IMF EXIT STRATEGY AND RURAL POVERTY

MICRO-FINANCE FOR RURAL POOR; ISSUES & IMPLICATION

Allah Nawaz Samoo

The government seems well prepared and confident on disengagement plan from IMF by
the end of 2004. The proposed framework of exist strategy that probably may form the
basis of next budget, highlights shifting of emphasis from macroeconomic stabilization to
accelerated pro-poor growth. Generally referred as the ‘second generation of reforms’,
this strategy focuses on ‘social well being of population’ as the core means to achieve the
objective of poverty reduction. One of the measures suggested to attain this objective is
providing micro finance services to the poor and middle class segments of the population.

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
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 behavior of ‘social-reciprocity’
for ‘mutual-survival’ in an era when market economy was not dictating force of life style.
The governing principle for such transactions primarily was to rescue from the crisis
rather than investing for 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, break down of traditional
institutions, and incompatibility of skills of rural poor to meet with the mainstream
demands. This process of transformation
Trends in Poverty in Pakistan, 1969-99 (%) from ‘value-based-society’ to ‘interest-
Year Rural Urban All Pakistan based-society’ tends to be more visible by
1969-70 49.1 38.8 46.5
its manifestations from late 80s. The
1979 32.5 25.9 30.7
1987-88 18.3 14.9 17.3 report on Human Development in South
1990-91 23.6 18.6 22.1 Asia 2003, by Mahbub ul Haq Human
1998-99 34.8 25.9 32.6 Development Centre notes that, ‘poverty
Source: Amjad & Kemal (1997) & Qureshi & Arif started rising after the structural
(1999), as quoted in Human Development in adjustment programme began in 1987-88.
South Asia (2003)
There are various reasons for this, most of
which relate to the direct and indirect effects of macroeconomic strategy itself’. At a time
when poor masses were detaching from 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 national 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 being
malnourished. Such output growth has also been associated with much lower
employment growth, at the trend rate of only two per cent per annum.

Trends in Income Distribution and The majority of the poor living in such a situation
Poverty in Pakistan are primarily dependant on agriculture for their
Percentage Share of Income livelihood, own extremely small amounts of land
Year Lowest Middle Highest
20% 60% 20% for cultivation, and support large families at low
1963-64 6.4 48.3 45.3 average per capita income levels. Further, since
1966-67 7.6 49.0 43.4
rural areas are not well serviced by physical
1969-70 8.0 50.2 41.8
1979 7.4 47.6 45.0 infrastructure like electricity and roads, their
1984-85 7.3 47.7 45.0 capacity to take advantage of market opportunities
1987-88 8.0 45.3 43.7 is severely curtailed. Households belonging to the
1990-91 5.7 45.0 49.3
1992-93 6.2 45.6 48.2 lowest income quartile spend as much as 91 per
1996-97 7.0 43.6 49.4 cent of their consumption budget on food. As a
1998-99 6.6 45.6 47.8 result, the consequences of a drop in their
Source: Pakistan Economic Survey, as quoted in Social
Policy & Development Centre Report, Oxford earnings or the need to finance unexpected
University Press 2001. 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 low-income households of
Pakistan are spent on consumption, food and non-food combined. These loans are mostly
from 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 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 practicing 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 ‘misuse of credit’!

Micro finance for rural poor envisaged in ‘second generation of reforms’ therefore needs
to be designed on the basic premise of bridging the gulf between 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 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 ambiguity of
authority and issue 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 micro finance services to segregate
the oranges and apples.
At the same time there is a need of convincing 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 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 income. Second, it
would link rural production with the market economy. The process can be supplemented
with micro finance inputs to get 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 when
is provided with accessible and affordable safety nets. There are evidences of increased
indebt ness 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 on the cost of something very horrible in the future and
that is unending indebt ness cycle.

Reference:
- Ishrat Husain, March 1, 2004. The Country is no longer in a crisis mode. Daily Dawn
Karachi.

- Mahbub ul Haq Human Development Centre. Human Development in South Asia

2003:The Employment Challenge. Oxford University Press, 2004.

- Social Policy & Development Centre. Social Development in Pakistan: Growth,

Inequality and Poverty 2001, Oxford University Press 2002.

- Mainfred Zeller & Manohar Sharma. Rural Finance & Poverty Alleviation:
International Food Policy Institute, Washington, D.C. June 1998.

- M.Huppi and G.Feder, “The Role of Groups and Credit Cooperatives in Rural
Lending,” World Bank Research Observer 4, no.2 (1990): 187-204.

- Hulme, David and Paul Mosley. 1996. Finance Against Poverty, London: Routledge.

- Joanna Ledgerwood, Sustainable Banking with the Poor, The World Bank,
Washington D.C. 20433, U.S.A. December 1998.

- RSPN, Islamabad. Rural Support Programme at Glance (paper), RSPN, January

2004.