If it works, where is the evidence?

1. ‘A wise man proportions his beliefs to the evidence’Ajaz Ahmed Khan, Senior Microfinance Adviser, CARE International UK7th Global Islamic Microfinance Forum, Istanbul, Turkey, 24th November 2017

2. If it works, where is the evidence? • The key question is, does access to Islamic microfinance improve the lives of poor people? • Many Islamic microfinance institutions have a social mission and claim to ‘be working to alleviate poverty’. What evidence do they have, firstly, to demonstrate they are reaching the poor and secondly, whether they are moving people out of poverty? • With regard to both questions, is Islamic microfinance any better or worse than conventional interest-based microfinance? • The empirical evidence on interest-based microfinance and client well-being is actually mixed • As a consequence, much of the initial enthusiasm for microfinance as a tool for alleviating poverty has been curbed1. Will support for Islamic microfinance go the same way? Isfahan, Iran 1 According to critics, evidence that financial services reduce poverty is lacking and the average estimated impact is ‘zero’

3. Why is it evidence important? • Although advocates argue that Islamic microfinance is ‘a poverty alleviation tool’ we cannot assume that financial inclusion automatically improves economic and social well-being • To receive support from social impact investors (particularly non-Islamic), Islamic microfinance needs to demonstrate that it has a ‘positive’ impact on the lives of poor people, and preferably that it is ‘more appropriate’ than interest-based microfinance – otherwise why not just invest in something else? • Once we know which Islamic microfinance products work well and which do not, we will be in a better position to make considered judgements as how to best structure and implement Islamic microfinance products and services so that they are more appropriate to the needs of poor people – we will know what works, what does not, and possibly what works best Abu Dhabi

4. Akhuwat: Key facts and figures Akhuwat is a microfinance organisation from Pakistan. Established in 2001 it provides poor people with Qard Hasan loans for establishing and developing their businesses. It charges nothing apart from an administrative fee of Rs.200 (about US$1.90) regardless of the size or length of the loan. • Number of active clients: 855,2332 • Outstanding loans portfolio: US$134m • Branch offices: 702 • Percentage female clients: 42% • PAR30 ratio: 0.16% • OSS ratio: 131% 2Akhuwat has the most number of clients of any MFI in Pakistan

5. What was our research methodology? • The research was as collaborative effort between CARE International UK, Akhuwat and the Portsmouth Business School from the University of Portsmouth in the UK • The data was collected through interviewing clients from four of Akhuwat’s branch offices in the cities of Lahore and Kasur in north-eastern Pakistan • We contracted independent researchers from local universities to interview 500 new Akhuwat clients during April – May 2015 as well as a comparison group of 100 non-clients • The baseline data revealed no significant differences in the personal or business indicators of Akhuwat’s new clients and the non-clients • We re-interviewed 447 of the original Akhuwat clients exactly two years later during February – May 2017 as well as 50 of the original non-clients. We hope to re-interview for a third time in 2019 • As well as a specific questionnaire for clients and non-clients we also collected the Poverty Probability Index (PPI) data Sana’a, Yemen

6. What do clients and their businesses look like? • Akhuwat’s clients are mainly male (63%), married (90%), with low levels of literacy (48% are illiterate and a further 16% only received primary education), and living in households with an average of 6.4 members – they are ‘poor people’ • The average age of clients is 39, and they have around 10 years of business experience. • They work on average 64 hours per week in their businesses and 54% work alone • Commerce and trade is the most common business (29%), followed by sewing and tailoring (28%) and production and construction (25%) • By the time of second interviews, all borrowers had repaid their first loans, 63% had requested or received a second loan and 13% were thinking of applying • 95% of clients reported no other loans (formal or informal) from any source Timbuktu, Mali

7. Were there any economic changes? • Overall, the economic situation of clients improved – 46% reported better household living standards while only 1% reported worse • Overall, 68% said of clients said their lives ‘had improved’, while 27% said is had ‘remained similar’ • 74% of clients reported increased sales and 34% reported an increase in business assets • The proportion of clients identifying lack of capital as the main limitation decreased from 77% to 20% • Positive impact on employment. Whereas 69% of clients reported working alone in 2015, this proportion had fallen to 54% in 20173 • On average, clients personal and household monthly income increased by 20% while monthly expenses increased by only 2.5%. Increases were greater for female clients • 23% of clients reported purchasing household assets in the previous 12 months in 2017 compared to only 10% in 2015 3 Collectively, interviewed clients created an additional 191 jobs in the two year period

8. What about the impact on poverty? Overall, client households have become less poor. • 55% of clients saw their PPI increase (the higher the score the lower the probability of the household being considered poor) 6% saw no change, while 38% experienced a deterioration • Average PPI score of clients increased from 63.6 to 66.8. The Average PPI score of female clients increased proportionately more from 60.1 to 65 whereas for male clients it increased from 65.7 to 67.9 • Average PPI score of non-clients actually fell from 74.4 to 73.2 • Does this mean that Akhuwat’s clients were becoming less poorer while the non-clients were becoming poorer? Putrajaya, Malaysia

9. What were the limitations of the research? • Relatively small comparison group and attrition, that is losing some clients but particularly non-clients between the first and second interviews which were two years apart • Arguably, Akhuwat is such a unique microfinance institution that it is difficult to extrapolate these findings to other Islamic microfinance institutions in Pakistan let alone Islamic microfinance in general

10. What should Islamic microfinance institutions be doing? We should be measuring impact and providing evidence – indeed it is imperative for any organisation that claims a ‘social mission’ Basic (and cheap) measures include: • Poverty Probability Index (PPI) for all clients • Enhanced Social Performance Management Advanced (and more expensive) measures include: • Social performance ratings • Collaborating with researchers to gather high quality qualitative and quantitative evidence Ultimately, it is good business – Lendwithcare is a microfinance crowdfunding platform with 43,000 supporters and we can now provide investors with evidence demonstrating impact. We say we are helping poor people through microfinance and they now have evidence that we are doing what we claim we are doing

11. Thank you!Khan@careinternational.org Sarajevo, Bosnia & Herzegovina