerging subject
for very poor people where they can have some productive asset together,
with minimized risks. Micro-leasing will be the future in this direction, feels
Dr. Anand.

36
Social security, insurance and remittances shall also form part of the portfolio.
He suggested that these cooperatives can also function as counseling centers
wherein government and NABARD both can provide some assistance. With
regards to Interest Free loans, heterogeneity in the institution can be useful,
he suggested.
“There are many examples like in Japan where de-mutualisation
of cooperatives have been talked wherein differential powers
of governance or differential membership has been taken into
account. In this, the cooperative provides money to many people
but not all of them become part of its governance. They can
rather be just a nominal or associate member which will help
self-reliant cooperatives.” – says Dr. Naveen Anand
Dr. Dinesh, CEO, NCUI spoke about the mass perception of anything that is free
especially if it is Interest free credit, it is not taken seriously. He felt that due
to lack of seriousness it becomes difficult to ensure repayment.
At the same time he also offered his suggestions to deal with the above. He
suggested that there could be a minimal amount of interest on the credit
provided, to foster discipline and seriousness. In both the cases, whether
credit is provided with or without interest, the borrowers shall be trained to
utilize the credit and gain profit. According to him this approach will have a
two pronged advantage – 1) Entrepreneurship Development and 2) Interest
free credit with assured repayment. This will ensure that they take the loan,
repay it and do not take it again.
Mr. L.D. Ahuja, Consultant, NCUI also articulated his concern about the ways
in which the institution will bear the minimum essential cost. He tabled the
issue of developing concrete provisions for management and sharing of profit
or surplus in the institution. On the other hand he also felt the inevitable need
to adopt such a model in the face of existing credit issues. Thus he suggested
dovetailing of the model with the government schemes and utilization of
existing cooperative structures to economise the cost.
He also mentioned that the Indian Parliament has passed a bill to make
cooperative formation a Fundamental Right. This also means that the
efficiency of operations needs to ensured. So a dialogue with stakeholders
will be important in this regard, as suggested by him.
Ms. Punam, Freelance Consultant, Community Based Organisations, turned
the lens of the camera to focus on the same issue from a different angle – the
standpoint of the community. She felt that it is also worth taking a look at our
expectations from the community with regard to the IfMf. She underlined

37
the fact that the success of the model is possible only if both hands meet i.e
where the appropriate strategies are worked out for the sustainability of the
IfMf by Sahulat as well as sufficient rapport and trust is built in the community
so that they take this model forward.
She reiterated the fact that cooperatives being the peoples’ institution shall
not lose their essence and hence shall be owned by the members. Since
there are a lot of experience of fall outs and crises that MFI’s have faced in
the past, it is important to develop some code of conduct and ethics before
establishing these IfMf societies. She also suggested to think through the
backward-forward linkages to identify the lacunae in the plan which can be
plugged in eventually.
Mr. Shashi Bhushan, General Manager, Naandi Foundation, Hyderabad
elaborated the challenges that Al-Khair Co-operative Credit Society already
faced during its pilot project on IfMf.
He stressed on the fact that among poor people Muslims are one of the most
disadvantaged and distinct sections. Their credit needs are slightly different
from other poor groups as they also carry the burden of certain biases
against them which push them further to the peripheries of the society. He
thus tried to bring to the notice that in the proposed institutional set up, a
distinct poverty group requires a distinct attention in terms of provisions and
strategies.
He shared a sharp observation that there exists a stark contrast in the policies
of the government where on one hand it proposes the bill, for cooperatives
to be department controlled and on the other hand another bill to make
Right to form cooperatives as the Fundamental Right. He identified that the
challenge to establish IfMf cooperative societies in 90 districts, in the face of
such contrasting policies, might be more stringent.
Dr. Veena Nabar, former Chief Economist NCDC and Consultant, shared her
views on bringing the Right to form cooperatives under the Fundamental
Right. She said it is a useful decision since previously the people convicted as
cooperative, went under state jurisdiction as cooperative is a state subject.
They lost their Fundamental Right. So what was needed to be done was to
have some kind of definition of cooperative for which it was necessary to
put it in the Fundamental Right. Through a constitutional amendment, Article
43B was added in part IV of the constitution as Directive principle of State
Policy for voluntary formation of cooperative societies. This constitutional
amendment, she informed, will allow people to approach the legal authority
with their fundamental rights.

38
She said, “there is much hope now with this amendment.”Dr. Nabar could
not see a reason why the central government wants to push cooperatives
into hands of the Secretary, Cooperative Department. She calls the proposed
amendment as retrogressive since it gives power back to the central
registrar.
She highlighted some essentialities before replicating the IfMf model like
multiple designs should be worked out for models for different areas or state.
She also raised a concern as to why working out a strategy is important. She
said, because many producer companies which were supposed to take care
of the problems in the cooperatives act, faced scarcity of resources due to
internal resource raising, as reported by NABARD. Therefore she strongly felt
this that the proposed model should be an integrated model which should be
able to address the problem of scarcity of resources. That she felt, should be
the strength of this model.
Mr. S.K. Tucker, Chief Director, NCDC said that the cooperatives are also
revisiting and changing their model. He emphasized the need to address the
‘element of efficiency’ which is one of the key elements in IfMf and which is
presently at low ebb in cooperatives. He submitted that the professionalism
in such models is very low which reduces efficiency.
He pointed to another existing government institutional model called Primary
Agricultural Cooperatives. They exist in a large number, almost 90,000, all over
the country and were supposed to function as credit windows. They earned
a margin of 2-3% under the re-imbursement financing scheme of NABARD,
which affected their viability. It was suggested that these credit lending
Institutions should become multipurpose to survive i.e. they should get into
marketing, crop subsidization, consumer lending, agro-processing to increase
their margins.
He raised a pertinent question on the ways to deal with non-repayments
which he said, should be looked into before starting to replicate the model.
He finally suggested that building some kind of cost, might bring in efficiency
in repayments.
Mr. Anoop Kaul from Basix spoke on the basis of his experience with
institutional Microfinance. He gave another standpoint to the idea of IfMf,
and suggested that it should rather be called ‘participatory finance’ which
better describes the objective of the model proposed. He explained the scope
of the word ‘participatory’ to mean much more than just finance. It essentially
requires provisions of building entrepreneurial skills of the borrowers earn
profits on the microenterprises and ensure repayments. He also clarified that

39
Microfinance does not just mean credit but also includes pension, remittances
etc. based on which he said that calling it Interest-free ‘Microfinance’ might
not be appropriate since the other things are not being provided in interest
free in the proposed model.
He shared about an exercise that had been done to analyse around 400
enterprises taken up by the poor people. The analysis showed that the
internal rate of return for these enterprises was about 35% to 40% which is
encouraging with respect to the viability of microenterprises.
He spoke about increasing the scope of the proposed institutional model
from being providers of seed capital for a microenterprise to being facilitators
in making the microenterprise a success. Thus he suggested a change of role
of the IfMf from being transactional (where they give money and wait for
returns to come) to becoming transformational (to make the poor people
understand the economic activity they are getting into, to understand financial
discipline to capitalize the money and get more returns on it). Since Sahulat is
a cooperative with intellectual capital it will be easy for them to provide both
credit as well as intellectual capital to the poor.
After the profound discussion and inputs by different speakers on the concept
of IfMf, Prof. Swaminathan culled out the vital points from the discussion and
responded with his own suggestions and recommendations on them. He
also sketched a framework of strategies and essential elements for Sahulat’s
proposed model, to facilitate the host organization in its endeavor to upscale
the intervention of Interest-free Microfinance through cooperatives.

40
Suggestions and Recommendations by Prof. Swaminathan
Encompassing the various critical points made by the speakers, Prof.
Swaminathan, enunciated the importance of initiating work in some of the
agrarian hotspot districts. He suggested that organisations like Sahulat shall
select few of these districts where there is urgent need for a different form
of credit which will be sustainable and which will not aggravate the problems
of the poor.
He does not forget to mention that with the available experience in this
direction, Sahulat shall also be benefitted in its way forward, by a few cardinal
points that came up in the presentations by speakers regarding the following
aspects.

Strategy for sustainability

Getting to more concrete steps ahead, Prof. Swaminathan identified the need
to prepare the ground before upscaling and implementing IfMf models in
other areas. He said it is important to think through, the kind of strategies
that could be designed in order to make it sustainable, economically viable
and self-replicating model instead of working in the philanthropy mode.

Governance and Management

Prof. Swaminathan referred to Dr. Choi’s speech in which he mentioned many
aspects of the cooperative model of governance with shared membership
and the elected office bearers. He also emphasized that some professional
management shall also be incorporated in the functioning of the cooperative,
in order to ensure efficiency.

Training and Capacity Building

Prof. Swaminathan highlighted the importance of training and capacity
building, as being essential to the viability of the model. He said it is important
to orient the members with the culture and philosophy of IfMf as people may
have difficulties in absorbing the concept. They should also be trained on the
ways in which resources will be mobilized in terms of finance as well as other
capital to make it sustainable. The capacities shall be built on the basis of
experience and successful models.
For that he gave the idea of either to develop training and capacity building
centres or to integrate this activity with the Krishi Vigyaan Kendras or other
existing institutions or infrastructure and use them as training centres.

41
Engendering IfMf
Spotting gender dimension as a key thread in the fabric of the IfMf initiative,
Prof. Swaminathan said that women have very specific needs. So it is important
to mainstream the gender dimension to be able to deal with a number of
issues that will crop up during the implementation.

Widening the role and scope of IfMf

He expressed his interest in the Idea floated by Mr. Anoop Kaul, about
renaming the intervention as ‘participatory finance’ instead of ‘Interest free’.
He felt the former widens the scope of Microfinance and assigns it a more
transformational role – transforming people from being hopeless to becoming
hopeful, which he said, is most important as most of the people have lost
hope due to maladies of credit and indebtedness. Together with this, he felt,
revival of the multiple support systems are also required.
He also shared some exemplary ideas both at policy level as well as at the
implementation level from all over the world which can provide learning
ground to concretely analyse the pros and cons of the proposed concept.
One such example was the Brazilian model of ‘Zero Hunger Programme’
(Programa Fome Zero), a series of hunger initiatives aimed at eliminating
hunger in Brazil.
In his concluding remark he thanked Sahulat for giving him the opportunity
to be part of the consultation. He suggested to follow it up with 3-4 districts
level seminars in the districts which are more vulnerable like Koraput, naxal
affected district etc. With a hopeful message of planning the next step to
select a few districts and design feasible and sustainable strategies based on
the inputs in the consultation, he thanked all the participants.
The consultation concluded with the vote of thanks by the H. Abdur Raqueeb,
General Secretary, Indian Centre for Islamic Finance. He summarized the
discussions and suggestions and agreed with Dr. Syeda Hameed that this
model resulted due to thinking out of the box, and it is eventually gaining
grounds all over the world especially in 2010. He also shared his hope with
the speakers and the participants that some of the issues raised here that
require policy advocacy, shall be taken up by the government. He summed up
with a wish that,
“Microfinance had started with a social mission but eventually
got confined to commercial activities, now it has to come back
to basics.“

42
 Annexure I

List of Participants of the Consultation

Sl. No. NAME DESIGNATION & CONTACT

1. PROF. M. S. SWAMINATHAN Member of Parliament, Rajya Sabha, Chairman M S
Swaminathan Research Foundation,
swami@mssrf.res.in

2. DR. SAYEDA SAIYIDAIN HAMEED Member planning Commission, Govt. of India,
s.hameed@nic.in

3. DR. B.K. SAHU Assistant Professor, Indian Institute of Foreign Trade

bksahu@iift.ac.in

4. DR. CHAN HO CHOI Regional Director, International Cooperative Alliance

(ICA), Asia Pacific, choi@icaroap.coop

5. DR. CHITRA KASANA Vice Dean of Student Affairs, Symbiosis International

University (SIU), chitra.kasana@scmsugnoida.ac.in

6. FUAD MAHMOOD IRAS, Railway Land and Development Authority,

Govt. of India.

7. G. K. GANGOPADHYAY Chief Director, National Cooperative Development

Corporation.
gkgangopadhyay@ncdc.in

8. GOPI N. GHOSH Assistant Food And Agricultural Organization (FAO)

Representative.
gopi.ghosh@fao.org

9. H. ABDUR RAQEEB General Secretary, Indian Centre for Islamic Finance.

abdraqeeb@gmail.com

10. J. N. L. SRIVASTAVA Retd. IAS, Former Secretary (Agriculture), Govt.

of India. Managing Trustee, IFFCO. Chairman,
Ishara Finance and Rural Development Pvt. Ltd.
jnlsrivastava@yahoo.com

11. L. D. AHUJA Consultant, National Cooperative Union of India

ldahuja129@gmail.com

12. DR. NAVIN ANAND Resource Person and Moderator, Microfinance

Community Solution Exchange, UNDP. navin.
anand@one.un.org

43
 13. MS. PUNAM Freelance Consultant – Community based
organizations and microfinance.
cheerfulpunam@yahoo.co.in

14. S. K. TUCKER Chief Director, TOPIC. sktucker@ncdc.in

15. SHASHI BHUSHAN General Manager, Naandi Foundation, Hyderabad

shashi_b31@rediffmail.com

16. SIRAJ HUSSAIN CMD, Food Corporation of India

sirajnoida@gmail.com

17. DR. VEENA NABAR Former Chief Economist, National Cooperative

Development Corporation, Consultant (Management
& Economics). veenanabar@gmail.com

18. PROF. APOORVANAND Delhi University. apoorvanand@kafila.org

19. DR. MD. KAZIM Delhi University. kazimdu@yahoo.com,

kazimdu@gmail.com

20. DHURVA NARAINA Alternative Economic Survey Group

21. SHAHEEN NAZAR Sharda University

22. NASIRUDDIN HAIDER KHAN Hindi Hindustan. nasiruddinhk@gmail.com

22. PROF. PULIN NAYAK Delhi School of Economics, pulin@econdse.org

23. PROF. MILINDO CHAKRABARTI Sharda University

milindo.chakrabarti@sharda.ac.in

24. DR. ASIF KHAN asifakh@gmail.com

25. ADV. ASLAM AHMED Advocate. aslam.ahmed.law@gmail.com

26. DR. HASAN RAZA JIH. hasan.nnts@gmail.com

hasan_nnts@yahoo.com

27. SHAHEEN NAZAR Dept. Of Mass Comm. Sharda University

28. MATHEW JOSE Deepalaya, Director Finance jose@dipalaya.org

29. GOVIN CHAUDHARY Action India (Director)

30. ALI JASIM Indian Centre For Islamic Finance

31. SHIRISH AMATYA High Mark Credit Services.

shrish.amatya@highmark.in

32. KHURSHEED A. NAJMI Partner, India Law Services.

najmi@indialawservices.net

44
 33. DR. ATHER FAROUQUI farouqui@yahoo.com

34. PROF. A. A. AHMAD FAIZI Professor at Centre for Rural Studies, Lal Bahdur
Shastri National Academy for Administration.
aaafaizi@gmail.com

35. P. M. PAREETHU BAVA KHAN Former Addl. Development Commissioner &

Director, SIRD, Kerala. pmpbkhan@yahoo.com

36. ANOOP KAUL National Head for Financial Inclusion,

BASIX anoopkaul@rediffmail.com

37. B. R. NAIR Director NCDC (Retd). pankuthararam@hotmail.com

38. SALAHUDDIN AYYUB Research Scholar, Jamia Millia

Islamia,ayyubsubhani@gmail.com

39. ABDU SADIQ Jamia Hamdard. manzoor@cbgaindia.org

40. MANZOOR ALI Research Officer CBGA

41. ASIF ALI Dawat Urdu. Dawattrust@yahoo.co.in

42. RAJA KHAN BASIX

43. MUSHAHID HUSSAIN Jawaharlal Nehru University

44. DAVID Jawaharlal Nehru University

45. SHARIQ RAHEEM Jawaharlal Nehru University

46. IRSHAD S. Jawaharlal Nehru University

47. MUSHAHID AMMAR Doordarshan

48. DR. DEVAKI JAIN Development Activist. devika@cds.ac.in

49. M AJMAL KHAN Editor INN London. innchief@gmail.com

50. DR. WAQUAR ANWAR Financial Advisor JIH. waquaranwar@yahoo.com

52. DR. DINESH CEO, NCUI. dineshncui@india.coop

53. I. H. ZAKI Muslim Fund, Najibabad

54. SHARIQ HASAN IDBI Bank

55. SEBASTIAN JOSEPH Deputy Director, Ministry of Agriculture & Coop.

56. B. N. MURKE murthyj@gmail.com

45
Annexure II

NATIONAL CONSULTATION ON

INTEREST-FREE MICROFINANCE THROUGH CO-OPERATIVES:

CHALLENGES AND OPPORTUNITIES

8 MAY 2012, India International Centre, NEW DELHI

ISSUES FOR DISCUSSION

by
Dr Ausaf Ahmad

46
Dear Prof. M. S. Swaminathan, Madam Syeda Saiyidain Hameed, Ladies and
Gentlemen:
I stand before you as a member of the Governing body of Sahulat Microfinance
Society. My pleasant duty is to welcome you all to this National Consultation Meeting
on the Challenges and Opportunities before Interest-free Microfinance through co-
operative societies. Why did we pull you out from the comforts of your homes on this
evening of Delhi Summer? We must explain what we expect from you. This shall be
helpful to put the discussions within a framework.
We have come here with an open mind. We have come here to listen, learn and
seek guidance from you. We have not come here to preach. However, by the way of
introduction to the uninitiated, a few words are in order.
First of all, I must introduce Sahulat Microfinance Society, the organization which is our
host this evening. Sahulat Microfinance Society was established in 2010 as a voluntary,
non-political, and non-profit social service organization. This was conceptualised in a
meeting of concerned professionals, activists and intellectuals who felt that some
work needs to be done to address the increasing social and economic inequalities of
Indian society and high levels of social, economic and educational disparities. These
trends cannot be left uncontrolled and unchecked to play havocs with our social
organization. Consequently, Sahulat Microfinance Society was born. It is not hidden
from you that all microfinance movements recognise the fact that ability to develop
is not lacking amongst the poor, unfortunate and marginalised people. What they
lack is access to financial institutions. The theory was tested on a limited scale by an
institution called Al-Khair Co-operative Credit Society in 8 towns of Bihar and Uttar
Pradesh. Impressed by the success story of Al-Khair Co-operative Credit Society, it was
felt that scale of this experiment should be enlarged and tested at different locations
in India. Accordingly, the main function of Sahulat Microfinance Society has been, to
facilitate in organizing and developing institutions at grass root level, particularly in
co-operative sector, with the aim to provide Interest-free Microfinance to socially,
economically and educationally marginalized sections of the Indian society in order
to reduce the growing socio-economic disparities.
This strategy of development raises certain pertinent questions. The main among
them are - Why Co-operative sector? Why interest free? Why microfinance? It shall
be my endeavour to provide some pointers to these questions in the time that is
available to me.

The Co-operative Framework

By now notoriously famous divergent views of development theorists seem to agree at
least on one point, that development cannot be triggered by imposing it from outside.
It has to be generated from within. Co-operative approach to development has
supremacy over trickledown theory of development. It recognises the importance of
internal factors. It is extremely useful for microfinance as it generates loanable funds
from within. By internally generating loanable funds, it is able to address chief criticism

47
against microfinance institutions that their executives function as mere disbursement
officers. Sahulat Microfinance Society has chosen to adopt Co-operative approach
for this reason besides its democratic functioning and peoples’ participation. Sahulat
believes that objection of functioning as disbursement officers cannot be levied
against its functionaries as loanable funds will be generated from within. If they do
not generate loanable funds (deposits) there will be nothing to distribute.
It is a good fortune of Co-operatives in the country that the Central Co-operative
Societies Act (Multi-State Co-operative Societies Act 2002) as well as the Liberal State
Co-operative Societies Acts in 10 states does not contain any obligatory provision for
payment of interest either on deposits mobilized from members or on loans given to
borrowers.
Co-operative societies, being the member based and democratically managed legal
entity, cater to various mutual economic needs of members like production, finance,
marketing etc. This is, therefore, an ideal form of institution to undertake the task of
interest free transaction with effective control on the members and without causing
any major threat to the smooth functioning of the system. Al-Khair has successfully
implemented this model for over a decade, though at a modest scale in just two
States. Before Sahulat is able to compile its own data. This data generated by Al- Khair
can now profitably be used by Sahulat to experience the micro finance transactions in
other states through its affiliated cooperatives, of course taking into consideration of
various factors of socio-economic conditions prevalent in those states.

Interest-free Credit
Another chief characteristic of Sahulat model of development is that it pleads for
interest free finance.
There exists some scepticism among Indian policymakers, academia, bankers and
financial planners regarding interest free. Their main argument is that an interest
free system is non-viable and non-feasible on the ground. However, there are ample
evidences available now to demonstrate the success of interest-free model not only
in India but across the globe. By a click of the mouse one can find about hundreds of
interest-free institutions working in different environments all over the world. IMF
and World Bank researches have dispelled the myth of impracticability of interest-
free model beyond any doubt.
On a theoretical plane, interest free finance has established the much-talked-about
link of the real sector with the financial sector. No production, No Finance. It could
mean as simple as that. On the contrary, much of the contemporary financial system
is based upon a thin air which is bound to develop into a bubble. And, all bubbles
are destined to burst. The burst of the International financial system developed into
global financial crisis. It was not very long ago when several financial giants collapsed.
It is to the credit to interest free financial institutions that they could come unscathed
from the turmoil. It is not to deny that some of them had to brave a sharp decline in
their profit caused by global weakness of aggregate demand. In short, interest free
financial institutions have demonstrated inherent strength and soundness.

48
Another importance of Interest-free model emanates from the fact that microfinance
operations have been criticised for their high rates of interest charged to the borrowers
(ranging between 24-36% in normal circumstances), multiple lending (too many MFIs
chasing same borrowers), and high handedness in loan recovery (snatching away of
roof, animal etc.). All these problems are not likely to occur in the model that Sahulat
pleads for its affiliated cooperatives.

Suicides of Farmers and Rural Credit

There are ample statistical evidences to suggest that incidence of suicides amongst
the farmers is on the rise. It has been recorded that over 2.5 lakh (quarter a million)
farmers have committed suicide in the last 13 years. Deshmukh reports the details of
these figures thus:
“According to P. Sainath, the number of farmers who have committed
suicide since 1997 to 2005 was 1,22,823 and all India level was 1,99,132.
Professor Nagraj proved that farmers suicide rate was 12.9 in the period
between 1997and 2005 and one farmer commits suicide every 53 minutes
in India.”8
Deshmukh has listed 18 reasons amongst the possible causes for the suicides.
Financial indebtedness occupied third rank among these reasons but it does not
need much effort to observe the havoc created due to financial indebtedness.
Similarly, the role played by interest could never be undermined. In case of default,
interest keeps on adding to the principal and in a few years grows enough to induce
the borrower to take the extreme step. Hence, logic demands that an alternative
system must be explored. We must decide whether finance is for people or people
are for finance.
What is the way out? To my mind, reduction in interest rate cannot be a solution, as
it may only delay the inevitable rather than solving the problem. The only possible
solution is adoption of an interest–free model. A legitimate question in this context is
about the viability of the system. I have alluded to this aspect in the above paragraph
and I am prepared to discuss further with the participants here. For the sake of
further exposition I may take a hypothetical example of an Interest-free Microfinance
Institution. On the liability side of the balance sheet, mainly two types of deposit will
form the bulk i.e. Demand deposits and Term deposits. The demand deposits come to
the institution mainly for convenience and safety reasons. The same is true even for
contemporary banking institutions where the prime motive is not of earning interest.
The issue of term deposits is rather trickier. These deposits are motivated by a desire
to earn an income out of it. Since the interest-free institution cannot offer interest
on this saving the resources coming through such deposits may be used in a manner
where profit or income earned through these deposits is shared with the depositors
in a pre-agreed ratio. I may remind here that interest-free doesn’t merely mean cost-
free or return-free.

8
P.V. Deshmukh, “Farmers’ Suicide in India”, Indian Streams Research Journal, Vol.1, No.1 February, 2011. p.114.

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On the asset side of the balance sheet, one may note that borrowers’ financial
needs may be categorised into two. Additional resources may be needed to meet
a contingency caused by a sudden illness, marriage, festivals and other contingency
needs. These may require the funds which need not be returned. The poor may need
outright grants to meet such a situation. The microfinance institutions may not have
resources to disburse funds as grants but they could give interest-free loans (Qard
Hasan) where only the principal amount is payable. The microfinance institution will
enter into a contract with the borrower requiring him to pay the principal as per
the agreed ratio. To mitigate the risk of delinquency or default, the microfinance
institution may demand some sureties or personal guarantees. A reserve will be built
over period to balance the losses incurred out of genuine difficulties faced by the
member such as death or loss of livelihood. On the other hand delinquent borrower
could be tackled through recourse to his surety or guarantee. In any case the lending
organisation cannot charge beyond the principal amount lent.
The major activity of the Interest-free Microfinance Institution on the asset side
would be to finance income generating activities. These could come in various forms.
This may take the form of mark-up sale, profit sharing or profit and loss sharing. The
profit, which comes to the co-operative, will be shared between the institution and
depositors in a pre-agreed ratio.

CONSULTATION
This National Consultation is organised with the purpose to share our concerns and
policy prescriptions and learn from your experiences. We hope to receive your full
cooperation in this noble cause of helping the poor in reducing their burden of life
and improving their income generation capabilities. Sahulat Microfinance Society is
committed to liaising and advocacy towards formulation of a National Policy conducive
to Interest-free Microfinance in India. In particular it aims to focus on:
• Steps to overcome the practical hurdles in registration process of Interest-free
Microfinance Co-operative societies all over the country.
• Mechanisms of suitable co-operative structure based on the concept of Interest-
free Microfinance.
• Insights on the feasibility of interest-free business model in the context of a
multiple and democratic society like India.
• Ways to achieve the objectives of financial inclusion, socio-economic upliftment,
self- employment and reduction of poverty through Interest-free co-operative
societies.
• Development of marketable, ethical and socially responsible products of Interest-
free microfinance with higher chances of sustainability in Indian context and
mechanisms for improving the service quality.
• Methods of establishing and sustaining Interest-free credit co-operative societies
in India under the Central/State Acts. The stress is on overcoming hurdles involved
in the process.

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• It has been noticed that in development of sciences and models, there is an
inherent bias towards urban concentrations. Since most of the microfinance
activities shall be concentrated in the rural areas, there is a need for a rural
restatement of these theories.
• Most of the Western societies are singular societies. Their conversion into plural
societies is a recent phenomenon. By comparison, Eastern societies have been
plural societies since the time immemorial. India is a case in point. Therefore
these theories mostly handle the situations arising out in singular societies. This
aspect of economic theory also needs our attention.
These are a few points. You may react on these as well as on others which may hit
your fancy. With these words, on my own behalf as well as on behalf of Sahulat
Microfinance Society, I welcome you all, once again to this discussion meeting. I wish
you all a very pleasant and productive evening.

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