Al-Khair Cooperative Credit Society is in its 8th financial year. The Society was registered under the Multi-State Cooperative Act, 2002. It has the permission of Central Registrar to operate in four states (Bihar, Jharkhand, Uttar Pradesh, and Delhi). Presently, there are three branches of the Society at Phulwari Sharif, Patna Central and Arrah. Process is underway to establish its branches in Jharkhand and Delhi states. The authorised share capital of the society is Rs. 25 lakh. The paid-up share capital as on 31-3-2009 is Rs. 11.12 lakh. Minimum share subscription is ten with a value of Rs. 10 each.
During the last eight years, the Society provided interest-free loan facilities of Rs.3.02 crore to about 4000 poor people. And this huge loanable fund was raised from interest-free micro deposits raised in three branches of the Al-Khair Cooperative.
INTEREST-FREE APPROACH TO SOCIO-ECONOMIC CHANGE OF MASS
The idea of starting an interest-free institution was actually mooted by Al-Khair Charitable Trust established in 1998. A group of social activists was deeply involved in socio-economic upliftment and charitable activities among marginalised sections of the society in and around Phulwari Sharif, Patna. With the assistance of fellow research professionals, a comprehensive socio-economic survey was conducted, encompassing poor families within the area. On the basis of survey report, a number of brain storming sessions were held to augment the experiment of ‘Bila-soodi society’ started by Jamaat-e-Islami Hind in 1960s all over the country.
It was envisioned to translate the idea into legal framework of microfinance cooperative institution. Nature of the proposed microfinance institution was actually decided within the broader Islamic framework of economic justice, equity and cooperation, as highlighted in the writings of Maulana Abul A’ala Maududi, whose writings remained the source of vision and mission adopted by the group.
The vision is to intervene in the economy with strong commitment to rejection of Capitalist system. The roadmap developed by the group was to educate the mass with alternative experiments towards bringing healthy socio-economic changes.
The Society is marching towards becoming a self-sustainable microfinance institution practising in interest-free financial transaction. The experiment is different from other microfinance institutions especially in two ways – one is its interest-free characteristic and the other is to function within the economy of poor mass without taking recourse to funding agencies. It has deliberately stayed away from external funding.
HOW THE LOANABLE FUND GENERATED?
Al-Khair has primarily relied on developing the habit of micro-savings among poor people. It has been experienced that the poor can be motivated to deposit their micro-savings if they are provided deposit facility at doorstep and they become confident that their deposits are secured and can be withdrawn without any cumbersome process and delay. Al-Khair has got the confidence of low-income group in operational area of its branches. Al-Khair experiment testifies the fact there is huge potential of interest-free micro-deposits from poor people irrespective of religious affiliation.
Out of these micro-deposits, it is possible to generate interest-free loanable funds to the extent of around 25% of total annual deposits with maintaining liquidity without delaying the withdrawal needs of depositors. Interest-free loanable fund generated during 2008-09 is illustrated in the following chart.
INTEREST-FREE CREDIT
Targeted beneficiaries are poor people. Credit needs of this group fall under two categories – (1) supportive to consumption gap and (2) supportive to capital need for small business activity. Presently major chunk of the loanable fund goes to interest-free Demand Loan within the range of Rs.2000 – 10,000/- to meet distress exigency or to carry on small business. Loan capacity is decided by the LAMC of the branch on the basis of socio-economic profile of the applicant.
It is to be mentioned that normal demand levels of loan for health and other consumption needs ranges from Rs.500 to Rs. 2000 and in no way beyond the repayment capacity of even the poorest borrower. Percentage of defaulters on account of timely repayment is very low. Cases of non-refund of loan are rare. To neutralise the negative financial effect of bad debt arising due to death or business failure on interest-free microfinance activity, some viable tools of micro-insurance is also required. Presently, it is written off on case to case basis.
Loans are granted to members only. They are entitled to 10 times amount of loan to their paid-up share capital. The liquidity is presently maintained at 69 per cent of the deposit balance. At present three instruments of credits are available in the Society.
Demand loan is provided with one time service charge in slab structure of loan-variable between 3.5 – 7%. The maximum amount provided under this loan scheme is Rs.10,000/- only. No addition in service charge due to default in timely repayment. The trend is to minimise the service charge which is evident from the fact illustrated in the following chart.
Short Term Business Loan (STBL or Mudhariba Loan) is provided for short-term business activity on profit-loss sharing basis. The maximum amount provided is Rs.20,000/- only. The loan period is normally four months.
Cost plus finance (Murabiha Loan) is provided for consumer durables. The Society purchases goods on wholesale price and transfers it on retail price to its members. The cost limit of supplied item is Rs.30,000/- only. The effective profit earned is 9 per cent on each transaction.
Deposits: Deposits are raised on interest-free basis. Deposits and borrowings can be raised only 10 times of the sum of the paid-up share capital.
There are two types of deposits, one is call deposit and the other time deposit. Call deposit is the main base of the Society. It is 88 per cent of total deposit. This means that the Society is successfully working without blocking the deposits.
Daily deposits, monthly deposits and special daily deposits are recurring account. It is being collected from the doorstep of depositors by the collectors of the Society. Recurring depositors belong to economically marginalised sections of society.
There are two time deposit instruments i.e. Sahyog (Cooperation) and Earmarked Fund. Sahyog account was launched in the initial stage of the Society. This account was targeted at good samaritans, who can deposit maximum 10,000 without interest for a period of six months to three years.
Earmarked Fund account is a special account. If one wants to give loan to someone, he can deposit the amount in EMF account and identify the person. The Society assesses the identified person for loan.
Income and Expenditure: The income of the Society is from service charge on demand loan, profit-sharing in short term business loan, profit earned from cost plus finance, admission charge, donation and fee and commission. The Society is yet to achieve the goal of optimal minimisation of service charge by cross subsidisation from other profit-bearing financial activities. However, the Society has pursued the two-point principle of keeping the service charge at a modest level and in no case to earn profit on account of service charge. Presently, the Society has to meet major part of the administrative cost from donation and share capital as illustrated in the chart. This is a major challenge for interest-free microfinance institutions towards attaining the sustainability goal. On the one hand, such institutions have to keep the administrative cost at a modest level and on the other hand to utilise Shari’ah compliant instruments of investment to earn profit both to meet administrative expenses and share dividends to micro-investors.
GROWTH FUND
Recently, the Society has launched an investment scheme at the Phulwari Sharif branch with an aim to enter into profit-loss sharing investment activity. Growth Fund Unit Certificate shall be issued either on one-time deposit of Rs.500/- per unit or on pigmy deposits accumulating to the level of Rs.500/-. Entry cost @ 5% per unit is deductible for managing the fund.
Identified areas of investment are: real estate, purchase of Shari’ah compliant equity shares and cost-plus business activity. A separate committee shall manage the fund. The committee includes legal, business and accounting experts, members from certificate holders and members of the Society, all nominated by the Board. Seventy-five per cent of the profit-loss share is to be distributed among certificate holders on time-proportionate basis. For maintenance of financial transaction and calculation of profit-loss distribution, a special software is required.
FUNCTIONAL ASPECT
The Society is owned and controlled by members of the Cooperative Society. For the management of Society affairs, a Board of Directors is elected by members of the Society at the AGM. Every branch of the Society has its own elected LAMC for regular monitoring of the branch. The Society functions as per the organisational chart given below enshrining the basic principles of the Cooperative.