The government seems well prepared and confident on the IMF's disengagement plan by the end of 2004. The proposed framework of exit strategy which may form the basis of next budget
, highlights shifting of emphasis from the macroeconomic stabilization to the accelerated pro-poor growth.
Generally referred as the 'second generation reforms', this strategy focuses on 'social well-being of the population' as a core means to achieve the objective of poverty reduction. One of the measures suggested is providing micro-finance services to the poor and middle class.
There are evidences in South Asia justifying the rationale and relevance of micro-finance services in the process of poverty reduction. Nonetheless, the results largely depend on the approach of operation, context of implementation, nature of implementing agency and priorities of policy framework. As such, the concept of lending is not new in our region.
The practice of informal lending exists since centuries. In a highly value-based society with barter economy, it was regarded as an inescapable moral obligation of the village head to help poor in hard times, only a few decades back.
The borrowing in kind was used to bridge the consumption gap of the poor. It was a behaviour of 'social-reciprocity' for 'mutual-survival' in an era when the market economy was not dictating the life style.
The governing principle for such transactions primarily was to rescue from the crisis rather than investing in growth. The partnerships tended to be long term and credible with tailoring financial services to specific demand pattern.
In other words, the poor were getting social and economic security from within the surrounding in return of their labour services.
However, during the last five decades, there appeared three major factors that gradually induced a change in this social relationship: market economy, breakdown of traditional institutions, and incompatibility of skills of the rural poor to meet with the mainstream demands.
This process of transformation from the 'value-based to interest-based society' tends to be more visible by its manifestations from the late 80s. The report on Human Development in South Asia 2003, by Mahbub ul Haq Human Development Centre notes that, the 'poverty started rising after the structural adjustment programme began in 1987-88.
There are various reasons for this, most of which relate to direct and indirect effects of macroeconomic strategy itself'. At a time when poor masses were detaching from the traditional bonds of livelihood security, the macroeconomic policies did not provide appropriate rescue cushions and safety nets.
What happened was simply an arrangement of 'capital-augmenting and labour displacing', something indicative of 'growth without development'. As a result, despite per capita growth, the country has so far systematically under-performed on most social indicators; 32.6 per cent of population living below poverty line, 45 per cent without having access to health services, 38 per cent without access to sanitation, 56 per cent adults being illiterate and 38 per cent of children under five years malnourished.
Such output growth has also been associated with the much lower employment growth, at the trend rate of only two per cent per annum.
Majority of the poor living in such a situation are primarily dependent on agriculture for their livelihood, own extremely small amounts of land for cultivation, and support large families at low average per capita income levels.
Further, since rural areas are not well serviced by physical infrastructure like the electricity and roads, their capacity to take advantage of market opportunities is severely curtailed.
Households belonging to the lowest income quartile spend as much as 91 per cent of their consumption budget on food. As a result, the consequences of a drop in their earnings or the need to finance unexpected expenditures such as emergency expenses could be quite serious.
The cycle of borrowing during adverse times or during planting seasons and repaying loans after harvest or when earnings are good is an integral part of livelihood system of the poor.
A study report of International Food Policy Research Institute (Washington D.C.) shows that more than 80 per cent of loans taken by the low-income households of Pakistan are spent on consumption, food and non-food combined. These loans are mostly from the informal sector like friends, neighbours and moneylenders.
The study further explains that a significant proportion of the poor, who do not apply for loans are discouraged from applying by the strict collateral requirements and high transaction costs frequently involved in doing business with formal institutions.
On the other hand, formal institutions feel reluctant to extend micro finance services to the poor due to their low paying capacity, expensive service delivery, seasonal pattern of demand and lack of skills required for basic accountancy.
These findings complement to another study undertaken by Hulme and Mosley and published in their book 'finance against poverty'. The authors observe that the development and refinements of micro finance products remain focused on the middle and upper segment of the poor, leaving the poorest behind.
They suggest that recognizing the heterogeneity of the poor should lead to more innovation and experimentation, which deepens the downward reach of micro finance services.
Another barrier in access of poor to formal institutions is the condition of extending micro finance for income generation activities only. While practising this, formal institutions overlook three main realities: there is not provision in their package for absorbing emergency shocks to which the poor is always vulnerable, there is not defined strategy for designing and linking the products of poor with mainstream market - an area in which the poor themselves lack skills/opportunities and there is not facilitation to the poor to get benefit of basic social services like health, sanitation and education.
Consequently, in most of the cases beneficiaries make themselves eligible for availing the loans by formally ensuring viable enterprises to the lending institutions, however, practically the money meets consumption needs. A wonderful adjustment by the deserving to which lending institutions despairingly label as the 'misuse of credit'.
The micro finance for rural poor envisaged in the 'second generation reforms' therefore needs to be designed on the basic premise of bridging the gulf between the poor and formal institutions.
For the purpose, there is a need of developing pro-poor, democratic and multidimensional structures that can work with poor without sophisticated formalities and over-bloated bureaucracies.
Contrary to conventional attempts of creating 'receiving mechanism', the approach should focus on enhancing the capabilities of rural people to a level that they can act as partners in the process of making decisions pertaining to them.
Based on this understanding, late Akhtar Hameed Khan proved through his work that people especially the poor, landless and those without assets are willing to do many things themselves and that the community as whole gets interested in helping the poor to attain their potential.
Following the philosophy currently more than eight Rural Support Programmes (RSPs) are working directly with about 42,932 community organizations round the country. In an integrated framework, thousands of community members are managing small infrastructure schemes and micro credit inputs on their own with minimum technical support.
In rural setup with low social indicators and lack of access to cash management units like formal banking, investment in community organizations can be very productive provided there exist sound, sustainable and downward accountable intermediary institutions.
Devolution plan gives a hope despite of all the ambiguities of authority and issues of capacity. Is it possible to relate the micro finance for rural poor with community citizen boards (CCB) over a process of time? The policy makers, economists, social scientists and donors can further explore this question while formulating pro-poor growth strategy.
Such a strategy also needs to look intensively into the current practices of micro finance operation undertaken by various agencies/institutions. The difference in their objectives, systems, scope and scale, inconsistency of policy and variance of interest rates and collateral requirements for the same package to similar type of clients, and availability of the subsidies are some of the factors that lead to a very vague and heterogeneous micro finance structure in our country.
In the absence of national regulation policy on micro finance even some state organs seem skeptic on the legitimacy of lending by formal institutions. Moreover, in such heterogeneity, it would be difficult to capture and attribute the change in terms of poverty reduction, somewhere in between the process.
What is required is to formulate broader, flexible and accommodative national regulation framework in consultation with all those involved in the micro finance services to segregate the oranges from apples.
At the same time there is a need of convincing the private sector to invest proactively in the rural areas. Such investment would lead to infrastructure development, which in turn would serve two purposes: First it would be a source of employment generation.
In rural areas family labour is by far the most important production factor and enhancement of labour productivity tends to be central for securing and increasing the income. Second, it would link rural production with the market economy. The process can be supplemented with micro finance inputs to get the synergy of effects.
In order to achieve the desired outputs, it is imperative to invest in health and education sectors. The poor segment of population can only sustain an upward-growth-trend which is provided with accessible and affordable safety nets.
There are evidences of increased indebtness in situations where loans were extended in the non-availability of income generation opportunities and basic health and education facilities.
Micro finance can be a potent tool for poverty reduction provided it is complemented with and integrated to basic literacy programmes, primary health care, infrastructure development and employment generation, training in enterprise management and the active participation of rural women.
Operating in isolation, it may fulfill the short-term consumption needs of the poor at the cost of something very horrible in the future and that is unending indebtness cycle.
