Breakfast With Aun Rahman, Pakistan Country Director

This past Tuesday in New York, Acumen Fund hosted a breakfast featuring Aun Rahman, our Pakistan Country Director and longtime Acumen Fund employee. The event began with Omer Imtiazuddin – Acumen’s health portfolio manager – introducing Aun. Before joining Acumen Fund, Aun worked for five years in economic and strategy consulting at Charles River Associates in Boston, specializing in financial modeling and quantitative analysis. Aun joined Acumen in 2003 as a Fellow, working for 18 months our investee, Saiban, to structure and incubate an affordable commercial housing project in Lahore and to develop the organization’s management information systems.

In 2005, he became Acumen Fund’s Country Manager in Pakistan. Originally from Karachi, Aun came to the United States to attend the University of Chicago, where he earned a BA in Economics. At the conclusion of his introduction, Omer remarked how he and Aun actually went to school together (in grade six) but only realized their shared history upon joining Acumen Fund. It is indeed a small world.

Aun began his talk by giving a demographic overview of Pakistan. Seventy percent of Pakistanis earn less than $2/day; fifty percent of the urban population lives in slums; seventy percent of Pakistanis don’t have access to clean drinking water. Not only that, but recent commodity price increases have put a squeeze on the purchasing power of the poor, exacerbating some of these (older) figures.

After his overview, Aun began the heart of his presentation by talking about Saiban, an incremental housing model targeting the urban slum population. The poor aren’t offered housing options in the current economy – it’s too expensive, on the wrong time schedule, and scarce. To address these issues, Saiban has developed a model based on the informal housing sector. Specifically, Saiban works with people in low-income communities who build their homes over a four or five year period – not a traditional housing or real estate model.

Acumen became involved to help Saiban accelerate and scale up the incremental housing process. When we came in, Aun notes, it was already a holistic business – they weren’t just building homes, but also the infrastructure, and facilitating financing and land purchase as well. Acumen’s assistance came in the form of a $300,000 grant/loan in 2005, as well as the services of Aun (Fellow, 2004) and Jawad (Fellow, 2007) working directly with Saiban’s team.

As far as impact, Aun displayed a slide noting that there are 22,000 residents living in 2 communities built by Saiban. There are schools, mosques, stores as well as a range of utility services (water, electricity, sanitation, etc.). Finally, and perhaps most interestingly, there’s a formal mortgage financing scheme for the poor – a first in Pakistan.

The second case Aun brought up was of the Kashf Foundation – which we recently profiled on the site. Acumen made a $350,000 grant/loan in 2002 to help them expand their branch network and add 15,000 poor female borrowers to their network. Today, Kashf is Pakistan’s third largest private micro-finance institution with over 300,000 clients and expected to scale to 1 million by 2010. A $900,000 follow-on loan was made by Acumen in 2007, to launch a home-improvement loan program for it clients. Acumen’s focus with Kashf isn’t microfinance per se, but rather broadening financial access to the BoP – particularly second generation microfinance products.

What’s a second-generation product? Kashf’s standard loan is a 1-year, $150 loan for working capital. Acumen’s capital and management assistance has helped Kashf offer a 4-year, $1200-1500 loan product to some of their repeat (second-generation) clients. This $1200 loan is being offered as a home improvement loan – 600 of which have been made to date. What’s interesting about these is that, by and large, they are uncollateralized. Even so, there have been zero defaults to date, and Kashf/Acumen are learning how to offer complex financial products to the BoP.

Micro Drip was Aun’s third example. The company is based in Thar, one of the poorest, driest parts of Pakistan – indeed, in all of South Asia. Micro Drip is an initiative of Thardeep, a NGO working in the region. Acumen introduced Thardeep to one of our Indian investees – IDE India – which had pioneered small-scale, profitable drip irrigation technologies and business models.

Once the introduction had been made, Acumen worked with both companies to facilitate a cross-border technology transfer – no easy task when the countries are India and Pakistan. Acumen then helped Thardeep set up the marketing, distribution and installation aspects of the business.

At this point, a few impromptu questions popped up. One questioner asked what the economic rationale for a farmer would be to invest in a Micro Drip irrigation system. Aun replied that the system costs about $500/acre, part of which is subsidized by a donor agency. As more and more systems are sold, the system’s price will come down – and as the technology is accepted by farmers, there will be stronger demand for it (demand in India has blossomed over time, improving IDE’s financial outlook).

2007-2008 is the first season for Micro Drip in Pakistan – 100 farmers have installed it on their 1 or 2 acre plots. Anecdotal evidence suggests the social and financial benefits are tremendous, allowing previously itinerant farm families to remain in their homes year round instead of being forced to migrate to cities in the dry season.

Another attendee questioned the rationale behind helping farmers use water in an already water-scarce environment – an excellent question. Aun replied that the Thar is already an agrarian economy, and that these farmers are farming 1 to 2 acres – not enough to drain aquifers. Rather, the Micro Drip business allows farmers to stay in their homes year-round – a significant social benefit.

After speaking about three current investments, Aun described some newly-approved investments. First, he talked about a micro-health insurance scheme – the first health/life insurance to be offered to the poor on a large scale across Pakistan. So far, 10,000 policies have been sold; Acumen’s role has been both an equity investment in the insurance underwriter and a guarantee to the insurance company.

Aun also described a franchised health center model that will offer pharmaceuticals and telemedicine – based in part on some of Acumen’s other investments in franchised healthcare in Africa and India.

Beyond the investments, there’s a nascent and growing Acumen community in Pakistan, including donors, advisors and strategic partners. Some partners include Unilever, which has provided some volunteer assistance to Micro Drip. Other engagements include LUMS Business School, which is working with Acumen Fund Pakistan to develop case studies.

After Aun’s presentation, there was a spirited Q&A. The first question was about Saiban’s and Kashf’s work with women homeowners. It’s interesting to note that a significant percentage of Saiban’s homes are owned by women. With Kashf, the home improvement loan is made to the household – and it’s not always clear that the home is officially owned by a man or a woman. That said, since the woman is the source of funds, it helps her standing within the household and within the community.

There was a question about Acumen’s process for making microloans; Aun clarified that Acumen itself is not a microfinance institution. That said, Aun described how the longer-term home improvement differs from a standard group loan. The main challenge, he said, is when 2 or 3 clients within a group of 25 want to take out a 4-year term loan – how do you get a group to collateralize that? To help minimize risk, Kashf analyzes borrowers’ cash flow streams – they only offer it to repeat borrowers who have used their previous loans to build up a steady income stream.

The conversation soon delved into one about microfinance interest rates – too high (20%) or not high enough (could it be 30%? 40%?) Of course, you have to balance the social mission and the financial sustainability factor, as one participant noted. Aun observed that Acumen constantly talks with our investments about how to keep prices low and balance those low prices with the organizations’ long-term business plans. In microfinance specifically, Kashf Foundation has repeatedly said that it will keep its rates as low as possible without compromising its ability to serve as many clients as possible – “just because you can have an interest rate doesn’t mean you should have that rate,” according to Kashf.

Aun dove a bit deeper into the numbers (his Charles River Associates background shined through here). Kashf borrows at 13 to 14 percent. Then you have to account for inflation, which is up to 14 percent in Pakistan these days. They have to add 17 percent transaction cost and operational costs. (This number is going up since Kashf has had to operate expensive generators recently during rolling blackouts in Karachi and Lahore.) When you add it up, their interest rates – in the low 30s – allow for a similar spread as you would see in banking here in the U.S. or around the world. This was interesting to the group, which delved into the merits of interest rate caps, central bank regulation, desired interest rate spread and so forth – prompting Omer and Aun to share a smile, as they have ‘lost’ the conversation to the group, which – at that point – was speaking expertly among themselves.

The second to last question was about land cost issues and Saiban. Aun explained that Saiban purchases loans on the periphery of the city, where land tenure records don’t exist. The lack of title and obvious ownership requires a long due diligence process – anywhere from 6 to 12 months. Second, there’s a major corruption issue at hand, where government officials expect bribes in order to sanction housing schemes. Finally, this isn’t real estate – it’s developing housing and a community. So Saiban has processes to weed out speculators and build community – which takes time and effort. But these hard stages – finding formal land, gaining official sanction and building real community – are part of the long-term commitment shown by Saiban and Acumen Fund.

Finally, Aun was asked what he would like to see Jawad Aslam – our 2007 Acumen Fund Fellow, working with Saiban – achieve in the final 6 months of his fellowship. It sounds simple – Aun wants Jawad to help sell more plots and homes to real buyers, which means getting customers and vetting their interest. Of course, it’s not that simple – but Jawad is making headway and should continue to do so as the fellowship winds down.

All in all, it was a fascinating breakfast. It was good to hear more detail about the Pakistan portfolio, and to know that there’s real interest within our community.

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