Microfinancing

Micro-financing – Issues and practices

By: Ghulam Qadir Arbab

(Article was published in daily dawn on October 01, 2001)

Last decade witnessed a sharp decline in availability of funds as a policy shift from the directed approach to the financial market approach. Most of the traditional lending lines to agricultural banks were discontinued.

Donor assistance currently centers more on micro enterprise financing and on the promotion of non-governmental financial institutions. Micro-credit is characterized by short duration loan, small loan sizes, strict supervision and direct or indirect client screening. This reduces default risks and leads to an overall improved performance.

Micro financing is not just forwarding credit or is not charity help to the poor. But it is to bring revolution in their lives with enhanced access to financial market. it is an enabling, empowering, bottom up tool to poverty alleviation that has provided considerable economic and non economic externalities to low income households in developing countries. There has been a gradual realization that microfinance alone is not enough. As it is not a replacement for jobs that are not there, markets that are inaccessible, or education and skills that does not exist. Particularly the main objective of microfinance institutions requires a holistic and in-depth understanding of the interplay between economic, social, cultural extracts of the development process.

Pakistan has the largest microfinance sector with more than 6.3 million poor households. But the available facilities for micro-financing are underdeveloped having less than 5% outreach micro-credit, whereas, DFIs do not target the poor which tend to perpetuate rather than ameliorate poverty. Realizing the needs, the government of established microfinance division to ensure orderly development of microfinance sector in the country. As a first step, the microfinance bank (MFB) has been established as a public sector joint venture with an initial paid up capital of Rs. 1.7 billion. The loan size ranges from Rs. 3,000 to Rs. 30,000 for upto a year. The bank lends at 18% per annum out of which approximately 6% of the interest revenues are diverted to the deposit protection fund and risk mitigation fund that will provide insurance cover to small savings mobilized by the bank and will mitigate default risk of the poor. In addition to the MFB, three categories of micro-finance institutions (MFIs) have been planned to be licensed with minimum paid-up capital ranging from Rs. 100,000 million to Rs. 1,000 million, on district, province and country based operations. The framework will provide the scope for NGOs to become regulated microfinance institutions (MFIs) to broaden and deepen the microfinance sector.

It is learn that MFB will follow the peer group strategy for its financing activities. No doubt peer group monitoring has been proved successful in micro financing as weekly meetings plays a role in increasing discipline, ensure regular payments, and promoting the transparency of financial transactions with bank staff. But peer groups as well as staff may have a tendency to exclude those most likely to experience repayment difficulties. During the process of self selection, group members will filter out those who represent the greatest risk for the group. There has also been allegations that in fact very poor are so weak as not to benefit from micro lending, and that it is the “better of poor” that benefit. While all poor need to be included in the programmes, the shortage of funds impels organizers to make special efforts to reach the less well off among the poor.

In the absence of long term sustainability, micro credit operations become a welfare or charity operations. Probably the single most important element in ensuring long term sustainability of the operations is to include in them the savings mobilization function. Having little or no saving or assets of their own, the poor are cut off from conventional credit sources at market interest rates and forced to borrow at usurious interest rates from landlords and informal money lenders. Any emergency from sickness to a social obligation like a marriage or funeral, even a bad day when their income falls below subsistence, can plunge the poor into further debt, which further erodes their income. The perception is that if you are going to help people overcome poverty, in addition to helping then increase their incomes through better livelihoods, you are going to build in some carefully targeted and tailored credit mechanism. Therefore, the result of emphasis on saving first is that members’ own saving serve as a guarantee. But more importantly, because most of the funds are derived from the community, failure to repay is seems as “stealing” from one’s own neighbors.

The microfinance bank following a realistic approach decided to ensure that at least 40% of its loan goes to women. Whereas, the Grammen Bank of Bangladesh disburses almost 94% loan to 2 million women members. But studies on women’s control over loans, or having relinquished all control to the males in the family. Behavior of the bank staff becomes undesirable with female clients once default occurs. Obviously, micro-enterprise of women does not appear in most of the cases. Micro-credit can often contribute to the workload of women, increasing women’s dual burden of productive and reproductive work. In fact, whether the borrower is a man or a woman, there will likely be an impact on women and girls in the household. The impact of micro-credit alone on women’s status and gender equity is limited. As part of a broader effort to raised awareness and mobilize women, credit could play an important role as entry point to strengthen women’s networks and mobility increase their knowledge and self confidence, and increase their status in the family.

Most micro-financing institutions show their recovery figures as success indicators. But repayment is not an important indicator as finds could have been invested other than in productive activities. Even when a borrower repays a loan on time, the source of income is not necessarily from revenues generated by investing the loan in the productive activities. In most peer group lending, for instance, borrowers must commence weekly installments almost immediately after the investment is made. Hence, borrowers will either be forced to choose activities that generate almost immediate revenue, or they will have to repay the loan from other sources. In practice, repayment is often derived from general family income rather than the income generating activity itself.

Hence, repayment may be good due to discipline or peer pressure, regardless pf business performance. Further, it recovery is the key indicator for success, then the Grameen Bank and such MFIs are successful with more than 90% recovery rate. But the status quo in highly distorted patterns of wealth distribution continues to persist raise questions for their success. No doubt recovery percentage is a key indicators but impact assessment should be the pre requisite to measure the sustainability of any micro-financing activity.

A key lesson for microfinance implementers is that micro credit involves a long term commitment. Financial intermediation is an on going requirement, and short term interventions may have a negative impact on existing informal and formal financial arrangements. The best programmes have proven the ability to bring about short-term increases in borrowers’ income. But a closer look at results a big difference between impact on the poor and impact on the poorest.

The development and implementation of a microfinance programme facilities, and is facilitated by organizational and operational systems that are set up as a part of the programme. They include community based organizations, peer groups etc. as well as systems of operation to manage the microfinance programme. A good organizational / operational system also leads to better financial sustainability. The success of microfinance programmes greatly depends on the degree of networking incorporated into the programmes – both within the community it operates and with external agencies and institutions that can help its development. Building the MFI’s capacity as well as institutional governance structure in its management is dependant on the links it develops, and in the information and transparency it incorporates into the programme. Good networking and information gathering system also leads to better informed decisions and understanding market operations.

Role of NGOs in primary education in Pakistan

Role of NGOs in primary education in Pakistan Ghulam Qadir Arbab

Abstract This research elevates the understanding about the nature of NGOs' involvement in Pakistan's basic primary education, identifying challenges facing basic primary education in Pakistan and the role of NGOs vis-à-vis the private and public sector. There is no doubt that progress has been made in the last few decades, but progress has been slow, and universalization of primary education still remains a relatively distant goal. There are also other issues that limit the progress that has been made. The state and society in Pakistan have, in many ways, accepted the fact that they need the help of NGOs and the private sector to ensure better delivery. The experiments of today, and especially the successes of today, can thus act as guides for tomorrow. NGOs are already playing an important role that will also shift towards formal education, from the current predominantly non-formal focus, and greater involvement in both elementary and secondary education.

Note: This article was written in March 2006

Article’s Objectives
§  Evolution of the role of NGOs in education §  Factors responsible for NGO involvement §  Current and future role of NGOs in education §  The ways in which NGOs are addressing social needs in primary education §  Why public-civil society partnership is needed? §  To evaluate lessons learned §  Major challenges in forming such partnership
Introduction
Pakistan has an estimated population of 145 million and education remains inequitably distributed among various income groups and regions in the country. Literacy and participation rates are below those in other South Asian countries with similar level of economic development. Access of education to children of relevant age group is still inadequate. Educational institutions lack physical facilities. The target of minimum essential requirement of competencies for quality education has not yet been achieved. Educational institutions face shortage of qualified and motivated teachers, especially female teachers. Due to financial constraints and want of managerial capacity education targets remained unaccomplished. Primary education has always been an important concern for society and the government. Universal literacy and the success of secondary and post-secondary education depend on how extensive and efficient the primary education system of a country is. Primary education is viewed as a service that must be provided to the populace, irrespective of affordability, and it is generally considered to be the responsibility of the state to deliver primary education. The public sector provision of primary education, like most other services delivered by the public sector, suffers from severe deficiencies in coverage, effectiveness and quality. There has been a paradigm shift in the development strategy and policy in Pakistan to ensure improved access to physical assets, education, vocational skills, training and other education services. Pakistan has deepened its commitment to partnerships with civil society organizations by placing an emphasis on working with a wider spectrum of civil society organizations including International and National Development NGOs through global partnerships to help deliver basic social services. Civil society organizations have become critical allies in designing innovative operations, implementing solution and monitoring results. Many NGOs provide primary education directly in neglected areas and they also provide support to the public and private sectors in various areas such as teacher training, curriculum development and informal education. Some of these interventions have the potential to alter the landscape of primary education provision in the country. The later chapters of this study will look at these opportunities in more detail.
Issues, Risks, Problems, Questions
Although successive governments have announced various programmes to promote literacy, but education in Pakistan faces a number of severe constraints which not only prevent it from reaching 100% enrolment, but also leads to high dropout rates and the provision of low quality education. Research in the last few years, suggests a substantial growth in the private sector both at the primary level of education as well as at other levels. This growth in the private sector reflects, in part, a wider paradigm shift within policymaking circles in Pakistan. Under the influence of recent decentralization in the country and the mounting recognition of the importance of civil society, there is a growing belief that the private sector is capable of providing social services that were traditionally associated with the government. In the last decade and a half, the private sector has made major inroads in improving the provision of primary education. Here we see a range of schools, from the elite English medium institutions charging very high tuition fees, to the local private schools set up in houses which charge nominal fees. The remaining percentage of the private schools is made up of NGO and not-for-profit schools. There is a growing consensus in Pakistan that public-private partnerships may address key shortcomings within the country’s public service-delivery system. More specifically, it has been noted that such partnerships would be better able to address issues of access, equity and quality in primary education. It is also important to note the cautionary tone of many NGO managers who are optimistic about the current phase of cooperation with the government but who, at the same time, insist that the private sector cannot and should not completely take on the role of the government.
The Role of NGOs
NGOs have several strengths. First, they have a capacity for participatory planning; monitoring and evaluation; and social transformation through grass-root interaction. Other strengths include their ability to closely monitor the schools and teachers, and their capacity and willingness to provide need based teacher training. The history of Pakistani NGOs goes back to partition in 1947, however, not referred to as NGOs at that time, many voluntary organizations were set up to provide humanitarian aid to the refugees pouring into the country and to help victims. The government of Pakistan has long recognized the importance of NGOs in terms of government’s willingness to extend cooperation to NGOS. The experience of NGOs in recent years suggests that at the level of policy planning. Building the school is only half the story. In Pakistan what are the required ingredients to transform a building into a school? Issues that need to be addressed include: How do you encourage parents to send their kids to schools? How do you get and keep teachers? How do you discourage student and teacher absenteeism? The provision of physical infrastructure needs to be supplemented by other measures to make sure the schools function properly: that both teachers and students attend regularly and that the education is of a high standard. Common implementation problems encountered under each project include: §  weak implementation capacity; §  frequent staff turnover; §  inadequate recurrent budgets; §  implementation delays; §  weak project management and supervision; §  weak coordination of activities, and among government institutions; §  incomplete training components ; §  underutilization of loan funds for capacity building, procurements and consultants; §  inadequate focus on qualitative changes; §  delayed and inadequate staffing of facilities (schools etc); and §  weak monitoring and minimal impact assessment Working towards a common goal of improving the situation of primary education among the country’s populace, NGOs use a variety of strategies such as public-private partnership; Teacher training; Family literacy; Community participation; Community supported schools; Adopt-a-School; Running non formal/community based schools with effective community participation; and Developing human resources for the education sector. NGOs are very clear about the fact that their role is not to replace the government but to ensure that the government effectively covers educational needs, with respect to quality, accessibility, affordability and equity in mind. NGOs assume several important roles such as advocacy, service delivery, capacity building, grass root community mobilization, innovation, social experimentation and research. Most NGOs mobilize the community to acquire land, labor and capital for building the schools. Communities also help in hiring teachers and monitoring the overall performance of the school. This builds trust, and ownership, and it also removes any information asymmetries about the intentions of the parties involved. Sustainability of institutions is dependent on the community taking over, to an extent at least, and being involved with the institution. To sum up, in spite of shortcomings, NGOs have an important role to play in meeting challenges of quality, access and affordability of primary education in Pakistan. Their involvement and their rapid growth spans over the last couple of decades, owing primarily to greater access to foreign and local funds. The future role of NGOs is going to be much more dynamic. NGOs are already playing an important role in networking and creating partnerships. Their supportive role in the future will include a shift towards formal education, from the current predominantly non-formal focus, and greater involvement in both elementary and secondary education.
Conclusions & Recommendations
There is no doubt that progress has been made in the last few decades, but progress has been slow, and universalization of primary education still remains a relatively distant goal. There are also other issues that limit the progress. The state and society in Pakistan have, in many ways, accepted the fact that they need the help of NGOs and the private sector to ensure better delivery. The experiments of today, and especially the successes of today, can thus act as guides for tomorrow. §  The level of instruction, environment and teaching has to go hand in hand with the raising of education board standards. Treating the teachers with respect and endowing them with the status of important team members creates an enabling environment for them. NGOs should hire teachers from needy families who are not over qualified for the job. §  The most important lesson shared for making the schools a success, is effective surveillance of schools through a variety of mechanisms, including local surveillance through community education committees and through NGOs’ community mobilizers. §  Donor dependency is the biggest challenge. Sustainability becomes hard to achieve once time-bound funds are exhausted. However, there are donors who are NGO-dependent. Careful planning and proper utilization of funds is the NGO’s responsibility as the donors are not always development experts. §  The government must ensure that every person - child, youth and adult - shall be able to benefit from educational opportunities designed to meet their basic learning needs. §  An expanded vision is needed to serve the basic learning needs, institutional structures, curricula, and conventional delivery systems while building on the best in current practices. New possibilities exist today which result from the convergence of the increase in information and the unprecedented capacity to communicate. We must seize them with creativity and a determination for increased effectiveness. §  Educational authorities have a unique obligation to provide basic education for all, but they cannot be expected to supply every human, financial or organizational requirement for this task. New and revitalized partnerships at all levels will be necessary: partnerships among all sub-sectors and forms of education, recognizing the special role of teachers and that of administrators and other educational personnel; partnerships between education and other government departments, including planning, finance, labour, communications, and other social sectors; partnerships between government and non-governmental organizations, the private sector, local communities, religious groups, and families.