Focus on micro credit

Wahid Gul had always thought of bankers as Babus (officers) in their striped suits and ties living in posh houses and working in modern offices. His only exposure to a bank was from the outside. He imagined bankers carried wads of cash around, the richest people in the world. One day about three months ago, that image was shattered for Wahid. A group of young men and women were asking his neighbours whether they wanted small loans to set up their own businesses. "Yes", he said when a neighbour asked him about it. This was Gul and his friends' first chance of getting a microfinance credit facility, a novelty for the uneducated and impoverished residents of Fatima village near Mardan, a prosperous yet backward town in Pakistan's North West Frontier Province, 125 km northwest of the capital, Islamabad. That first October meeting proved to be life changing for Gul and others in his village. They have started thinking in terms of the community, and that banks are not just places to deposit money, they are a source for borrowing as well. So Ahmed attended the first community meeting in October last, excited at the prospect of getting the small loan and equally curious to see and meet bankers up close. "I was not surprised, they were just people like us, though they spoke in a sophisticated way...they were all very educated," Gul told IRIN in Mardan, the most fertile area of NWFP, about his meeting with the customer services officers of the Khushali Bank, the first state-owned microcredit bank of Pakistan. The bank, set up early last year and aiming to provide small loans to the poor, plans to increase lending up to US $17.45 million, a dramatic increase from loan disbursements of just US $3.48 million last year. "We have established a network in 30 districts and beneficiaries are 20,000 households," Ghalib Nishtar, President of Khushali Bank, told IRIN in an interview in Islamabad. "But now we have the capacity to reach 100,000 households (annually) and over a six-year period this is about reaching 600,000, or ten percent of the six million poor households in the country," said Nishtar, who started the bank last year. Gul and several of his neighbours took advantage of the scheme by taking small loans worth US$ 50 to US$ 160 for a year, money enough for them to start a small business and bring some change in their impoverished lives. Gul borrowed US$ 160 for reinvesting into his business from the bank and is now pleased he had done so.

"Small scale farmers can increase output with capital from banks offering micro credit"

"I sell tea," he said. "In the past I used to borrow money from friends, relatives or neighbours for investment," he said explaining that he would buy tea from the wholesale market and then sell it to shops on a small profit. "But every time I wanted to borrow money and say needed five thousand rupees (US$ 83), someone would offer only a thousand rupees (US$ 16) and ask for its return three weeks down the road," he complained. "Now I have invested 10,000 rupees (US$ 160) and have to pay thousand rupees a month and I can afford that. My sales have gone up too," he added as others standing in the dusty street nodded in agreement. "In the past to get money for buying seeds or fertiliser was like begging from others," said 25-year-old Nur Islam, a farmer in the same village. "Now it is like we are in business," added Islam proudly, another client of the Khushali Bank. Their story is repeated almost everywhere the Khushali bank operates. "We are really the first organisation dealing with microcredit [in Pakistan]," said Ghalib Nishtar, formerly with Citibank. The Bank was established as a public-private enterprise with initial paid up capital of US$ 29.66 million subscribed by 16 banks, 13 from the private sector. The Manila-based Asian Development Bank has loaned it US$ 150 million on soft terms with the possibility of more support in the future. Nishtar said the bank's focus was to operate in areas of Pakistan where poverty levels were high and the people had no access to credit. "For instance, most of our work is in [southern] Sindh and Baluchistan province," he added, though the bank also works in urban centres. According to official figures, Pakistan's population of 140 million - growing at close to 2.6 or 2.8 percent per year - includes 46 million, or 33 percent, living below the poverty line. Another 40 percent of the population lives at subsistence level. Nearly two-thirds of Pakistan's population live in rural areas. "The objective of the programme basically is to enhance the outreach of the people. Building social capital and mitigate risks faced by the poor," Nishtar explained. Nishtar said poor Pakistanis consumed up to US$ 2.5 billion in loans annually to run small enterprises. Currently, 95 percent of that money was provided by middle men at exorbitant rates of interest and only five percent through NGOs or the state. For example, he said, a poor fisherman borrowing US $17 may have to pay US $20 every month to the middleman. "He can never get out of the vicious circle," Nishtar added with regret. "No business can generate so much money and therefore these people stay in perpetual poverty. We went to some of the developed areas of Pakistan, for instance Karachi. In Karachi, collateral offered for the loans were their daughters, and in most cases they are going to lose that collateral," said Nishtar, recalling the anguish of some of the people he met over the past 12 months. Commercial banks in Pakistan, like elsewhere in the world, rarely cater to poor creditors who are often unable to provide collateral for loans. Khushali works on social collateral, which means involving the community, in ensuring loans are paid back. Nishtar said many people were initially sceptical that borrowers would simply run away with the money but that has not happened. "We have broken the myth. We have lent over 200 million rupees [US$ 3.48 million] and our recovery rates are above 95 percent," Nishtar said. But maintaining such an impressive record is not always popular with clients. "What about my request for loaning me some more thousands of rupees," said Zakia Bibi, a mother of five, who has been a client of the bank for the last three months. "You know we don't loan any more till you have paid back the full amount," replied Shugufta Khan, a customer services officer, catering to clients in urban Rawalpindi, Islamabad's nearby twin city. From the US$160 loan, Bibi, her husband, and four children make popcorn, after bagging it, they supply the snacks to shops which in turn sell them for a meagre US$ 0.017 each. The enterprise provides sufficient for the family to live on, but last month her small house in the squalid neighbourhood of Muslimabad in the poor part of Rawalpindi caught fire, gutting two rooms. "If they loan me more money, I can rebuild one of the rooms," she told IRIN. However, the bank's policy is very clear. A client can only take more loans if the first has been repaid. Another client, Farah Sultan, who opened up a small tuck shop in the same neighbourhood, is facing yet another problem. Three months ago she took a loan of US$ 160, opened a door to the street and set up a small shop. "The business is good, it supplements the income of my husband," said Farah, a mother of six. But last month the Water and Development Authority (WAPDA) discovered the shop and said her electricity charges double - because her house would now be classified as a commercial property. After arguing with WAPDA officials, they agreed that if she took a separate connection for the shop, then the rest of the house would be considered residential. But a new connection costs roughly US$ 116, money she wants the bank to help her with. "I know the ground situation, I have seen many cases like that and it will be next to impossible for them to repay any more loans," said Shugufta Khan who ignores the squalid conditions of the area and reaches out to people who had not been reached before by any financial services. A second bank called The First Microfinance Bank has also opened its headquarters and plans to open ten branches in various parts of the country and start mobile banking to reach people in rural and urban areas. "We are the first private microfinance bank in Pakistan. Our bank will target the unbanked poor and under-served population, particularly women of Pakistan," Chief Operation Officer, Salim Jiwani, told IRIN in Islamabad. He said the bank will provide lending and depositing facilities, sale of government paper and fund transfer facilities. "We will be building a sound deposit base, we want people to learn about savings, because poverty cannot be ended with just giving loans," he explained.