CREATING ECONOMICALLY SUSTAINED ENTITIES

An exclusive interview with Basheer A. Chowdry, Chairman, Modaraba Association of Pakistan

SHABBIR H. KAZMI, Special Correspondent
May 21 - 27, 2007

PAGE: IS MICROFINANCE A SUSTAINABLE ECONOMIC ACTIVITY?

I think the best way to approach the microfinance is to take the lead from the contemporary legend in the region. I mean no one else but Muhammad Younus who has made Grameen Bank in Bangladesh a role model not only for the developing economies but also for the entire world. Microfinance should be viewed as a social business enterprise that serves a cause, covers its costs and also earns a reasonable rate of return.

PAGE: WHAT SHOULD BE THE STARTING POINT?

Microfinance should be viewed only in this context if we want to provide a sustainable financial service to the poor and enable them to exploit opportunities. This practical and tested approach also suits the socioeconomic climate of Pakistan. First we have to identify the major components of the micro finance activity in Pakistan. We have to examine the effectiveness of what has been done so far, diagnose the practical difficulties and hardships, both of the infrastructure and of the enterprise, and more importantly to act as a catalyst for the betterment of the targeted segments of the society.

PAGE: HAS A BEGINNING REALLY MADE?

The micro financing activity has grown about 22 times over the last seven years. However, according to a recent study only a limited number of potential beneficiaries have been able to utilize the facility. With the primary objective of achieving poverty alleviation in the country and making skilled individuals improve their earnings, Pakistan Poverty Alleviation Fund (PPAF) was established in 1997 and micro finance banking came into operations in year 2000. The major contributors to the effort at the moment are the micro finance banks, leasing companies and Modarabas, NGOs, rural support programs and some international donors.

PAGE: ARE THE OTHER FINANCIAL INSTITUTIONS ALSO PARTICIPATING IN THIS ENDEAVOR?

Some of the commercial banks are also participating in the activity though in a negligible manner. Until end June, 2006 the micro finance banks and the commercial banks had lent around Rs 6.6 Billion to about a million borrowers which the government plans to increase to three million by 2010. This will be done through active implementation and monitoring of microfinance sector development program by State Bank of Pakistan. Considering the estimated number of potential borrowers, growth rate far has been far below expectation.

PAGE: ARE THE BORROWERS ABLE TO IMPROVE THEIR LIFESTYLE?

A survey conducted by Gallup Pakistan, two years ago established that in Pakistan low income households who borrowed from PPAF were better off in their earnings and lifestyle compared to those who did not. The survey confirmed that the income levels of such individuals raised, consumption increased and personal and business assets improved including their housing facilities and social status. However, a recent Asian Development Bank report on efficiency of poverty reduction programs in Pakistan concluded that the result of the studies did not provide rigorous factual calculations and the precise impact of micro credit on income and therefore, it can at the best be accepted as an indicator rather than a confirmed result.

PAGE: CAN PERFORMANCE BE LINKED TO THE ACTUAL DISBURSEMENT TO THE BORROWERS?

The most important parameter for evaluating the performance is, how much of the actual credit reaches the ultimate beneficiaries and how much of their resources are actually consumed by the intermediary and processing activities. Along with this performance, efficiency, outreach and overall accountability of the microfinance system needs to be examined.

PAGE: WHAT AREAS NEED SPECIFIC ATTENTION?

Some of the specific facets of the microfinance have to be given specific attention. These include small loans to the women entrepreneurs, deprived entities of the society and remote areas of the country. Internationally, 90% of the micro loans go to women and in case of Grameen Bank, the number is about 95%. In Pakistan, the percentage of women borrowers has fallen from 30% to 24% instead of witnessing proportionate increase.

PAGE: WHICH GLOBAL MODEL SHOULD BE FOLLOWED IN PAKISTAN?

For the guiding principles, I would again draw upon the Grameen Bank model. It promotes credit as a human right. It provides service at the doorstep of the poor based on the principle that the lender should go to the needy and not otherwise. It is aimed at creating income generating activities as opposed to consumption or subsidy. It also aims at promoting function of social and human capital for improving the environment. Most importantly, it is based on the premises that most of the poor have skills which remain un-utilized. Poverty is not created by the poor, it is an outcome of the ineffective institutions, policies and the circumstances which surround them. In order to eliminate poverty, appropriate changes have to be made in the institutions and policies. The microfinance eventually helps in creating self-sufficiency and human dignity amongst the deprived.

PAGE: WHAT IS THE WAY FORWARD?

All the stakeholders need to deliberate and come up with realistic and practical ways of promoting the effectiveness of the microfinance regime. Firstly, the sources of the microfinance activity need to be critically analyzed to assess their efficiency and to suggest improvements in their infrastructure and perhaps for promoting alternate sources. For this, the performance of the microfinance banks, commercial banks, NGOs, non-banking organizations like leasing companies, rural programs and some of the international donors will need to be considered.