Interest free loans may be a dream elsewhere, not in Bihar where a credit society has transformed the lives of hundreds of traders, small farmers and women - restoring their self esteem and giving them a reason to go on.

Based on the Islamic principle of prohibiting interest, the Patna-based Al-Khair Cooperative Credit Society Ltd has provided 'free' loans of Rs.5 million to 1,200 people in the three years of its existence. About half of these beneficiaries are Hindus.

Regardless of religion, the society has opened new vistas for large sections of marginalized people, skilled and unskilled. That it involves minimal paperwork is a further attraction for Al-Khair's clients, many of whom are not very literate.

Nayar Fatmi, who is closely associated with the society, said that a large number of Hindus were attracted to it as it neither takes interest on loans nor gives interest on deposits.

"Earlier they were either taking loans from moneylenders on high interest rates or cursing their fate for not being able to get loans from banks," Fatmi said.

According to Arshad Ajmal, the society's chairperson and CEO, the interest free economy has universal appeal - and it is not just for Muslims. "Islam prohibits interest as it terms it unjust."

"Nearly 40 percent beneficiaries of interest free loans are Hindus, Most use the money for income generating activities," Ajmal told.

Interestingly, a majority of the Muslims who have taken loans have done so for purchasing consumer durables.

The beneficiaries are many with varied interests and occupations.

Like Usha Devi, 30, who took on a loan of Rs.4,000 to run a small bangle shop on the outskirts of this capital. Or Indrajeet Kumar, who took money to set up a shop selling beauty products.

"For poor people like me, interest free loans are an attraction and there is not much paperwork like in regular banks," he said gratefully.

The beginnings were modest.

According to its latest annual general body meeting report, in the first year of its operations in 2002-03, Al-Khair could give loans of Rs.426,110 to 117 people. This went up to 559 people being given Rs.1.8 million the next year. And 445 people being provided loans of Rs.2.7 million in 2004-05.

The society charges a nominal service charge, ranging from Rs.40 on Rs.1,000 to Rs.860 on Rs.10,000. "Interest free loans are not cost free, so we charge a service tax to run our establishment, including salary for the staff and other expenditure," said an Al-Khair official.

The society also operates through deposits by its members.

The brain behind the society, Ajmal explained further: "We initiated a small step to help people, mostly poor, by providing interest free loans to start income generating activities to help them earn their livelihood. The response of the people has been tremendous because they found it more friendly than banks.

"Banks charged interest and there is a lot of paper work involved that only discourages and frustrates the poor."

The society began with only 155 members and now has over 1,500, about half of them Hindus.

Recalling the early days, Ajmal said: "In the first three months, we launched a drive to mobilise funds from members. We started giving loans with initial deposit funds of Rs.200,000."

Deposits have jumped from Rs.1.8 million in 2002-03 to Rs.8.4 million in 2004-05.

Till now, the society, with five Hindus in its 21-member board of directors, was providing loans of Rs.1,000 to Rs.30,000. This year, the maximum amount is likely to be enhanced to Rs.50,000.

Encouraged by its success, Al-Khair plans to expand its network in different localities of Patna and then other districts in Bihar.

Al-Khair members clarify that they are working towards capacity building and income generation, not poverty alleviation.

This could be the way of the future too.

According to Ajmal, the central government last month asked the Reserve Bank of India (RBI) to explore ways to bring Islamic banking into India.

Interest-free banking has been getting increasingly popular, not only in Gulf countries and Southeast Asian countries like Malaysia, but also in other developed markets like Britain.

Banks like Citibank, Standard Chartered and HBSC operate interest free windows in several Middle East countries, Europe and the US.