A review of the main small-scale credit programmes in Pakistan.

Feb 17 - 23, 1996

With unemployment in Pakistan well into double digit figures, small business ventures are, or at least ought to be, a popular vehicle for income-generation. If this is so, small loans and small-scale credit schemes should play an important role in providing both start-up money and working capital for these businesses. The most obvious hitches are collateral for the loan and problems of repayment. Nevertheless, such programmes have been successful, both in Pakistan and in other parts of the developing world where loan utilisation has been effectively monitored.

The Executive Director of Network Leasing defines a micro-enterprise as a processing, commercial, manufacturing or service enterprise employing at least one person and whose total assets are valued between Rs 5000 and Rs 1,000,000.

According to the Sindh Small Scale Industries Corporation, a cottage industry

is an enterprise in which the owner combines in himself the functions of the investor and the labourer and the capital employed does not exceed Rs 100,000 at any time during the year. The number of workers employed on a single shift basis does not include the owner or his relatives does not exceed fifteen at any time during the year, the owner does not own any other cottage industry or any other enterprise and where he does, total capital employed does not exceed Rs 100,000.

The micro-enterprise sector in Pakistan contributes about 20% of the total value-added in the economy. Of the total growth in employment of 1.2 million jobs since 1977, almost 1.1 million were created in the small-scale industries. Because these industries are more labour intensive, they generate more jobs per unit of capital invested.

Traditionally small loan schemes have been the domain of state institutions, and what has principally been lacking in such programmes is, as just mentioned, an effective system of monitoring loan utilisation which inevitably results in high rates of default. A particularly pertinent example here, is the Agricultural Development Bank of Pakistan which through its small loans to farmers has accumulated unpaid loans amounting to Rs 1.5 billion. Recently, they have sought the government's help in recovering dues and have, upto the end of January recovered Rs 7.4 million this year.

Aga Khan Rural Support Programme

The Aga Khan Rural Support Program, which operates in the mountain valleys of Northern Pakistan, was launched in 1982, and is an exemplary case of social organisation and the effective use of credit. It supports the formation of village organisations which receive program grants for income-generating infrastructure projects that are carried out by the organisations themselves. In a project area of over 70,000 square kilometers, and a population of one million, more than 1700 organisations have adopted these initiatives. The Aga Khan Rural Support Programme, has been working with the objectives of involving rural communities in their development for sustainable increase in incomes and evolving a replicable model for small farmers development.

The Enterprise Development Division (EDD) was established in 1992 for the support of small farm and non-farm enterprises. The main areas of its operation are market linkages, feasibility studies and managerial advice to small-scale entrepreneurs and cooperatives as well as training courses. There are three main programmes in this division: The Apricot Marketing Association (BAMA), the Gilgit Agriculture Marketing Association (GAMA), and the Micro-enterprise Credit Programme (MECP). BAMA is a cooperative of apricot growers from all over the area with the aim of increasing the income of the poor apricot growers, and in 1994, return on equity grew to over 56%. GAMA seeks to improve sales from apricot and potato seeds and has orders from both the US and Brazil. MECP was initiated in 1992 as a credit window for short-term financing and has adopted rigorous loan application procedures so that a borrower will have to consider all aspects of his enterprise before he applies for credit. Helping people link up with markets is one area where this programme has made a significant contribution- in Gilgit efforts were focused around marketing of green peas and fresh cherries, and in Baltistan, the marketing section organised two Friday markets in which producers could bring their produce to Skardu. The MECP began as a pilot activity to fill a gap in the credit markets and is targeted at micro-enterprises with low capital requirements which are unlikely to have access to alternative sources of short-term financing. The initial loan amount is limited to Rs 5000 but if loans are utilised for agreed purposes, and repaid on time the borrower is entitled to Rs 10000 and according to the AKRSP annual report of1994, the maximum limit is Rs 40000. The repayment period is six months in Baltistan and one year in Gilgit and Chitral and the interest rate on these loans is at 18%, which though high has not been altered since the purpose of this loan is a competitive short-term working capital scheme. It is their emphasis on facilitation rather than intervention which has promoted self-sustainability of medium and small-sized enterprises. The micro-enterprise credit programme really took off in 1994 with over 1300 loans being provided.

Another credit programme is the Credit and savings programme which was established in 1983 with the initial objective of making credit available to the largest minority of small farmers who did not have access to institutional credit since the cost of disbursing and recovering small loans is very high. This programme is based on the establishment of village and women organisations (VO/WO) and these village-level institutions act as receiving and delivery mechanisms in terms of credit disbursement to, and recoveries from its members. This programme is based on the process of learning-by-doing in order to develop and introduce loan products that have been identified and demanded by the village and women's organizations. Upto December 1994, AKRSP had organised 2600 rural communities into village/women organisations with 101300 members and the programme had lent Rs 350 million and accumulated Rs 210 million in savings. During 1994, the credit programme disbursed Rs. 90.59 million through 2069 loans to 31380 beneficiaries and new default management procedures were put in place and as a result, net default decreased by 1.33 million. The key has been for the people to undertake their own development.

The savings programme requires that all VOs/WOs start a process of capital generation through regular savings. Over the years, the savings process has become institutionalised at the VO/WO level and the management of savings is carried out by the VO/WO representatives and AKRSP staff monitors savings and provides on-the-job training to VO/WO managers in keeping books. After the initial period, the VOs/WOs no longer saw savings as a mandatory requirement imposed by AKRSP, but as security for the village and an easy access to credit.

Through the credit programme, as of December 31, 1994, 10381 loans have been issued to over 390500 beneficiary households and about Rs350 million disbursed cumulatively. During 1994, Rs 90.6 million has been disbursed.

The Micro-enterprise Credit Programme accounts for 13% of the credit funds disbursed during the year and in 1994, the short-term credit and the medium-term credit accounts for 10% and 1% of the credit funds disbursed during the year. The AKRSPs credit portfolio over the past year is characterized by a significant increase in Village Organisations Credit Programmes and Women's Organisations Credit Programmes and MECP credit with a decrease in short-term and medium-term credit. After five years of operation the VOCP/WOCP is becoming the most popular credit window, especially in Gilgit. The Strategy Development Committee has proposed a Development Bank and an Enterprise Support Company to take over and expand the existing credit and saving functions and the enterprise support functions. Credit has generally been used to generate additional income and people have invested in housing, schooling for their children. In other villages, the availability of short-term fertilizer loans has meant that farmers have been able to increase their output and hence have not had to sell livestock during the winter months in order to purchase food. The overall default rate is 3.19% which is quite remarkable and can be partly attributed to their policy of flexibility in loan collection since their experience has shown that although repayments may be delayed, the relationship of trust and credibility which has been established, ensures that loans are repaid.

Orangi Pilot Project

Orangi Pilot Project has worked extensively in the credit market under the name of Family Enterprise Economic Program; working class people in Orangi have been setting up workshops on a family basis but scope for expansion was curtailed due to non-availability of credit. The Orangi Charitable Trust was set up in 1987 to borrow from commercial banks without concessions and then lend to family units at bank rate, to overcome the problem of collateral. However, the loan system seems to have been built around trust rather than the concept of group guarantees as collateral. The objectives of the programme were to discover efficient methods of management, identify correct criteria for selection, learn the art of supervising family units and recovering small loans, create a base of honest and loyal clients, and promote the formation of real cooperatives. Although initially, bad debts were high, in the third year, the recovery rates began to rise.

As at August 1995, cumulative bad debts from September 1987 were as low as 4.41% of total loans.

OPP advanced loans to a community of fishermen in Ibrahim Hyderi, a village just outside Karachi in 1993 for the repair of fishing nets and boat engines. Since February 1993, till August 1995, loans totaling Rs 6.28 million have been advanced to 166 fishermen, and till August 1995, they have paid back Rs 2.95 million principal and Rs 697, 705 markup. 35 loanees have repaid their loans in full and there have been no bad debts so far. The trust loans are returned in 2 to 3 years at a rate of 18%.

In 1984, OPP also launched their Women Entrepreneurs Program, through which women work centres were financed; women independently established workshops in several different sectors including stitching units, consumer stores, embroidery workshops, dairy cattle, leather work, jewellers, schools, bakeries, flower making, and others. Examining cumulative figures from September 1987 to August 1995, it is seen that 681 units were established, with a total loan amount of Rs 9674037, of which repayments were to the tune of Rs 6879951 and the markup was Rs 1853563.

The Orangi Charitable Trust has extended the loans through local NGOs in Lahore, Gujranwala, Larkana, and Thatta, of a total amount of Rs 952500, of which Rs 133112 has been repaid. The chief donor is the INFAQ foundation who has funded to August 1995:


			Amount		Units		Repaid 
Family Enterprise loan:	6350960		464		4424325 
Rural loan		8034000		475		5330341 
Prog for men		2832360		194		1211115 
Total			17217320	1133		10965781


The next biggest donor is the World Bank which sanctioned a revolving fund of $ 100000 which has been drawn in two installments, and the Swiss embassy which started giving a grant of Rs 200,000 annually from 1988 raised it to Rs 300,000 in 1991 and have raised it to Rs 4.5 lacks from September 1993.

	Women Entrepreneurs	Per cent	Rural loan	Per cent 
Units		681		19.13		664		18.66 
Loan		9674037		17.07		15369360	27.12 
Recovery	6879951				9169069	
Markup		1853563				1823796 

Government Programmes

The Sindh Small Industries Corporation's (SSIC) self-employment was formed in order to attract unemployed young graduates to establish cottage industries. Under this scheme, loans for the purchase of locally manufactured machinery are to be sanctioned upto Rs 1 million. The SSIC is a statutory body of the government of Sindh.

The SSIC has established 14 small industries estates around the province and two industrial parks. The cost of an industrial plot of 1000 square yards is Rs 51000 and possession is handed over on 20% of the payment. The rest is paid in installments, if the industry is set up within two years of allotment of plot, 50% of the cost is refunded, otherwise the full cost Rs 51000 is refunded. SSIC also provides a free advisory service for the preparation of project reports and the preparation of loan applications.

The scheme is meant to serve the massive unemployment in Sindh and loan arrangements are made with Habib Bank, National Bank, MCB, FWBL, UBL. The target group for these loans are unemployed technically trained people, professionals, and graduates of technical institutes and polytechnics.

Industrial units with a fixed investment cost not exceeding Rs 1.5 million are provided a loan of upto Rs 1 million for the purchase of locally manufactured machinery alone. In case of default in payment of the installment of disbursed loan, a fine of 25 paisa per Rs 100 per month on installments not paid on due date are charged. Before disbursement of first installment the borrowers get mortgaged existing and future assets of the projects and also collateral in favour of SSIC. A debt- equity ratio of 70:30 is required and the loan to borrower is treated as normal loan provided by Participating Commercial Banks for the purpose of mandatory targets, but the loans are routed through SSIC, and the recovery too is effected by SSIC. Repayment period is a maximum of 10 years excluding an 18 month grace period. Installments are deposited on a quarterly basis, and the repayment schedule for the principal amount is worked out on the basis of the total sum of refinance claimed by SSIC from the commercial banks in a month divided by the number of installments after allowing grace period. Project assets and collateral are to be insured against theft, loss, fire and all expenses in this regard will be borne by the borrower. The rate of mark-up will be 11%. District officer and the respective regional directors of the SSIC are resopnsible for proper utilisation of loan for the purpose it has been sanctioned.

Estimated Sector total fixed cost (000)

Textile and hosiery 5713

Food and Allied 11000

Paper products 1575

Leather, plastic and rubber products 9754

Wood and Misc 45090

Small Business Finance Corporation was incorporated in 1972 with an authorised capital of Rs 100 million. The main objective was to finance cottage and small scale industries, small business enterprises. The loan period is between 3 and 5 years but can go upto a maximum of 8 years. Paid-up capital is subscribed by the government, the State Bank and the the five national banks. According to the self-employment guide prepared by the National Association of Business, Agricultural and Professional Women, the SBFC has certain eligibility criteria: cottage and small scale industries in the private sector with fixed cost not exceeding Rs 10.5 million, small traders and professionals with fixed cost not exceeding Rs 300,000, and individuals wishing to buy transport for public. Loan limits are Rs 500,000 to cottage and small-scale industries, Rs 100,000 and Rs 50,000 to individual transporters, and Rs 50000 to small traders and professionals. Financial assistance is made available on profit and loss sharing basis. The corporation imports and purchases machinery and gives it to the applicant against 40% down payments on hire purchase basis. Financial assistance at the rental rate of 11% p.a. is provided for construction of factory buildings of cottage and small scale industrial projects. A debt-equity ratio of 60:40 is required. Advances more than Rs 10000 are secured against immovable property, advances upto 10000 with two personal guarantees. Repayment period is 5 - 8 years for small-scale and 3 years for traders. The SBFC, however, has been facing severe problems in recovery of loans- in 1995, Rs 831.627 was recovered from borrowers which represents a 30% increase form last year. As a recovery campaign notices were issued to defaulters and a number of conferences were held during the year to review the progress of the recovery efforts and devise measures to recover dues. Last week, a two-day conference of regional managers of SBFC began in Islamabad, for considering ways to make self employment scheme more purposeful and strengthen recovery. SBFC disbursed Rs 6366.5 million during the last two years generating more than 140000 jobs.

Youth Investment Promotion Society (YIPS) was established in 1987 in collaboration with NDFC, SBFC, and the government, and there are now more than 100 YIPS windows. The main aims are to: to employ young persons in income generating activity, to help in the preparation of feasibility reports, to develop and conduct training programmes, to coordinate with the financial sector to arrange financing for the young. Upto April 1994, YIPs had sanctioned Rs 4.04 billion for self-employment of over 53000 people. According to the same guide, the applicant must be unemployed but if working in a private organisation the income must be less than Rs 1000 per month and applications must be made either as individuals, firms of 2 to 10 persons, or cooperatives of 10 persons. The maximum loan is Rs 50000 but in case of more than one applicant each applicant can get Rs 50,000. Urban projects will have to be financed 80:20 and 85:15 in rural areas, and the mark-up rate is 5% and 3%. The applicant will have to provide a guarantee of two persons who will take responsibility for the loan: a government officer can guarantee one loan of Rs 200,000 or two loans of Rs 50,000 each, business executives who pay an annual income tax of at least Rs 2500 can guarantee two loans. The repayment period is from 4 to 7 years.

Commercial Banks

According to Shaukat Kazmi, the president of Allied Bank Limited, ABL has two separate schemes which are part of their programmes for socio-economic development: the unorganised sector financing scheme, and the women's programme. The former provides credit to the micro-enterprise sector. This programme came into operation in April 1993 and since then, 1202 projects involving Rs 33 million have been sanctioned. The programme has centres in Punjab, Sindh, NWFP and Azad Kashmir. The objectives of the scheme are to assist entrepreneurs in the unorganised sector to increase productivity, and increase employment levels within the unorganised sector. For successful operation of the scheme, special training has been imparted to Special Credit Officers who visit the projects, assess their its viability, determine credit needs and process credit proposals. They also supervise and monitor the projects and conduct consultations for upgradation.

According to Mr Kazmi, the repayment rate is 100% and they have the largest micro-enterprise financing sector and there are plans to double the portfolio by next year.

Allied Bank also plans to launch an economic uplift programme for women. This will involve the establishment of a women's banking division which will be managed by women and will provide banking services to all women in the country. Further, women entrepreneurs will have access to soft loan facilities at a reduced mark-up rate by 2% of usual charges. Women will be encouraged to make their debut in trade, industry, business, service, etc., and will be provided business information and other support services. Thirdly, Allied Bank will open special zones where women will be able to open sales outlets, display products and run business houses. This will be made available in both the rural and the urban areas. Possible areas for women could be arts and crafts, embroidery, dress making, toy making, sewing, knitting, hair dressing, jewellery making and clothing. Training programmes will have aspects such as women's work building, group formation, developing communication facilities, and developing their level of knowledge, skills, and attitudes.

First Women Bank Limited, on the other hand, has established a system of loan advancement based on group guarantees as collateral. They have evolved a credit disbursement programme for women from low and lower middle income groups in katchi abadis, rural areas and major cities. They have used the help of NGOs which have an established base of community development work and are able to identify women entrepreneurs who need credit and they assist in the formation of groups as well. In order to be eligible for a group (which apparently are not self-formed) a woman has to have an annual income of at least Rs 12000 and possess basic skills relevant to the project she is interested in. Fifty percent of the members of the group are extended credit in the first instance and if there are no defaults within the first two months, the rest of the members receive loans as well. Subsequent credit would only be available to any member of the group if the repayment performance of the entire group is satisfactory; thus the concept of peer monitoring is employed. This system was introduced in August 1993, so far 3930 women have been financed, total disbursements have amounted to Rs 81 million, and they have achieved an excellent recovery rate of 97%.

Leasing Companies

Lease finance is particularly well-suited to the micro-enterprise sector because the asset is collateral itself, and collateral is usually the biggest problem for the micro sector.

According to Musarat Siddiqi, the executive director at Network Leasing, obtaining credit through lease financing without additional security and on a medium term basis of three to five years is ideally geared to the micro and women's enterprises. At the end of the agreed period the asset is transferred to the lessee on payment of all rentals. Network Leasing was formed last year with the specific aim of providing lease financing credit, a collateral substitution for micro-enterprises. With a paid-up capital of Rs 100 million Network earned Rs 1, 496, 976 through leasing operations in its first six months. Cash is released for working capital purposes by using the lease instrument to finance asset acquisition directly as well as through sale and lease back arrangements. The target market is urban and later rural micro-entrepreneurs. The credit is given on a mark-up rate consistent with the general level of credit cost. Clients include women enterprises in low-income areas such as home schools, small primary and secondary schools, technical education centres, clinics and maternity homes, cottage industrial units, small workshops, and service garages, small fishermen and farmers, photocopy kiosks, and tyre repair shops, as well as professionals. At Network, lease finance is not provided for start-up business and they have certain criteria which have to be met before continuing businesses are eligible to apply: the business to which the asset is being leased should have been in operation for three years and is required to submit business accounts for three years as well as bank statements for the preceeding six months.

Orix Leasing's Micro Enterprises Sector has obtained a credit line from the World Bank, from which they have drawn $8 million. They enter into leasing agreements on a small-scale basis for which they require personal guarantees. For example, they have leased assets to small shops, professional firms, and other units. One project involved the leasing of boats and boat engines to a community of fishermen, in Ibrahim Hyderi, a village near Karachi.

As the experiences of both SBFC and ADBP have shown, credit schemes established by government institutions have not generally been successful. The reason for this, among others, is that the utilisation of the loan is not effectively monitored and no basis has been formed through which the repayment of the loan in assured. As a consequence of this, efforts have to be made to recover dues, (SBFCs current status) and the credibility of the organisation itself is eroded. In comparison, where the aim of the organisation has been to establish a comprehensive economic programme which will provide a permenent method of income-generation and poverty alleviation, like the Aga Khan Rural Support Programme and the Orangi Pilot Project, repayment rates have been consistently good. The lessons of experience such organisations have provided are noteworthy in the context of developing stable, long-term strategies for the financing of micro-enterprise.