MICRO-FINANCING NEEDS TO BE REDESIGNED

40 percent living below the poverty line

From KHALID BUTT, Lahore
Sep 12 - 18, 2005

Lack of adequate human and institutional capacity, shortage of local expertise and weak coordination among the various stakeholders are the factors holding off the growth of formal micro-finance sector in a country with Rs. 750 billion of bank advances along with 40 per cent of people living below the poverty line.

Though microfinance in Pakistan is still in its experimental period, depleted outreach has a long way to go. The steps taken during the last three years in credit distribution are still quite low as compared to the needs and demand of the target group.

In order to achieve sustainability, it is important that micro-finance framework should encourage institutions and programs, modeled on an inherently sustainable design. The objective of micro-financing program primarily is to enhance the outreach of the people while building social capital and mitigating risks faced by the poor, whereby up to $2.5 billion in loans are consumed annually to run small enterprises.

A State Bank survey data shows that the private moneylenders are providing over 40 per cent of financing where the interest rates are much higher as compared to the formal sector. Those who obtain credit from the private moneylenders possess petite collateral. But usually they return the loans rapidly as their trade does not involve large investment or long-term investment. Their turnover is also pretty quick. However, the advantage of private moneylenders financing to the poor is the instant linkage with request for a loan and supply, whereas nearly all NGOs/CBOs take a minimum period of a week and banks take even longer.

An earlier estimate by the State Bank had indicated that the total bank credit availed by the small industrial sector was less than five per cent of the total credit, which was returned pretty quickly.

The complementaries between microfinance and other elements of poverty alleviation such as investment, infrastructure, social services and capacity building are clearly recognized worldwide. Income generation by the poor cannot crop up only through availability of finances in the absence of infrastructure, or markets for selling their products. Likewise, there won't be any scope for sustainable microfinance without building the knowledge based enlarging capacity.

The government is experimenting with a variety of institutional models of delivery mechanisms including outreaching to the poor through a retail bank, Khushali Bank, which claims to have reached out to 100,000 customers and has a target of 700,000 by 2007. The Rs. 20 billion Khushal Pakistan Programme launched in January 2000 is apparently a response to the failure of the Social Action Programme (SAP) 1 and 2 in view.

The new strategy, aims at decentralizing SAP operations and integrating them into the devolution plan, has been plugged as the main vehicle for "increasing employment and providing essential infrastructure in rural and low-income urban areas".

Two commercial banks are also providing credit lines for microfinance. The Habib Bank has allocated Rs2 billion for the purpose, and National Bank of Pakistan Rs1.5 billion. Habib Bank was the first to start a micro-credit scheme in 1998 with the assistance of a NGO.

However, the planners are yet to make it out as to which particular delivery mechanism will be effective. That is why experiment with plurality and diversity has been adopted to pick out the way.

In Bangladesh the backbone of the Grammen Bank are women who borrow the money, use that largely in the garment manufacturing and return the capital in time. Their record is excellent. But in Pakistan, where the women are less liberated and more dependent on their men economically, the borrowers are more likely to be men and they may not be as conscientious in returning the money as the women are. Yet they have to be encouraged with the necessary safeguards for ensuring return of the capital or the culture of repaying loans.

The reward for repaying the loans in time is more loans and larger loans for larger enterprises, which can indeed be encouraging for developing the culture of repayment.

The amount of Rs 5, 000 to Rs 30,000 per skilled person on the basis of personal guarantees of two persons from their own community may not be enough to start one's own business for skilled persons. Therefore, there is likelihood of flexibility in this area on the basis of merit of each applicant and the project on which he proposes to invest.

The interest rate of 16 per cent is almost the same as proposed by the Nawaz Sharif government for his second taxi scheme as well as his 'Mera Ghar' scheme. That is likely to come down as the interest rate goes down. Governor, State Bank, Dr. Ishrat Hussain is striving for it.

Care should have to be taken to avoid overabundance in any particular sector as a result of over-investment in that sector. It may not be easy in the initial stage to export their products, and if they do not sell well in the local market, they may come to grief and the banks suffer.

Encouragement of cooperative societies in such sectors is also necessary so that they could get their raw materials on cheaper rates in addition to selling their products profitably. A single or a group of skilled workers may not be able to produce their products while buying their raw materials and selling their output profitably at every level. The country needs to develop a good marketing structure for such products as the cottage industries departments perform but without their red tape and corruption.

Clearly, micro financing and recovering it is only one process among several. The other activities must receive enough attention for the micro finance to give macro results while the planers seem to have their terminology and technicality in the right place, the question arises here as to how does the government plan to implement, and sustain these strategies in the longer run?

It is being assumed that the participation of NGOs will bring about greater awareness and public involvement. However, it totally negates the fact that the NGO sector in Pakistan is still in budding stages and requires a great deal more of soul-searching to be able to come into equal partnership with other civic and state agencies. Communities themselves are victims of over-exposure to "participatory strategies" without understanding what they entail.