SBP efforts for promoting formal Microcredit facilities in the country would surely help the poor who want to help themselves


Dec 20 - 26, 2004




















The State Bank of Pakistan (SBP), Pakistan Poverty Alleviation Fund (PPAF) and Pakistan Microfinance Network (PMN) are jointly organizing a two-day international conference on microfinance in Islamabad. The conference aims at creating awareness about existing policy initiatives, identifying key issues and challenges in South Asian region and developing recommendations for future. The conference is being organized to celebrate 2005 as UN International Year of Microcredit. According to the UN Secretary General, microcredit has proved its value as a weapon against poverty and hunger in many countries and that it can really change for better the lives of people who need it most. Besides the participants from government and financial institutions, the conference will be attended by the renowned practitioners including Professor Muhammad Yunus, the founder of Grameen Bank, who started microcredit as a pilot project in 1976 for giving small loans to landless people with a view to save them from exploitation by the money lenders and the middlemen.

SBP efforts for promoting formal Microcredit facilities in the country would surely help the poor who want to help themselves. However, major impact would only be felt if concurrently remedial actions are initiated by the government for ending deprivation of the poor by different sections of our society. Poverty Cycle, in the writer's view, has five stages. It starts with Deprivation, which leads to Poverty for most of the affected people. Lucrative or attractive Opportunities are mostly grabbed by the few influentials, leaving only crumbs if at all for the poor masses. Many of the poor seek formal or informal Microcredit and work hard for servicing the debt and for redeeming their self-esteem and Rehabilitation in the society. The desired results some times remain illusive.

Poverty in Pakistan is growing particularly in the rural areas. The government has been taking measures to alleviate poverty. USAID, Microcredit banks, Rural Support Programmes, the World Bank, ADB and a large number of NGOs are supplementing the efforts of the government. The outgoing American Ambassador at a function at Lahore reportedly said that expanding economic opportunities for the people is one of the main goals of the cooperation between Pakistan and USAID. In addition to these institutions, the individuals and communities at their level are helping alleviate poverty and also providing financial support including microcredit to the needy. However, despite all this, so far there has not been significant reduction in poverty. Poverty might soon be reduced due to more attention and resources from the government and the multinational donors including more extensive microcredit facilities from local institutions.

Proper appreciation of prevailing deprivation practices might lead to appropriate solutions for reducing poverty. The poor people themselves are many times responsible for their sorry state of financial and family affairs. Many of them are uneducated, unskilled or drop-outs from schools and have little chance of getting career employment even at lower levels. The unemployed, like some of their brothers who are technicians or small traders, can also improve their lives if they seriously learn technical trades or develop the knack for starting small businesses. However, some of these drop-outs loathe hard work and easily fall prey to drugs. They need medical help and psychological support, which their families can hardly afford. The facilities at the government hospitals are simply inadequate. The conditions of the poor are aggravated with their unnecessary fights, sometime ending in killings, over petty matters because of their peculiar sense of honour. Early marriages, poorly-fed children, unhygienic living conditions, strange customs, lack of fixed assets, extravagance through borrowed money on marriages or deaths in the family, etc have their toll and render most of them unsuitable or willing for hard labour. These people particularly their children deserve all help and support for rehabilitation.



The government is expected to provide basic facilities of health, education, sanitation, protection, etc to the people. Shortcomings in the provision of these facilities particularly in localities housing the lower middle or lower classes, pushes the people towards poor health and low quality education. They are not in a position to improve these basic facilities on their own. As a result, the boys and girls from such localities are mostly destined to low level jobs. Due to persistent lack of opportunities, we find increased number of people on the verge of poverty. The government occasionally announces for their benefit different schemes such as land for housing, agriculture loans or food coupons, etc. It is not uncommon that many undeserving people having connections at high places manage to grab big part of the welfare schemes, depriving majority of the deserving people and thus pushing them to further poverty. Some of the farmers particularly with small land holdings do not get the minimum produce price announced by the government due to lack of holding power or connections in the right places. The middlemen mostly deprive these farmers of major share of their profits, which have already reduced due to increased prices of in-puts. High margin of the middlemen also adversely affects the urban consumers.

Some of the influentials or well-to-do people unjustly grab attractive public assets or opportunities for trade, business or employment for them and their children and deprive the deserving people from chances of lifetime. It is said that the some of the officials at the lower levels unjustly favour such clever influentials. In the rural areas, people with large land holdings 'convince' the small land holders to sell out their land at dirt cheap prices and become landless. In the process, the big land holders become even bigger. This process thrives, sometime with connivance of the local authorities. Young meritorious aspirants from poorer sections of the society are often deprived of the employment opportunities under one pretext or the other. As a result these poor young people remain jobless or start their lives with odd jobs. The situation is not much different when it comes for admission to the professional colleges in the public or private sector. The professional qualifications promise good future. However, poor young boys and girls often fail to get admission due to sky-high fees, which their families cannot afford.

The poor people doing odd jobs or in self-employment are easy prey to some of the junior personnel of public authorities controlling trade, manufacture, businesses, law & order, etc. It is rumoured that the poor have to buy protection through regular payments to these personnel. As a result, the meager earnings of the poor are further reduced, making it difficult for them to come out of poverty and provide decent education to their children.

The above examples are only a sample of deprivation culture prevalent in our society. Deprivation leads to poverty. These exploitative deprivation practices are against the law of the land as well as the religious teachings. SBP and the microcredit institutions might keep these conditions in view while designing microcredit products. They are also urged to use part of their financial resources to educate the people against such deprivations of the poor and poverty inducing practices prevalent in the country.

Microcredit informal or formal is not a new idea. It has been around for a long time in all the countries of the world. Family and friends are the first to be approached for small loans, in cash, kind or tools and equipment. They often oblige. Repayments do come although some times delayed. Such loans if used for productive purposes are more beneficial to the debtor and the society. However, if the loan proceeds are used for meeting extravagance on marriages or birth of a son or death of an elder, then repayments become doubtful. In the formal sector, the rural and city money lenders, later turned into banks, have been making secured loans. The bad loans were recovered through enforcement of securities often with the help of 'enforcers' employed by the money lenders. The rates of interest were mostly exorbitant. Many people might still recall Shylock and the pound of debtor's flesh he was after. Let us prey, plan and act that our poor debtors do not have to face such difficult times.

SBP's Prudential Regulation for Microfinance Banks define "Poor person" meaning a person who has meager means of subsistence and whose total income during a year is less than the minimum taxable limit set out in the income tax law. The current income tax limit is Rs100,000 which is maximum exposure limit for microcredit. Majority of the loans are much smaller. The Managing Director, Karachi Stock Exchange, speaking at the Global Micro-Entrepreneurs Award recently said that the number of people eligible for microfinance is about 5.4 million of which only 0.5 million have so far been provided the loan facilities. The Prime Minister in his recent address to the nation said that the government was trying to take this number to 3.2 million. Besides, vocational training shall be imparted to 300,000 people annually. Sometime ago, the President of Khushahli Bank had estimated total annual demand of micro credit at $2 billion in Pakistan. The authorities are urged to go far microcredit in a planned manner under an integrated strategy for poverty alleviation.

The following suggestions are offered for consideration:

1- The government might initiate policy and administrative measures to end deprivation practices prevalent in the country, which induce poverty. Microcredit might be made compatible with demand, from different sections of poor. Suitable technical skills and basic education might be provided to the poor to help them come out of poverty by getting gainful employment or starting their own businesses. Microcredit process might increase access of the poor households to affordable financial services by diverse groups of creditors including rural banks, cooperatives, NGOs, microcredit banks and institutions. The commercial banks and DFIs might act as apex institutions providing credit lines to the microcredit institutions. All creditor institutions might be committed to poverty alleviation and microcredit.

2- SBP might ensure that the poor debtors are not exploited by the creditors or their staff. Truth in lending must be ensured and credit agreements might be screened to delete exploitative clauses. Intermediation margin might not be more than 5% of average rate on deposits. Small loans to poorer sections might be without physical security. The condition of the poor debtors might not be made worse through enforcement of security if loan turns sour. The debtors, if having a house of their own, might not be made homeless. Repayments might be tailored according to the cash generation. SBP might consider allowing refinance of existing loans from money lenders or informal sector, borrowed at exorbitant rates. Such poor debtors need to be rescued.

3- Bangladesh has had happy microcredit experience due to factors such as visionary leadership, decentralized structure, hands-off regulatory policy of the government and provision of funds at appropriate times. Using experience in Bangladesh and other neighbouring countries, the microcredit institutions might suitably modify credit products for different classes of unemployed, educated or technical hands. Also, there might be a balance in regulatory requirements and policies governing microcredit. The access to microcredit might enable the poor particularly the poor women to better manage their risks, increase income, save more money, buy and build assets and enjoy a better life.

4- The microcredit institutions should be profitable and might sustain themselves, not through unjust or cruel treatment of debtors with high transaction costs, but through performance-related financing compatible with demand, handled by capable staff recruited from regional areas, and preventing misuse of funds by on-site monitoring.

5- Population migration from rural areas to urban areas is bringing the urban infrastructure under great stress. The government might consider developing new towns, near big cities, to accommodate different technicians and landless poor people to be trained in technical trades under government programmes. These towns might be provided all utilities so that the technicians start producing different handicrafts and manufactured items largely for exports. This might benefit all the economy.

6- There are reports that large scale privatization in many countries has been increasing unemployment, of which poverty is not far behind. The government might reconsider the privatization rationale and might put in place safeguards for protecting the poor people from harmful effects. The benefits of privatization might be routed to the poorer sections of the society.