Small Loans, Large Purpose: How Roshaneh Zafar Became a Leader in Pakistani Microfinance

Roshaneh Zafar started a microfinance organization called the Kashf Foundation in Pakistan to help women out of poverty. With the mentoring help and a US$10,000 loan from Dr. Mohammed Yunus, founder of the Grameen Foundation in Bangladesh and winner of the 1996 Nobel Peace Prize for his work, Zafar has reached 1 million female entrepreneurs, while the current outreach of the program is 300,000 active clients.

Zafar founded the organization in 1996. It took six months before she could convince the first client to borrow. Eventually, she won the trust of the women by keeping her appointments, regardless of rain or high water. In 1999, Kashf introduced the first pro-women consumption loan in the sector. In 2001, it was the first microfinance institution to offer micro-insurance services by collaborating with one of Pakistan’s oldest insurance companies. In 2003, it was the first microfinance institution to become financially sustainable. Four years later, Kashf Foundation closed over US$36 million in commercial deals with key local and international banks. Today, it is the third largest microfinance organization in Pakistan, with US$22 million worth of loans and a 98% recovery rate.

Zafar has been awarded the Tamgha-e-Imtiaz, one of Pakistan’s highest civilian awards, for her work in the field of development and women’s empowerment. She was also awarded the Skoll Award for Social Entrepreneurship in 2007. Zafar earned an undergraduate degree from the Wharton School at the University of Pennsylvania in 1989, and also holds a masters’ degree in development economics from Yale University. Speaking to Arabic Knowledge@Wharton, Zafar talks about how she built her institution, and how has microfinance impacted the lives of Pakistani women. She also recalls a chance meeting with a Nobel Prize winner, and how that friendship proved instrumental to launching her efforts.

An edited transcript of the conversation follows.

Arabic Knowledge@Wharton: What made you decide to get involved with poverty?

Roshaneh Zafar: I did my undergraduate degree at Wharton in finance and economics. And I decided to switch my focus to study developmental economics at Yale. I interviewed with companies as an undergraduate and I felt I didn’t want to work in an environment to make wealthy people even wealthier. Especially coming from a country where we have limited resources and a huge population. I felt I needed to push the frontiers in my own country. I felt I would waste my energy and intellect at an investment bank. I didn’t know about microfinancing as an undergrad. But at Yale, I came across the work of Dr. Muhammad Yunus and the Grameen Foundation. [The Grameen Foundation pioneered the concept of microfinancing in Bangladesh and Dr. Yunus won the Nobel Peace Prize in 2006 for his work.]

My professor at Yale did some agricultural research work in Bangladesh and knew of Dr. Yunus. He shared the concept of microcredit in a lecture. That’s when I first heard of microfinance. And then I saw the news program 20/20 and it ran a segment on Dr. Yunus’ work. It put a seed of germination in my mind. I still wasn’t clear what I wanted to do. But I joined the World Bank after I did my master’s at Yale. I interviewed at the World Bank because I wanted to do development work, in particular social sector development and started working in Islamabad, Pakistan.

The World Bank was as far as I knew in understanding development work. One day, my boss was supposed to go to a conference about women and children in Islamabad sponsored by UNICEF. He couldn’t go and he told me I could go in his place. I sat down next to an individual and we struck up a conversation. The next thing I knew he was going up to the podium to give a talk. He turned out to be Dr. Yunus and he gave me his card.

Arabic Knowledge@Wharton: So you maintained contact with Dr. Yunus?

Zafar: For four years, we kept in touch. The Internet had just started then. It was the mid-90s. He would be gracious enough to keep e-mailing with me back and forth.

After four years at the World Bank, I decided to leave. I sent him an email and said I was unemployed. I didn’t hear back from him. And then one day, I got a call from a local travel agency. They said they had a ticket for me bought by a Dr. Muhammad Yunus from Islamabad to fly to Bangladesh.

Arabic Knowledge@Wharton: And what did you do at Grameen Bank?

Zafar: I spent 10 weeks at Grameen Bank, training and traveling across Bangladesh. I visited branch offices and stayed around the country with a little knapsack. I learned the stories [from Grameen] and how they transformed people’s lives. I was thinking about trying to get a job at Grameen Bank but Dr. Yunus told me, “Pakistan needs you more than Bangladesh.”

He said he would give me a US$10,000 loan to start an organization when I was ready. I traveled around South Asia, including Nepal and India, for a year. I came back and set up my own institution. I had student interns from INSEAD during the summer of 1995 to help do a feasibility and business plan. We did market research and extensive research into women’s businesses and female entrepreneurship in Pakistan. We took the principles of Grameen to see if we could apply them to Pakistan.

Arabic Knowledge@Wharton: How did you start the organization?

Zafar: We got the US$10,000 from Grameen and also got a small action grant from the Swiss government and another grant from The Netherlands. We initially started in 1996. We registered in June 1996, but we did a lot of preliminary work in 1995.

We took about a year for planning. There were five of us at the office, all women. I was a loan officer and we were based in Lahore initially. We gave our first 15 loans out in November 1996 and they were all women who become our first acceptors and in some ways were the brave few, who later became role models for other women.

Arabic Knowledge@Wharton: We read that the women were initially hesitant about taking out loans.

Zafar: Yes, it took six months before anyone would borrow money. We would meet with the community and they would say, “There’s got to be hidden agenda.” Trust building was quite challenging. I used to work in one community and do you know what finally convinced them to borrow? One of the anecdotes they would tell me is, “Even if there was rain or hailstorms, you were always there.” They said that keeping your promises was the reason we learned to trust. “If you said you would be there, you would be there,” the women said.

Arabic Knowledge@Wharton: After that, women began to borrow money?

Zafar: They [needed] some basic training. They needed to learn to sign their name. We went through numeracy training. It would take three months to get someone ready. Some would complain it was too tedious or they were too tired. They would say, “We’re not going to get the loan at end of the day.” We’ve made the system faster [since then].

Arabic Knowledge@Wharton: Do you remember what the amounts of the first loans were?

Zafar: Yes, it was about 4,000 rupees, which at that time was worth around US$80. Our first loan was used to start a little grocery store. [The client] used part of her home, a little room, and opened the door out to the street. The second was an individual poultry farm. Our client bought little chicks and raised them into chickens. She sold the chickens, as well as the eggs. Another woman bought two goats. A fourth one started a vegetable stall in the market. Another one started a catering business.

Arabic Knowledge@Wharton: What made you decide to call the organization Kashf Foundation?

Zafar: I believe some things can get pre-ordained. One of most famous Sufi philosophers is buried here in Lahore. Kashf is a Sufi word, which means miracle or revelation or self-actualization. It’s a belief that God is within you, God is in humanity. Any individual can be a good individual. When I was in Bangladesh [with Grameen], the word “Kashf” came to me.

Arabic Knowledge@Wharton: When you started off, was it only women you were targeting?

Zafar: We targeted women and families. We were mostly helping family enterprises. We wanted women to be part of the lending decision. Poverty affects the whole household. And the money had to be spent on an income-generating activity, not just for consumption.

We assess the families for their business plan, validity of their proposal, future prospects, and their reputation within their community. We sit with the households and develop a business plan with the whole family. We look at their debt management capacity. It’s a very intensive process with the family. Then we provide the loan. We have to be careful so the families don’t get pushed more in indebtedness. We are the third-largest private microlender in Pakistan now.

Arabic Knowledge@Wharton: Do you still use the solidarity methodology (wherein groups of people take out loans together) to handle loans? How does that work?

Zafar: We used to up until three years ago. Grameen started on a group model: Five women get together and take out a loan, 25 people act together as a center and there is one manager for them. As the group graduates, they qualify for more loans. Now, it’s more of a credit appraisal-based loaning. It’s more of a customized process for clients.

Arabic Knowledge@Wharton: You have also started a microsavings bank.

Zafar: Two years ago, we established the Kashf Microfinance Bank, which provides a savings source. Deposits are usually regulated by The Central Bank [State Bank of Pakistan]. Now we can offer deposit accounts to our clients. Over the next three to four years, we will make sure all our clients will have bank accounts and save for the future.

Arabic Knowledge@Wharton: Was there hesitation at first for people to open up a savings account?

Zafar: Since we’ve doing this for fifteen years now, we have brand recognition. So they don’t hesitate now. There are five branches where we will pilot the program [to have clients open up a savings account as well as a loan]. Trust-building initially was very challenging but it’s much easier now.

Arabic Knowledge@Wharton: What do people usually want to accomplish with a savings account?

Zafar: They’re used for major savings needs. For example, I want to buy a washing machine or build an extra room. Or go to Mecca. These are goal-oriented saving accounts for life-cycle events. We want to help people plan for that event. The nominal interest rate is around 6 percent.

Arabic Knowledge@Wharton: You mentioned in an interview that product design, frequent small paybacks, and group dynamics were important in making microfinancing successful. Can you explain more about that?

Zafar: Poor households don’t have large sums of money. They usually get small, regular amounts of income every day. It’s important for our clients to pay back their loans in regular and small amounts on a monthly basis.

We also look at our clients’ ability to generate income, their general overall reputation in community. We’re not looking for credit history or bank accounts. We look at their history within their community, their expertise and their reputation. Each loan has to be customized or it can’t be sustainable or efficient.

One thing we have to be is a responsible financier. We don’t want the loans used for consumption. We also have to be transparent in our relationships. We explain all our terms and conditions and what they must expect from us. We are extremely conscious of our customers and satisfaction. We have a complaints phone line, where people may call and say something like the loan officer was a little harsh. The client relationship needs to be built on dignity. We are empowering people.

Arabic Knowledge@Wharton: Is it difficult to get a loan?

Zafar: About 2 to 3% are rejected. If people are late with three or four payments, they will be rejected the next time they ask for a loan. We want to create credit discipline. Everyone knows this and they know to pay on time. If there’s a flood or other disaster, we will work with the clients to reschedule the loan and to sustain the family.

Arabic Knowledge@Wharton: What are the different types of loans you have?

Zafar: Since the economic downturn, we just have income-generating loans. The downturn has had a very negative impact. Inflation has been high in Pakistan.

The business ‘surmaya’ loan has been graduated to the Kashf Microfinance Bank. Small entrepreneurship loans above US$1,000 have been graduated to the bank. The purpose of the bank is job creation because 65% of the Pakistani population is below 25 years of age and we need job creators. The Kashf Foundation is about economic empowerment.

Arabic Knowledge@Wharton: Have there been any cases of abuse in Pakistan? This is in reference to another Knowledge@Wharton article on the microfinance industry’s growing issues, which also quotes a member of your organization.

Zafar: Since that article refers to the Andhra Pradesh crisis, I believe that is a more complex issue, which was not fanned by a client-level breakdown in relationships, but was the result of the political economy around microfinance in India, where you have government-run microfinance programs in parallel with commercially motivated enterprises. It’s gotten media attention due the recent initial public offering of SKS Microfinance Ltd. shares, and led to a media campaign that associated poverty suicides with microfinance. It is my understanding that most of the reported cases did not happen due to microfinance, but were a result of the nature of the rural economy in India where prices of agricultural products are kept low to support urban development and industrialization — a typical development dilemma.

That being said, at Kashf we have a very clear stance towards responsible finance and all our lending decisions are based on business appraisals of the client’s income-generating activities, along with a strong consumer protection code which allows clients to report any abuses directly to us through a client complaint cell phone number. In our experience, we have had a few cases where clients have complained about staff attitude, which we have taken serious note of and immediately rectified.

Arabic Knowledge@Wharton: How do you see the recent controversies impacting the industry in Pakistan and globally?

Zafar: Well, microfinance is going through a difficult phase and has lost a bit of its fairy dust. Personally, I believe this is an opportunity for us to rethink business models and improve our frameworks. I am not overly concerned about this, as long as we are transparent and build strong relations with our clients and offer them demand-oriented services. On a global level, investors in the sector are having some second thoughts and are waiting to see how this pans out.

Arabic Knowledge@Wharton: With the recent unrest in the Middle East, has it, or will it have an adverse effect on capital flow?

Zafar: This is too early tell. I think the Indian crisis, and now the personally disturbing campaign against Dr. Yunus in Bangladesh, will have a bigger impact on capital flow. As far as I am concerned, I am outraged by the way that Dr. Yunus is being treated in Bangladesh. Again this case tells us how microfinance can be politicized for personal gains, and in the end, the real losers will be poor clients, especially women.

Arabic Knowledge@Wharton: Why and how do you think microfinance has found success in conservative societies, where women traditionally don’t run businesses?

Zafar: It’s about breaking myths and not taking no for an answer. Women are key contributors to the informal economy, even in traditional societies. Microfinance builds on that existing role and makes it more viable. It is not rocket science.

Arabic Knowledge@Wharton: How many clients do you have now?

Zafar: Since the financial sector has undergone a downturn, we have 300,000 clients. Our new goal is to have 500,000 clients by 2015. We rely on sources of credit from commercial banks and it’s much harder to get credit in this climate.

Arabic Knowledge@Wharton: Have other microfinance institutions in other countries followed suit and targeted women? Which countries?

Zafar: About 50% of the microfinance clients are Pakistani women. Kashf lends only to women. We have often been accused of reverse discrimination! In India and Bangladesh, it is even higher. Uganda and Kenya have had varying success. There has been great success in Latin America, where microfinancing has been women-targeted. There are also organizations in Mexico, Guatemala, Peru, and Bolivia.

Arabic Knowledge@Wharton: Do you sometimes use theater? How is it used?

Zafar: We still do. It’s interactive theater for social development. Some of the topics have been about the education of girls, dowry, or violence against women. We set up tents and invite 200 people. We ask audience to change the storyline and become directors or actors themselves. It’s part of our communication strategy in the field.

Arabic Knowledge@Wharton: Are you’re thinking of building schools for poor children?

Zafar: We want to in the coming years. There are entrepreneurs who will set up these schools. We will fund those entrepreneurs and help provide teacher training. That’s a long-term project for an education finance bank and it’ll be the first of its kind in Pakistan.

Arabic Knowledge@Wharton: Can you tell us about your most inspiring story?

Zafar: Recently, I was visiting one of my clients in the city of Kasur, which is about one-and-a-half hours from Lahore. She’s been a client for 10 years. Her husband was a day laborer. Their income was erratic. When she first came to us, she just bought fabric in another town to sell in her community. It was her first venture she started to work on. In time, she chose to diversify with an innovative business idea. She decided to buy raw white thread and have it dyed. She bought one spooling machine for her home. She decided to package it herself. She produced spools of thread and sold them at the market. She started with one spooling machine and employed herself. Now her husband works with her and buys thread for her. She has five spooling machines in her home. They’ve moved out of her house and turned the house into a little factory. She employs five other women do the packaging of the thread. They will now buy a small van to transport the spools to other towns. They have four children, two of whom are in college and two are in school. Both the husband and wife are illiterate.

Arabic Knowledge@Wharton: What is the biggest impact of microfinance?

Zafar: If you ask Dr. Yunus, the biggest impact is on the next generation. Like in the last example, all four children are in school now.

On the economics side, their poverty status is improving. About 30% of our clients move above the poverty line. Households have a greater ability to save. Their quality of life changes. They get better nutrition and can afford better health care.

On the social side, women are more empowered. Their self-esteem goes up when they are more empowered. You can see the self-actualization of these women happening.

Arabic Knowledge@Wharton: What experience at Wharton helped prepare you to make this foundation possible?

Zafar: It gave me a good academic background. Wharton gave me a good sense of ethics, strategy and ambition. It challenged me. I had the best time networking with my peers. I gained exposure to all that was possible. It definitely made me who I am. It gave me the desire to strive for excellence. This is what I imbibed from Wharton. It also taught me there are financial solutions if we think out of the box. And not to accept limits to how the world works.

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