The Role of Micro-finance in Alleviating Poverty in the Region of Hunza - Research Paper Example

The Role Of Microfinance In Alleviating Poverty In The Region Of Hunza 1. Introduction Pakistan, like many other developing countries, is struggling to find solutions to address the issue of poverty1; a key topic of discussion in the country. While international donor communities debate this subject, and economists grapple to explain how poverty is affecting the communities, I am personally more interested in determining how poverty can be eliminated, as I believe poverty is one of the key issues that need to be addressed in order for Pakistan to develop and join the ranks of the developed economies. Since the country comprises mostly villages, any developmental efforts should be focused on rural areas. Therefore, in order to research this issue, I have chosen Hunza, a remote region in the North of Pakistan as my subject. Poverty has been affecting the survival of the people here and even basic amenities are not readily available here. Thus by alleviating poverty, not only should the region develop financially but also the Human Development Index2 should increase. Hunza is a valley where the mountain ranges of the Hindukush and Rakaposhi meet. (refer to fig.) This region lies along the banks of the Silk Route and its inhabitants trace their roots back to Marco Polo and legions of Alexander the Great. Access to Hunza through road is a dangerous proposition due to exposure to landslides from adjacent mountains. It takes over 18 hours by road to Hunza from the Capital city of Islamabad. Air travel to Gilgit, the nearest airport which is a 2 hours ride from Hunza, is not an ideal option as flight operations are unreliable and subject to weather conditions. The people of this region are rich in their traditions, and progressive in their thinking. They value education and boasts of a higher literacy rate than the rest of Pakistan. By evaluating their needs and identifying the areas where they lack economic developmental opportunities, this research will attempt to find solutions for improving their economic conditions, and suggest possible interventions available for a sustainable programmatic approach to address this issue. 2. Research 2.1 Meeting with the People In order to gain first hand experience on the key issues of economic backwardness of this region, I decided to visit the Northern Areas during my summer break. In Hunza, I interned at a micro-bank for a week and had numerous sessions with commercial banks such as “Soneri Bank.” I also worked with different co-operatives that play a key role in the financial aspects of rural areas. I met a wide cross section of people from several villages spanning from the lush valley of Karimabad to the hard plains of Sust, the outer post of Pakistan where trade caravans from China converge to barter goods such as silk, cotton, spices and fruit with merchants in Pakistan. To narrow down the information and to understand the key needs of the people I designed the following questionnaire. i) Client Information: Information Name Village Sex Marital status People in Household Adults Children Total Education Level Source of Income Member of any Financial Institution No Financial Bank Microfinance Institution Other Business Activity Business Sector Micro Enterprise Agriculture Others Livestock Through these questionnaires I was able to derive the following information. 2.2 Occupations The main occupation of the people of this region is agriculture and small retail type businesses (mainly shops3). Young members of the population migrate to cities, where they work to provide their families in the region with supplemental incomes. 2.3 Needs of the People Based on my research, I believe that there are two fundamental elements this region’s economic fabric lacks. First, the inability to raise funds for capital investment; and second, their inability to access know how in modern farming techniques. Those who are engaged in retail businesses are handicapped due to their lack of understanding the basic business tools such as keeping proper accounts, maintaining appropriate inventory levels etc. They also fail to appreciate supply-demand relations and are ignorant of basic marketing strategies. The population also needs funds for life-cycle events such as birth, marriage and death, and to meet recurrent expenses such as school fees. They also need to keep provision for emergencies such as sickness or injury. The Hunza region is prone to flash floods, and on several occasions such incidents have destroyed their crops. Landslides and other natural calamities are major threats that these communities face. All such emergencies create unforeseen and sudden need for cash. The chart below presents a summary of my findings in this regard: Fig 2.1 REASON SERVICE Education, birth, marriage Safe place to save Death, asset protection Insurance Access to funds sent by relatives Remittances and Transfers Old age Pensions Illness and other emergencies Loans for emergency needs Working capital Micro-enterprise Loans Improving crop yield, better management Skill set, know how 2.4 Poverty Cycle Through my research, I was also able to decipher that the inhabitants of this region experience another problem. Traditionally, they cultivate the land and stock the harvested crops for their future needs. Through the winter, they consume what they have thus stored, and the money they derive from selling surplus products provide them the resource for buying other consumer items they require. However, they are unable to keep reserve funds for the next cycle of cultivation and thus on most of the occasions, run out of funds to meet the expenditure towards buying seeds and fertilizers to enhance their crop yields in the next season. Due to the non-availability of capital resources, they are also unable to employ sophisticated equipment which would provide them more economical methods of plowing, watering etc. As a result, they are unable to tap the full potential of cultivable lands. Thus, over the years, land under cultivation has suffered, leading to lower and lower incomes. Furthermore, if in any given year there is crop disease or lack of rain, the crops fail and the farmers are left with no means to make up for loss. Such situations compel them to sell their land or part of it and thus they enter the poverty cycle4 having lost their economic base. The poverty cycle can be illustrated as shown. Fig 1.1 In the case of the small businesses, the shopkeepers usually have to travel long distances to collect their supplies and this can only be done during the summer months when road conditions are favorable. They have to incur heavy overheads in maintaining inventories; and with the low operating margins, they are unable to sustain high levels of stock, enough to last through winter season. Thus, they run out of supplies and as a consequence close their shops and wait for the roads to open for getting the stock again. Businesses that are starting up also face similar problems. The amount of working capital available at the disposal of a potential retailer is meager and, therefore, he has only a few goods in his store. As a result, such entrepreneurs are caught in a cycle whereby they either wind up business or survive on very low returns. The final outcome is that the contribution of farmers and retailers to regional economy is negligible. This constrains the buying power to marginal amounts for expending on health, education and for economic enhancement. The standard of living, as a consequence, falls to a very low level as these communities sink deeper and deeper in to the quagmire of poverty. 2. Solutions From the research it is apparent that the most pressing requirement in the region is some source which can provide ample funds towards capital investment. The purpose would not only be for the people to come out of the poverty cycle, as shown in fig 1.1, but also to generate business activities which in turn would create more job opportunities. More employment will mean increased financial stability for a wider group and it will facilitate more circulation of money in the market. There are essentially three ways in which this objective can be achieved. 3.1 Selling of Assets Since land is the most abundant resource available with the population, the primary source for generating funds would be selling land. The next option will be livestock. However, since the community had been practicing this for a long while, it had led to depletion of resources. As a result, economic stability of the area became further compounded and the population remained trapped in poverty syndrome. “In some countries, there is considerable inequality among the various regions. The governments should help level out the differences between poor and rich, as well as between the regions with a good and a poor infrastructure by means of investment programs. Within this framework, it is important that development programs be drawn up for integrating towns and their rural environment.” 5 With the objective of narrowing the gap between the rich and poor, the government has enacted ‘the Land Reforms Act. The only effect of land reforms on this area has been that some of the agricultural land was taken from the feudal lords (known as Zameen Dars) and re-distributed amongst the poor. Also, there has been no significant government intervention to help sustainable farming or to increase the capital available to farmers. Thus the land remained either unutilized or under-utilized. While it will be a feasible proposition for some land owners for capital investment in business or agriculture, the majority may not be able to practice this. 3.2 Aid The second source is through aid or donations from non-governmental organizations or from international agencies. This source of funding also suffers from limitation that it is not a sustainable form of funding as the priorities of donor communities keep changing. The amount available may be limited and there will be some criteria to be satisfied to become eligible for the aid. The donor agencies cannot sustain the funding and their offers may be limited to a specific target group. 3.3 Loans The third option available to generate capital is through loans, which can be delivered by means of an institutionalized approach. This is to give the people incentives to be innovative and to invest in order to develop a better method of production and distributions of goods. This will lead to economic development by increasing the circulation of money and increase job opportunities. As a result there will be increased per capita income, better education and health as well as environmental protection6. “It is of crucial importance that the capital goods be available at the appropriate time and as input package” 5 In this context, there is one main economic development model available known as the saving function7. In the early post-war times two economists, Roy Harrod and Evsey Domar, came up with an economic model known as the Harrod-Domar model. This model states that the growth (g) or GDP of a country is directly proportional to the national savings ratio (s) and inversely related to the national output (k). This model can be thus put in the form of an equation, g = s / k By using this model the required savings rate can be calculated if one knows the target growth rate. However, this model also states that if one is unable to generate that level of savings, then money can be borrowed, such is the case of the people of Hunza. There are various means of borrowing money. Again, I designed a questionnaire to find out the means of taking loans. Name Institution from where Loan was Taken First Time Loan Yes No Current Loan Received Loan Duration Interest Rate Purpose of Loan From the responses, I derived four key means of acquiring loans, and narrow down to the type of organization that grants the loans effectively in not only giving temporary relief to the people but also in the institution’s role in helping alleviate poverty in the long run. 3.3.1 Commercial Banks Out of the 40 plus commercial banks operating in the country, five large banks have over 60% of the market share. The rest are small and cater to niche markets. Some of the large banks as well as the medium size banks that have wide networks operate in the Hunza Region; but on commercial basis and generally their products are either ‘standard’ type that cannot meet the requirements of service charges are very high. During an interview a branch manager of a medium size bank, Soneri Bank in Aliabad Hunza, mentioned that their target market comprises of individuals with income greater than Rs.20 thousand a month, which pre-empts a very large number of inhabitants. When verified from locals, they stated that they do not access commercial bank financing, basically due to stringent collateral/security requirements. Most of the micro businesses do not have tangible securities like land or proper titles, and often their incomes are below the required minimum level. It has also come to the fore that lending small amounts of Rs.10, 000-Rs.25, 000 is not commercially viable for the banks. Banks also need audited account statements of businesses; which small businesses are unable to produce. In addition to this, the bank branches are typically located in large Regional Centers, and it is very difficult for the people who live in far flung villages to travel to the branches. The loans also take processing time of 1-5 days, where in some cases the people need the loans immediately. While speaking with a car parts dealer in the Ali Market, he said that he cannot afford to stock car parts and so he buys them on demand. For example, if an engine is not working, he may need an almost immediate loan to buy the parts and fix his customer’s car. Moreover, the commercial banks do not sanction loans against pension for retired government employees. 3.3.2 Co-operatives and Societies Another potential source for loan is Co-operatives societies, which are member owned. In order to borrow from a co-operative society, the borrowers are required to have a membership, the fee of which may range from 1-10 thousand. Ostensibly, the financial cooperatives are low cost operations, accessible to the poor. However, some shopkeepers in ‘Sust Market’ believed that Co-operatives Societies operating in that region have many flaws like: 1. There have been instances when the co-operative societies have gone into receiverships because of the unreliability of some members who are in charge. 2. Absence of effective financial supervision and lack of accountability. Loans are managed in some cases to favor a specific group. 3. Co-operative societies have small capitals and their lending ability and products offerings are limited. 4. Co-operative Societies are unable to provide the necessary know how that the borrowers need. 3.3.3 Informal Sector Informal sectors comprise individuals who are known as “Loan Sharks”. They give loans to desperate people who fail to meet eligibility criteria of commercial banks or co-operatives. Due to dire needs of people the informal sector commands an estimated 60% of the loan market. The interest rates are very high and are not fixed. The loan givers often require the money returned in a lump sum which is hard on the borrowers. The loan givers frequently exploit the people who are desperate for loans. 3.3.4 Micro Finance Banks The last source of loan is the Micro Finance Institutions. The Government of Pakistan (GoP) agreed to put in place a framework for creating sustainable microfinance institutions (Banks) in the country as a response to the Millennium Goal8 of the World Bank. As a fist step, a specialized Micro Finance Bank Ordinance was enacted in early 2000. Under this special Ordinance, a Government sponsored Micro Finance Bank (Khushali Bank) was created. Later in the year, the GoP enacted another Ordinance, which allowed the formation of Micro Finance Banks through private initiatives. This framework allowed the Banks to lend without tangible security and without the availability of audited accounts etc. During the research, I found that Micro Finance Banks meets the needs of the people, as mentioned in 2.3, the most. The Micro Finance Institution, which seems to be popular, is The First Micro Finance Bank Limited. 4. The First Micro Finance Bank Limited (FMFBL) 4.1 About As part of an ongoing Credit and Savings program that the Aga Khan Rural Support Program (AKRSP) was successfully managing in the Northern Areas of Pakistan, a strategic decision was taken by the Aga Khan Development Network9 (AKDN) to institutionalize AKRSP’s Credit and Savings Program by forming a Micro Finance Bank. This led to the creation of the country’s first privately sponsored Micro Finance Bank: The First Micro Finance Bank Limited (FMFBL). This bank came into existence in 2001.By early 2002, the bank was licensed by the State Bank of Pakistan to operate nation wide. FMFBL commenced its operations by establishing its business in the Northern Areas. Hunza was selected as one of the principle hubs. Soon, the bank extended its reach throughout the region. Its ability to capitalize on the framework of the Credit and Savings Program enabled the bank to quickly establish itself as the prime deliverer of financials products in the market. 4.2 Aim FMFBL follows the philosophy of reaching communities with and providing innovative packages tailor-made to specific needs. Its objectives are to build sustainable businesses and to enhance the capacities of the community. Today, the bank has over 36 branches and outlets throughout the country. The bank focuses on vulnerable groups such as women and offers capacity building programs, which strengthen the skill set. These groups are important contributors to the society. For example, women have now opened their own businesses, which gave them more power and respect. The alternative source of income within a family offers confidence to withstand crises such as a bad crop, natural calamities or illness. While supporting those who are unable to support themselves, the bank fully covers its inflation-adjusted costs with its revenues. FMFB is more than just a bank. 4.3 Services Offered The Bank offers a wide range of services which the other institutions listed under 3.3 have not been able to provide. These services include: Loans- The main type of loan FMFB offers is group loans. Groups are formed with a minimum of three persons. If a member defaults payment of installments, other members in the group are bound to pay it. The bank offers different types of loans for different financial needs. The micro credit is used for both farming and non-farming based activities. The types of loans offered by the bank can be seen in fig 3.1. Repayment schedule is based on the client’s income, repayment capacity and loan amount. Interview with a few customers revealed that the main reason why they choose FMFBL is because their loan payment plan is extremely flexible. Savings- the bank also provides savings account facilities of four types: (Refer to fig 3.2) 1. Current account: This is a regular non-interest bearing deposit account. Clients can deposit or withdraw funds without any limitation. In order to open an account a national identity card and Rs.5 (approximately $ 0.08) is needed. 2. Various types of savings accounts, which are targeted for low-income clients who are micro savers. 3. Cash Maximiser: This attracts clients who run institutions and organizations. The amount required to open up a cash maximiser account is very high. Hence this is not popular in Hunza. Fund Transfer - In addition to savings products, there is a domestic fund transfer facility which is relatively cheaper particularly for people working in cities who want to send money to their villages. This allows clients to transfer money through any of the branches across the country round the clock. Finally, the housing improvement loan scheme offers low cost products for the needy customers. Micro Insurance - Life and credit insurance are offered to customers at a rate of Rs.100 ($1.67). In case of death or a serious disability, the bank covers the clients’ outstanding loans. The bank also provides a sum of Rs.10,000 ($167) to the client’s family for emergency needs. Training - Apart from loans and services, the bank also provides training and counseling to capital investors. This way, the people not only get money to start their own businesses, but they are also taught how to invest it and how to maximize profits. Health Awareness Services-The bank, in collaboration with AKRSP and the Aga Khan Health Services (AKHS), offers health awareness programs in Hunza. This program is mainly targeted towards women but is open to the whole community. 4.4 Effect of FMFBL on the People of Hunza After speaking some clients, I came to the conclusion that a wide range of the bank’s services are very popular. The people have come to trust the bank and its impact on the community is evident. To state a few examples: (a) During my extensive travel throughout the region, I had personally visited shops in the markets and asked if they banked with the FMFBL and if so, whether it made a difference to their way of working. Out of 50 sample shops in 5 villages, 90% had a borrowing relationship with the bank. All of them said that they were able to increase their stock levels significantly by utilizing FMFBL loans. Over 50% felt that they have been able to increase their stock levels by 100%; and 80% had a depository relationship with the bank. I visited 5 village organizations, where members have borrowing relationships with the bank. Almost 100% of the loans given are being used for agricultural financing purposes. The representatives of these organizations claimed that they have achieved significant increases in the crop yield and in their livestock. The FMFBL also planned to undertake an impact assessment study by end 2007 to determine the effectiveness of its programs, and to use the results to further improve their product offerings. FMFBL in the Northern Areas has recently won an award from Credit Rating Agency which manifests the international recognition that the program has received, within a short span of commencing its operations. 5. Conclusion From the facts that emerged during my study of the situation in Hunza prior to launching of FMFBL, and the economic changes that entailed after it commenced operations, I have come to the conclusion that the bank has understood the role of financing in the economic development of the area. It is also appreciative of the importance of technical know how and support in uplifting society. Thus the bank has been able to provide customized services by offering tailor-made products that suit the needs of the population in Hunza apart from inculcating saving habits in them. The bank has been able to identify key areas where the region lagged. The bank has devised such packages that could be instrumental in bringing financial stability to the community, which in turn would facilitate economic development in Hunza. The intervention in alleviating poverty becomes evident in its contribution towards the empowerment of women. Loan products offered by the bank in various small enterprises like poultry farming, stitching and handicrafts etc will enable the women to gain financial independence, which will be highly productive in the economic growth. The bank has also increased the employment opportunities significantly. It employs 350 people in the region, out of which 150 are from the Northern Areas. They have done a commendable service by providing technical know how to new entrepreneurs in business. Thus the people in Hunza region can now build sustainable businesses with a long term vision. “The FMFBL has given us hope”.10 However, at this stage there are no official figures on the quantity of change in the region. The only way to estimate the effect is to speak to the people and observe the change in their living conditions. In a nutshell, my survey results validate the fact that Micro Banking is a sustainable and most viable form of institutionalized lending and savings to the poor. A manifestation of my conclusion can be drawn from the recent award of Nobel Prize to Dr. Yunus Khan, the founder of Grameen Bank in Bangladesh. Summary: Underdeveloped countries can achieve economical stability only by eliminating poverty which is an impediment in the path of their progress. My study attempted to find out how Pakistan could alleviate poverty and attain a GDP index that can place it among the developed nations. In order to understand the economics of a nation it is necessary to closely analyze a smaller representative cross section. So, I decided on Hunza, which has a high literacy percentage and excellent natural resources. Unfortunately, in terms of economic growth it figures as an underdeveloped area. Its state of regression can be attributed to lack of financial resources for capital investment. A review of the financial institutions operating in the area revealed that micro financial institutions are the most potential and viable lending source to the economically backward population in Hunza. During the course of my research it has also become evident that these institutions are contributing significantly to the economic growth in the region through their innovative loan schemes which are being taken advantage of by a large segment of the population. However, there is still scope for further research in this area so that the funds available with them can be prudently deployed to derive maximum benefits. The government also needs to recognize this and institutionalize the process of capital financing by identifying potential areas for investment. The Hunza area is rich in resources and has the potential for developing into an international tourist attraction. The natural water available here is rich in mineral content and the area is reputed to be free of ailments like cancer and coronary heart diseases because of healthy climate and living conditions. (Refer to Annexure-I & Annexure-II). Further, its topography offers an exotic location for adventure sports (Refer to photographs at Annexure-III). Financial institutions should, therefore, promote entrepreneurship in tourism business. Government should market this region as a location for health/medical tourism and adventure tourism. This will raise the employment and business opportunities and thereby boost the economy of not only the region but also that of the whole country. Fig 3.1 Loan Products11 Product Name Delivery Mechanism Loan Range (Rs) Duration (months) Min. Max. Repayment Frequency Service Charges Min. Max. Business Group Loan Group 5,000 100,000 1 12 Weekly/Fortnightly/Monthly 12% Group Loan Group Equal to amount of savings 100,000 - 12 Lump sum 10% Woman Entrepreneur Group 5,000 55,000 6 36 Monthly 12-15% NISA Loan Group 3,000 100,000 3 36 Flexible 12% Fig 3.2 Savings Account Product Name Minimum Balance (Rs.) Payment Frequency Withdrawal Restrictions Current Account 5 Nil None Savings Account 5 Semi-annually None Micro Cash Maximiser 500,000 Monthly None Term Deposits 10,000 Maturity Fixed Fig 3.3 Insurance products Product Name Insurance Cover Coverage Maximum Amount of Cover (Rs.) Premium (per annum) Life Insurance Accidental Death or natural death and permanent injury. (i) Outstanding loans of FMFB and (ii) cash payment of Rs. 10,000 to the family 100,000 (i) Rs. 100 for loans up to Rs. 50,000 (ii) Rs.150 for loans up to Rs.100,000 annually General Insurance Borrowers fixed assets are acquired from the bank. Theft and damage to assets due to a disaster, fire, explosion or riots. 50,000 Rs.100 for loans up to Rs.50,000 Fig 3.4 Other Products Product Name Coverage Charges Check Collection In-country (i) Nil for local collection (ii) 0.2% on outstation check Funds Transfer In-country Varies Annexure-I Chemical Analysis of Drinking Water in Hunza Chemical Analysis of Drinking Water from Karimabad, Hunza, Pakistan (Data expressed as mg/l except for pH, specific conductance and suspended solids.)   Clear Liquid After Centrifugation SiO2 4,180 Fe 380 Ca 11,500 Mg 1,260 Na 760 K 5,800 As 0.3 Ba 43 Be Read More