Failure of microfinance?

By Ahmad Rafay Alam
A person is considered to be in poverty when their daily income is less than two dollars, the amount of money needed to buy the basic foodstuffs for a healthy and productive life. Last month, the Planning Commission reported that Pakistan's poverty rate had jumped from 23.9 percent over the last three years to a staggering 37.5 percent. In other words, more than 60 million Pakistani barely earn enough money to feed themselves.Some time ago, I was approached by subsistence farmers from Bahawalpur. These were farmers who owned five acres of land or less, though most of the families in their area cultivated no more than an acre or two. They were some of the nearly 40 percent of Pakistani struggling to stay above the poverty line. And they had an incredible story to tell of the manner in which already impoverished farming communities were being forced into cyclical debt at the hands of poverty- alleviation and microcredit organisations.Small farmers need only a few thousand rupees to pay for their input costs – the seed, water and labour needed to cultivate their landholdings. Cultivation earns them a few thousand rupees' profit. With this money and from some of the crop they harvest, they feed themselves and take care of their basic needs for the year.Then along comes the National Rural Support Programme (NRSP), a government-run NGO. It dazzles these poor, illiterate farming communities of tales of economic development through microfinance and poverty alleviation. Tales are told of how the NRSP will create community organisations and loan its members Rs10,000 each, money they can use to pay for their input costs. And then some. Tales are told of how farmers can take the surplus and benefit from the infrastructure development the NRSP will bring: things like tube-wells, roads, schools, watercourses, and so on.What the NRSP does not tell them is that it loans the Rs10,000 with mark-up. At the end of a year, the farmer is expected to pay back Rs12,000. What the farmer isn't told is that he won't even be getting Rs10,000. After deduction of registration fees (Rs1,200), bank-account-opening charges (Rs500) and fees incurred by the NRSP (Rs500), the farmer is left with considerably less. What the NRSP doesn't tell him is that his yield will scarcely cover the repayment of the loan. Somehow, the farmers manage, and then the NRSP offers them Rs15,000, with the same registration fees and charges. This time the farmer has to pay back Rs18,000. Which he does. With some difficulty. And then the NRSP offers the farmer a loan of Rs20,000. And thus the story of circular debt begins.The farmers who came to visit me had been in the NRSP for three to five years. None had a good word to say about the manner in which microcredit organisations were operating in their area. The farmers were illiterate and couldn't understand the terms on which they were taking money. One of the documents they signed to get the funds was in English. Some of its terms are:"If any one member [of a community organisation] fails to honour the agreement, then all the others will be held responsible; Their possessions and/or monies can be taken from them to make up the breach; Their assets will be taken and auctioned off to recover not only amount lent, but expenses of lawyers, courts, agents and auctioneers as well as mark up, up to a maximum of Pk Rs. 1,000,000."They could hardly understand the documents they were made to sign and mark, let alone the ones in English. Yet they had imparted their thumbprints on the documents, making them somehow legal. But how can such an agreement pass the litmus test of law? Not when the people entering it had no means to understand its terms and conditions. The documents the farmers were made to sign do not contain any reference to the mark-up they have to pay.Many had pawned whatever gold or silverware they had in their homes. Some recipients of NRSP loans had been forced to sell plants and fruit-bearing trees to pay back their loans. Others were being forced to sell their land. Yet others were forced into the clutches of other microfinance organisations or, worse, usurious moneylenders.The situation was alarming enough for the federal ministry of food, agriculture, and livestock to commission a report of what was going on. The report is terrifying. In Mehrab Goth, a tehsil in Bahawlapur, 2,396 households out of a total of 3,800 are in debt to the NRSP or other microfinance institutions. They are not just in debt, they are poor. They are not just poor, they are impoverished. Some cannot even afford to feed themselves and their families once a day. At the same time, in Islamabad and throughout Punjab, political bigwigs debate the finer points of democracy. The dining tables at the Presidency and at Raiwind overflow with the munificence of their hosts.The NRSP isn't the only player in the region. Other microfinance institutions include Khushali Bank and the First Micro-Finance Bank. These organisations have it good. They get their funds from international donor agencies or other banks, which are more than happy to lend at market rates without the bother of having to open up branches in far-off places. The microfinance institutions merely tack their service charges onto this rate, jacking up the mark-up and making their rates unconscionable. As long as the villagers keep on paying, the officers and employees of the microfinance institutions can earn their salary and perks. On March 12, the Planning Commission hosted a conference on the state of microfinance in Pakistan and during which meeting recommendations were made for the future. The farmers were heard. The recommendations must be: stop the usurious business of microfinance in Bahawalpur and elsewhere. Write off, just as India did a few years ago, the debt accrued by the poor borrowers. Take action – including winding up – of those institutions that knowingly took advantage of the poor. There are far too many starving Pakistanis for our rich, well-fed politicians to ignore.