WELCOME TO ISLAMIC MICROFINANCE by Farhat Shah

A New Era of Poverty Alleviation Begins

Welcome To Islamic Microfinance Farhat Abbas Shah

2011

FARZ FAOUNDATION

Good

Bye Microcredit

WHY ISLAMIC MICROFINANCE IS NOT SCALING UP?

Lots of studies conducted by major stakeholders showed Islamic microfinance as a huge untapped market. The figures suggested to jump into any new pattern of microfinance. The pitfalls of conventional microfinance also pushed the serious players of the sector towards Shariah compliant model along with a new commence of SME. The incentive for MFIs to graduate into Microfinance Banks ( The department of Microfinance, State Bank of Pakistan is working smartly on this move ) and the decisions of G20 policy makers proved that the expectations from conventional microfinance could not bring-in the targeted results and devastated their confidence upon the sector. Finally, the removal of Professor Yunus confirmed that the

FARZ FOUNDATION

Page 2

Good

Bye Microcredit

high ups has taken the decision to minimize the conventional microfinance activity and to convert the investment potential to the SME and Islamic Microfinance model. High interest rates like Compartamos Banco exercises, over indebtedness, rapid growth, weak impact, suicides of clients in Andhra Parades, suicides of MFI staff in Asasa Pakistan, late night recoveries, and the role of ghost managements of MFIs jointly directed the stakeholders towards a paradigm shift. CGAP’s studies and initiatives turned the attention of the concerned people towards Islamic Microfinance and a suggestion to the financial and other pertinent institutions and organizations were made with a strategic manner to channel Shariah Compliant instrument. The “Islamic Microfinance Challenge” was one of the major revelations to kick off the plan. Suddenly, the whispers stated blow sounding, Why Islamic Microfinance is not scaling up? It may be this whisper makes a man wonder for a moment but for us, it was quite an expected phenomena, Because we were observing all the bustle very minutely with a deep longing for the success of Islamic Microfinance. We were analyzing and also expressing mainly through “Microfinancefocusnews” that although the endeavors ( which are undoubtedly sincere and honest ) were being made to achieve the goals. However, these were still being steered by the conventional players, (without understanding the spirit of the faith based system) for the conventional players and to the conventional players. We examined at our humble level that the copy paste method is being implemented but innovation is being told. Irony is that, even the so

FARZ FOUNDATION

Page 3

Good

Bye Microcredit

called Islamic Players are also just trying to present the solution of the same conventional gear by changing their exterior only. Islamic Microfinance Challenge could be a useful tool to collect the innovative Islamic microfinance ways but that again came up with a few products, which were also being practiced already by a few institutions and the innovation seemed a question. An Islamic conference and advisory services champion of Pakistan satirically comment about the livestock product of Farz Foundation by saying, Mr. Shah you have nicely pulled in livestock into Islamic Microfinance. I astonished at his comment because the goat farming is a prophetic profession which is historically proven a beneficial business, particularly for the poor and The Holly Prophet Hazrat Mohammad (PBUH) Himself demonstrated it. A senior banker sitting in the State Bank of Pakistanâ&#x20AC;&#x2122;s committee for Institutional Strengthen Fund suggested me to adopt any Musharkah product by borrowing from any Islamic bank instead of spending money on product development procedures. I find that gentleman not so false, because the same copy past methods have become the culture of the sector in Pakistan, and he thought the same about Farz Foundation, while I was trying to convey about the structural modifications by Farz Methodology to translate the true Islamic poverty alleviation attitude into microfinance. However, he was fixed at his position with a typical Pakistani bureaucratic manner. I mean to say that If we want to do something new with an old mindset, we could only make the things more confuse. The gentle man was true with his almost 20 years professional experience, while I were also not tending to change my own mind set.

FARZ FOUNDATION

Page 4

Good

Bye Microcredit

PMN has formed an Islamic Microfinance wing within the PMN. PMN was supposed to achieve a certain target regarding a particular number of clients, which could not be attained unfortunately due to lot of reasons. Now a group consisted upon four five old conventional MFIs has been formed under the leadership of a very well known and well reputed Qarz e Hasna model charity based MFI, to manage the opportunity of Islamic Microfinance. It shows the members of PMN do not want to lose any chance to step in. Yet it leaves lot of questions behind it. An international Islamic Microfinance Network has been institutionalized in Pakistan and it can not be activated yet in a factual sense. There was a very interesting situation occurred, when during a meeting of the network, the meeting started by playing recitation of Holly Quran on a Laptop. May be apparently it doesn’t seems awkward but it shows a conspicuous triviality regarding the faith based and cultural sensitivities. All these actions taken by the sector players are making loud the whisper in my ears, “why the Islamic Microfinance is not scaling up”. The policy makers sitting in World Bank, CGAP, IMF and other stakeholders seriously would like to put a huge investment in the sector of Islamic Microfinance, and there is a big untapped market undoubtedly, but the fog is not ready to go off. I believe there is a chance to change the economic fate of Pakistan and the whole universe as well through the faith based model, though, the Clarity never comes by vague tools. The sector ( conventional microfinance ) could not demonstrate any reasonable impact during 25 years even after spending billions of dollars, how they will earn something real without having the original vision and mission. Pakistan needs true efforts for economic stability. A peace full economically sustained Pakistan is inevitable not only for us but

FARZ FOUNDATION

Page 5

Good

Bye Microcredit

also for the rest of the world. If we honestly review, among the all financial institutions, only the State Bank of Pakistan is credible and can play a pivotal role in the current scenario. If the honorable Governor of State Bank of Pakistan and his higher management appoint a visionary leadership for the task to create a new era of economic sustainability of the country through Islamic Microfinance, the objective can be made. I appreciate the collective efforts of Pakistan State Bank, Pakistan Poverty Alleviation Fund and Pakistan Microfinance Network but it these efforts can not become fruitful without a visionary, sincere, honest, unbiased and true leadership. It is impossible to get the expected targets without changing the whole previous scenario of the sector. The Microfinance Department and The Islamic Banking Department of State Bank of Pakistan are making their efforts with their limited influence, since it requires more resources to set a new framework for conventional and Islamic both microfinance sectors. MFIs and their networks also must be come under the regulations of State Bank of Pakistan at country level and this practice can be insured also at international level according. Otherwise poverty alleviation or economic sustainability is mere a dream and it will remain only a wishful thinking. Letâ&#x20AC;&#x2122;s see whatâ&#x20AC;&#x2122;s happening once again. __________________________________________________________

FARZ FOUNDATION

Page 6

Good

Bye Microcredit

LIVESTOCK THROUGH ISLAMIC MICROFINANCE IN PAKISTAN A BIG OPPORTUNITY

According to the observation, mostly, at Islamic Microfinance Sector level, it is being practiced with the conventional structures. If there is any will to do can feel for Islamic Microfinance, the lake of proper systems and unavailability of skilled staff are the hurdles. In Pakistan a few Islamic banks are studying Islamic Microfinance models to chalk out a proper one. However none of them found the key solution yet. SBPâ&#x20AC;&#x2122;s Institutional development fund is an attraction for the institutions, but the people sitting in the committee are preferring only the institutions already have a visible scale. According to the vision of the committee members the institutional development fund is not for the organizations which are not already developed with a handsome portfolio, while the Islamic Microfinance means no commercial funding, no capacity building no MIS and no product

FARZ FOUNDATION

Page 7

Good

Bye Microcredit

development support. In Pakistan a few development organizations like Islamic Relief, and Muslim Aid are doing Islamic Microfinance by maintaining their other projects. A charity Based Microfinance Institution has a tremendous Qarz e Hasna, portfolio, but being a non commercial organization for donors the experts are not ready to accept it as a sustainable model, while the past proves it more sustainable than many other Microfinance institutes, which demonstrated worst in spite of having all the popular microfinance controls and risk mitigating systems and procedures. The success of any business depends upon the proper Products fundamentally, while the conventional microfinance products showed only 3% impact according to the CGAP study. It is obvious that the products sold through microfinance were not appropriate to alleviate poverty. The reason I found behind the failure was an incapable human resource and the lake of true visionary leadership. According to the current poverty alleviation scenario, we would have to appreciate CGAPs efforts for identifying Islamic Microfinance for not only the Muslim poor but to gain noticeable positive impact at a larger market. During a survey for spotting a Farz SME Village in District Jhang, which is an untapped area of Punjab province, and one cannot find any perceptible engagement from NGOs, because of (perhaps) being a sectarian violence affected area. However, Farz Foundation has started its operations in two rural areas of the District Jhang. During research work, Farz Foundation found the area very potent to launch their traditional products of livestock after a pretty customization and aligning the products with a formal Islamic Microfinance mechanism

FARZ FOUNDATION

Page 8

Good

Bye Microcredit

(Farz Methodology). At the second stage of the study, the survey and the focus group discussions revealed that the products of goats and sheep are more feasible than buffalos and cows at the first phase. Study also shows that only the customization of the system is required with a capable human resource having a strong interpersonal relationship ability with the traditional and cultural familiarity to build a strong social and business relationship with the client. And a huge untapped ripe market is awaiting because the 65% economy of Pakistan is based on agriculture and out of it almost 52% economy is based on livestock. According to a Gilani Research Foundation survey carried out by Gallup Pakistan, meat is the most essential food item in peopleâ&#x20AC;&#x2122;s daily diet. In a survey in October 2008, respondents were also asked to list what they would like as the main component of their daily diet. Assuming that Financial constraints were removed and price was kept constant the results revealed: 52% would prefer meat. while the products are needed and marketable at the international level undoubtedly. The markets of UAE and Europe can be quoted as the potential meat markets for Pakistan.

Community is expert in nurturing and nourishing the livestock from centuries to maintain their living. They know every sophisticated detail about the animal and also very found of having them as their assets. Livestock has been considered here as a social status also and one can measure the economic level of a family or a person by assessing the volume of the livestock he or she has. There is a very common practice among the rural poor community to get the

FARZ FOUNDATION

Page 9

Good

Bye Microcredit

livestock from a well-off land lord on 33% partnership or sometimes at 50% for a breed period or a period of maturity of the animals for meat purpose. The livestock for meat purposes has an extraordinary perspective on Eid e Qurban along with the daily consumption of the meat in the country. According to economic survey of Pakistan 2005 and 2005, 1.9000 metric tan meat being consumed only in Pakistan. Mostly rural poor feed the live stock by getting them to the jungles and green fields. Where the animals get the grass and various other stuff to eat. They give animals also the special food called Wanda. The poor stock the animals for their hard days and also to fulfill their immediate needs like accidents, weddings or in case of a death in their family. They usually sell the animal and accomplish the necessity. Studies predict the livestock is not only an ongoing consumable item and a very successful business but a social welfare work and a noble cause also as a poverty alleviating tool. According to the financial analysis of the business by Farz Foundation, it gives 500% profit to the investor during a project of three to five-year period and is 1000% profitable for the poor. The economy of a country could be run and poverty could be eliminated only by the livestock business if done properly. Any how the microfinance or even banking with conventional structures believing in monthly or fortnightly recoveries with interest or profit may not be able to do this kind of business. Primarily, Farz Foundation aims to disseminate the information and to invite the social investors to step in, particularly the people want to do the Halal investments. If Islamic microfinance organizations engage themselves only in livestock business, they can show the tremendous results. Secondly, Farz Foundation offers a partnership opportunity at

FARZ FOUNDATION

Page 10

Good

Bye Microcredit

all investors. Donors and philanthropists level to come and join hands with Farz Foundation in this regard. -----------------------------------------------------------------------------------------------

FARZ FOUNDATION

Page 11

Good

Bye Microcredit

REINVENTING MICROFINANCE IN PAKISTAN

PART 1 Poverty certainly emerged as the single most problem that lies at the heart of modern day crisis. It quite recently has assumed alarming proportions. Many efforts were made in the past but they could not wholly succeed. Among significant tools, the microfinance was also used for getting rid of poverty which quite recently plagued the whole world. There is always a room for innovation to be introduced to already existing structures. Though microfinance made some gains in alleviating it but with sufficient services the amount invested lie in the danger of being spent on the items of daily use owing to extreme poverty.

FARZ FOUNDATION

Page 12

Good

Bye Microcredit

What in fact is required is the provision of certain services that may enable the person concerned to become self-earning unit. So the first and foremost thing in this regard is not to simply extend credit. It is more advisable to do kind of asset sharing, along with provision of services which could lead to an economic activity at an individual level. Certain experiences in this regard bore good results. For instances a woman who was provided with the necessary material and skill, is successfully running her business of making and selling artificial flowers. What worked in this case was the fact the instead of extending credit, she was provided the raw material along with the skill. What could further be added to it is the provision of health and education facilities to the community so that each individual keeps on learning during this process. By adopting this method microfinance becomes a well-organized business as well as a community services and incidence of default is reduced to the maximum level. Now this issue of poverty is what upon which the future of political structures rests. It needs more coordinated and scientific approach. Among the efforts made so far, this method of empowerment through education and asset based loaning has bore good results. At a time when world economies are shrinking and people at large losing their jobs worldwide, this method could be used to off set the impact of recession in the poorer world. We have seen that the government agencies could not come up to the expectations and number of people falling below the poverty line is growing. The supply side economics or trickle down theory is being looked at with suspicion. We need more non-governmental structures to fight this growing menace.

FARZ FOUNDATION

Page 13

Good

Bye Microcredit

Owing to shrinking world economy, the poor countries are also being hit hard. The individualsâ&#x20AC;&#x2122; economies cannot sort this problem out as they have to cut their non-development expenses. In such a critical period poverty needs to be fought at war footing. Recently, Farz Foundation (The First Islamic Microfinance Organisation ) has completed its two-year pilot project in the area of Shalimar Lahore in two phases. The organisation has done the comparative analysis of currency disbursement and the Farz Methodology (asset delivery method) in which the asset based microfinance shows 80 percent positive and productive results while the popular practice of microfinance, which is based on credit in the shape of currency depicted 80 percent negative and non-productive results. The study confirms the reports are already being published in the international journals about the very low impact of currency deals in microfinance. Although the efforts made by the CGAP and other agencies at the international level and Pakistan Poverty Alleviation Fund at the national level cannot be ignored but the speed of the inflation and poverty increase ratio demands more sincerer and creative efforts. There is another challenge of exploring the new markets which still needs to be addressed because the process of demand and supply matters even at the level of the micro entrepreneurship. Home Based Women Entrepreneurs are still in the clutches of the middle man, who is earning far more than the HBMEs. Another important issue is trust-building. The development sector has successfully won the hearts of the community but unfortunately the microfinance sector is losing the trust day by day particularly in Pakistan and India. Although The SEWA in India and RSPs in Pakistan has set the milestones remarkably, however, various MFIs have annoyed the poor community.

FARZ FOUNDATION

Page 14

Good

Bye Microcredit

Though the poverty alleviation objective stipulates to support the innovative mechanisms like Farz Methodology, even at the government level as well as at the institutional level; the microfinance donors are not encouraging the new and innovative players as per the need and the requirement of the day. It will be lethal not only for the innovative human recourse of the sector but also will reduce the impact of the endeavors already being made by the sector of microfinance.

FARZ FOUNDATION

Page 15

Good

Bye Microcredit

PART 2 There is Chinese proverb that says we are living in very interesting times. Indeed we are. Old economic patterns are directly flying in our face. The ongoing recession has defied most of our beliefs. What triggered this, to put it brief, was the irresponsible ways of lending that almost sunk the world economy. Amid all this there is another effort through lending to alleviate poverty, known as microfinance. It began with a justified fanfare and made certain gains as well but the over all outcomes betrayed some imperfections. This right up would tend to elaborate the so-called Farz Methodology, which, in fact, is another attempt to avoid certain negative outcomes. The irresponsible ways of lending, which we mentioned earlier and which almost sunk the ship of world economy, may also be one of the factors responsible for certain negative results in the world of microfinance.

FARZ FOUNDATION

Page 16

Good

Bye Microcredit

What could not work in the cold world of business could never have done better where the borrower is a marginalized poor. Here comes the Farz Methodology which enshrines in its philosophy the passage to the relative well being of the person concerned through social as we as economic empowerment. Another technique that this methodology carries is that of not allowing the direct access to the poor and the vulnerable to the hard cash. What is suggested instead is educating the poor along with providing him with necessary tools such as the stuff he needs to initiate an economic activity. Our initial experience was also a clear testimony to the potential that this method carries. Our success rate in our projects remained 80 per cent which also worked as a spur because we had a long list of volunteers who were ready to work without compensation in the beginning What made a clear difference was the realization that microfinance is not a mere business. It rather needs a business like skill, understanding of the world in which the poor exist and understanding of their limitations. We achieved this by looking at the world through the eyes of the poor. Farz Methodology as an innovative economic mechanism ensures the long-term profitability of microfinance. We need to help the borrower make his business successful. Recovery, of course, cannot be had from a failed business. MFIs must make certain the recoveries from their profits, instead of their losses. Recovering from losses defeat the very purpose of the whole exercise. The micro trade cycle technique of Farz can ensure not only the sustainability of the sector but the long term profitability as well. There are many researches that demonstrate that funds spent and efforts made are being wasted. What our methodology ensures is the

FARZ FOUNDATION

Page 17

Good

Bye Microcredit

maximum possible empowerment through basic health and education. Because the human resource of external organization (Members or clients ) should also be capable of delivering things well regarding their businesses. A business can not be a successful with bad health, illiteracy and skills. As the organizations build the capacity of their staff to get more and more output. Similarly microfinance sector will have to trained their clients to get more and more out put. So the integrated approach of Farz Foundation emphasizes on a skilled poor community to win the war against poverty to achieve the ultimate vision of the sector. Today even the first world is no more unscathed by this recession. But that still has the advantage of a skilled labor. This fact alone would soon retrieve the falling economy in the rich countries, may be sooner than later. But in countries like Pakistan we need to initiate this activity on war footing. The strategies of Pakistan Poverty Alleviation Fund (PPAF), studies of Pakistan Microfinance Network, (PMN) efforts of Social Performance Management and Social Performance Task Force focus on making loans productive through social performance is need of the hour. Considering our collective past experience, we should not hesitate far a moment to implement these strategies with collaboration of Farz Methodology because the purpose of the sections is the same, how ever the Farz methodology will protect the expected gains. This would even help retrieve even the failing projects. The capacity building of clients like training in credit discipline, basic marketing skill, and feasibility preparation are of paramount importance. This should be carried out the way we train our staff. Another advantage of this strategy is that it would bridge conventional microfinance and Islamic banking. That would also allow us in a huge market that still remains untapped.

FARZ FOUNDATION

Page 18

Good

Bye Microcredit

At a time when Pakistanâ&#x20AC;&#x2122;s economy is expected to grow by less than 2 per cent, we should adopt this measure to enhance the growth. Government is facing many other challenges like war on terror and perhaps cannot focus on economy as much as the civil society can. In the ultimate analysis war on terror could only be won through economic and social empowerment of the people. So the success of microfinance is the success of the forces struggling for peace and betterment of the country. The idea of decoupling that was being put forth in the beginning of this recession could only be materialized by kick starting growth where the impact of the world recession is slightly less. The task of course is gigantic. But of course the journey of thousands miles begins with one step. Letâ&#x20AC;&#x2122;s start restructuring existing MFIs methodologies and also begin establishing new projects to steer out of these testing times.

FARZ FOUNDATION

Page 19

Good

Bye Microcredit

PART 3 Changing the economic environment always calls for more innovative response. We, of course, are living in a time where hosts of events have crowded a comparatively short time span, particularly in the world of finance. Despite an incorporated world economy, the tools and methods needed in the so-called Third World would definitely be different from those of implied in the developed world. For instances the ways to fight poverty in the countries like Pakistan needs certain changes to suit a constantly aggravating economic situation. The main emphasis in this approach is that by empowering an individual through services other than finance, in fact, we secure the money lent and make it productive over a long time. The most important task that today we face is not only to mitigate the impact of the recession but also to off set it. The governments in the region are tied with the host of other challenges, including war on terror. It makes it more important for the civil society to play its role in more effective and intelligent way. By kick starting an economic activity through incorporating the poor with provision of non-financial services as well as financial, we would bring them closer to the institution of microfinance. They own this whole process which in turn is enhancing their productivity and also inculcates a sense of responsibility among them. The various research and evaluation projects have already unveiled the causes of the breakdown of the financial services system. So it is

FARZ FOUNDATION

Page 20

Good

Bye Microcredit

imperative to sort out a method which could offer a viable solution to provide a long-term relief. Undoubtedly the microfinance can provide a contingency plan in the right direction. Different studies suggest that the week impact of different microfinance methodologies already in place demand an innovative microfinance mechanism to be implemented at a large scale. The efforts made to link microfinance with Small Medium Enterprise (SME) and SME to Medium Enterprise and then macro enterprise are still in the process of achieving the goals to make any breakthrough. One reason behind not achieving our goals has been undue compartmentalization and division of work. What is needed, instead, is the integration. No business or credit or any financial system can be sustained in isolation. This is the core philosophy of Farz Microfinance Methodology. What goes without saying is the fact that consumption is the key to all types of production. Dwindling consumption means a stalled or hampered productive process. Thriving need-based local markets can become a gateway to micro productivity. At the micro enterprise level there are a lot of things that need to be addressed like the role of middle man and the whole sellers. Farz methodology emphasizes providing a just economic system for the productive poor according to their needs and requirements. The productive poor will have to be facilitated as a wheel for the international trade cycle. The role of currency should also be minimized and would have to be replaced by income generating kinds like tools and assets, etc. The artificial expansion of businesses or trade should be checked through asset providing mechanism. Farz Methodology as Noe Microfinance has proved through positive outcome as the most effective system in the given economic milieu. This inference has been made on the basis of results achieved in the poor neighborhoods like, Chongee Amarsidhu and Meu Colony in Lahore. Previously about eight MFIs targeted this area and six left by declaring them red (negative) areas. Two reaming are grappling with their zero tolerance policy and late night recovery problems. In the same area Farz Foundation has started its pilot to

FARZ FOUNDATION

Page 21

Good

Bye Microcredit

gauge the results and to observe the effectiveness of Farz Methodology. First time in Pakistan the microfinance is being customized according to cultural and religious circumstances simultaneously unlikely the various previous practices. Farz Foundation has also launched a saving scheme that requires each member to pool a specific amount on monthly basis which is given to one member or the other on the basis of lucky draw. This is a practice known as committee (community's rotating funds) which develops saving habits and also works as a trust-building measure. What FF did was that it began, in accordance with Farz Methodology by conducting free eye camps and also picked some of the poor families and took the responsibility of paying for their children's education. Through further penetration into the area it was learnt that previously the borrowers were further lending the money at even a higher rate of interest, which defeated the very purpose of the whole exercise. They, of course, were bound to fail. All that Farz Foundation has dealt with so far does not lay bare the whole panorama of opportunities. In the future FF intends to provide direct market linkages to eliminate the role of middleman that will further increase the rate of profit of the home-based women entrepreneurs. As the first Islamic microfinance organization of Pakistan from its first day with a full fledge Islamic vision of trade and business Farz Foundation has provided an Islamic solution of the non productivity of the micro loans, which not only can cater to a huge Muslim Market but the general clientage as well. The main aim of this exercise is to kick start the demand at micro level which will initiate an economic activity at the supply side. Even agricultural sectors lie untapped and the efforts made so far did produce desired results. As mentioned earlier, through adequate financing, the expectations assigned to the microfinance sector could easily be fulfilled. At a later stage it wont even involve a great deal of finances as through market linkages an economic activity would be initiated on the credit bases between the

FARZ FOUNDATION

Page 22

Good

Bye Microcredit

venders and sellers all that would be required to monitor and guide it to more productive directions. However currently it needs the support from the institutions which are working for the promotion of Islamic or conventional microfinance as a poverty reduction tool. ----------------------------------------------------------------------------------------------

FARZ FOUNDATION

Page 23

Good

Bye Microcredit

REVITALIZING MICROFINANCE The greatest dilemma of the twenty first century is translation of growth rates into the welfare of common man. For example India is considered to be a healthier economy even during this one of the deepest recession in history. India is growing by 8% to 9% and still its 77% population earn rupees 16 a day. 40% of Indiaâ&#x20AC;&#x2122;s land is under the control of so called Maoists. Poverty is cited to be the reason behind this state of affairs. One laudable effort has been the role of microfinance, but even this effort could not equal the magnitude of

FARZ FOUNDATION

Page 24

Good

Bye Microcredit

this problem. This was also our dilemma, when we began our effort from the plat form of Farz Foundation. After having thorough analysis of this situation and after taking the stock of efforts made by the microfinance sector, I came to the conclusion that we need to reinvent our tools for fighting poverty as now, it is remain un checked, can threaten the whole system. Interest has been an effective tool for development, and may remain so even in the future as well, as for as the major economic activity is concern. We reluctantly began our exercise of providing interest free and asset based microfinance along with provision of health and education facility and business training. The outcome was unbelievable. According to the finance ministry of Pakistan, 3 out of 4 persons live on less than two Dollars a day. Microfinance sector so far has helped just 1. 8 Million People. Even that exercise had some set backs owing to the miss management of some players in the sector. Quite recently Pakistan Poverty Alleviation Fund has issued a letter to its partner organizations, directing them to inform PPAF about their other donors and also intimate them if they open a new branch. This fact alone indicates the set backs in the sector. CGAP also termed in one of its study the rapid growth of the sector was responsible for failures. It goes without saying that PPAF should have taken this step a little bit earlier. This letter also lays bare the fact that the local partners were approaching multiple donors for the same segment. Dwelling to much on the past may not look very pertinent. How ever it is very important to keep in mind the past practices to avoid a deep crisis of the sector, which seems quite possible in the near future. It also

FARZ FOUNDATION

Page 25

Good

Bye Microcredit

seems plausible that even KIVA,s interest free life changing loans were misused. The core principle of Farz Methodology is the strong belief in transparency and information exchange. The dual audit by Sharia and conventional methods works as an double internal check in Farz Methodology. Farz Methodology mitigates the risk of fraud at field staff level, as it do not charge any thing as initial fee or documentation charges e.t.c. On the larger scale the Farz Foundation intents to launch entrepreneurial villages in remote areas, housing live stock , home based business. Farz Foundation and Global Pakistan are going to sign an accord for solar solutions to fight energy crisis particularly in the far flung areas. There is a potential market of at least 30 Million clients, which can be taped through MURABAHA, MUDHARBA and MUSHARKA products of microfinance. Launching of these products through Farz Methodology insures their exemptible as well as reduces the risk of default to a possible extant. The Farz Foundation intents to bring in a flesh blood to the sector through its innovative products. It is quite obvious, governments alone in the given situation can not fight poverty. An honest effort on the part of the sector through committed players can help achieve. -----------------------------------------------------------------------------------

FARZ FOUNDATION

Page 26

Good

Bye Microcredit

THE METHODOLOGIES AND PRODUCTS OF MICROFINANCE BOTH NEED REFINEMENT

If a product could not provide the solution to the purchaser against the price, how long it can stay in the market? No doubt the products of microfinance were need based, however they could not fulfill the actual objective of poverty alleviation as per the expectation. Although the cash based products fulfill the immediate need of the clients, but they cannot find the real solution to poverty. It goes against the vision and mission of the business. The productive loans proved unproductive at the end, thatâ&#x20AC;&#x2122;s why crisis took place and the bubble market was created. Microfinance was never a routine business, like an electronic or home appliance trade. It, of course, addressed a global curse of poverty. But Poverty is not a single dimensional phenomenon and irony was those

FARZ FOUNDATION

Page 27

Good

Bye Microcredit

trying to address it had no direct exposure to it. The people who made policies, most of them lacked a multi-dimensional approach to it. Off course, they conducted a lot of researches, invented various instruments and tools, however, all these efforts were intended to measure the poverty, without feeling it. There is a major difference between gauging and feeling it. There was another dilemma of the experts that they were studying the poor but were thinking that they are studying poverty. It is strange to me, the people are still counting the heads of the vulnerable, and however they are not feeling the intensity of the starvation. I will recommend another rectal scale, which can measure the hunger and thirst, and behind. If we want to sell the solution of poverty, we have not only to know the poverty but have to feel the poverty, if we could. Otherwise we will again design the products similar to the ones that did not deliver. The previous products worked like a painkiller but not like a wound heeler. We launched the gigantic discussions on the various topics like "interest rates" or "whether microfinance is a social business or commercial". However we never try to analyze the nature of poverty to design the products accordingly. Even we did not try to know that which products built the assets for the poor in the human history within different cultures and geographies. There is also a significant aspect that needs to be kept in mind that different people react differently in different times and spaces. Certainly different poor communities deal differently with their poverty in different situations. The people of Afghanistan are very different from the poor in India and the poor in Africa must be dissimilar than those in Indonesia. Nature of poverty in a far deep rural area is certainly different than that of a cosmopolitan city. Sometimes poverty forces to kill others, and sometimes pushes to commit suicide.

FARZ FOUNDATION

Page 28

Good

Bye Microcredit

This is the time to find out of the box solutions in the real sense and not only as a fashion. The people who have a true concern with microfinance are seriously worried for the survival of the sector. My humble suggestion for them is to initiate an original product development move. Those who are focusing on the need for innovative products, they should be careful about the selection of the product developers. Sometimes products look original apparently but actually are not. It is a very critical time for the Global Economy. The microfinance is going to play a very significant role to strengthen the capitalism and free market economy as well. The new structures and partnerships are going to emerge out of reinventing microfinance. So the components like financial and non financial services, Social Performance Management and Information Systems must be intelligent and according to the nature of poverty. Methodologies and strategies also need refinement, and we have to design the products which can provide the solution against the price, the poor borrowers are paying. The long term profitability of the sector certainly depends upon this fact. Because if a soft drink cannot fulfill the thirst and does not satisfy the customer, It means it will be no more in the market As well as the Islamic financial products are concerned there is a dilemma prevails at even marketing level. Islamic financial institutions are offering the products to the customers, mostly with their Arabic Titles like Murabaha, Mudarba or Musharka,Slum and Takaful e.t.c. While the customers are not familiar with these names or titles. Irony is that the practitioners are also yet in the phase of developing their understanding with the products. So there is a strong awareness required at the public level to not only provide the consciousness to the customers but to convince them to make a better for a suitable product, matching to their needs. Although there are a lot of ways to deal with finance according to Islam. However, the interpretations be under the necessity of to be focused. The difference of opinion by Sharia experts is the area which is still waiting for a logical oneness.

FARZ FOUNDATION

Page 29

Good

Bye Microcredit

For example, in Pakistan, Islamic financial institutions could not justify the Title Takaful as a substitute of insurance. Honestly speaking the common man of Pakistan does not know even the meaning of Takaful, so how could he understand the features of the product and why? On the other hand, experts are not ready to accept the word “Islamic Insurance”. They argue that by putting the same title, it will go un Islamic. There is another question arises, whether the languages or words can be labelled as Muslim and non Muslim. Playing with the words always damages the spirit. The financial sector cannot afford the delays at this time of uncertainty. The Islamic world has to come forward with openness and clarity. We have to focus on real issues and challenges in spite of non issues. Islam is the code of life for the betterment of the humanity. Salamty(Betterment) for all is the spirit of Islam. We have to prioritize the points which can move the action of betterment forward for the whole world with all beauty and softness of the code. There is a serious issue seems to be placed in near future, That is about the institutions, which are playing or want to play with both conventional and non conventional methods simultaneously. Particularly, in Pakistan’s microfinance sector there are many unsustainable MFIs are trying to rush towards Islamic microfinance just to get another financial opportunity for the sake of fulfilling their hidden agendas and the personal benefits, which has been already put the sector at risk. They will again ‘enjoy’ the grants and charities for a planned span of time and at last will show the un sustainability and will go with the wind. In spite of all these challenges, there is a huge untapped market is available for Islamic Banking and finance, particularly for Islamic microfinance in Pakistan and throughout the world as well. How ever it needs an ultimate transparency, safe and secure systems, user profitable products and un complicated delivery methods.

FARZ FOUNDATION

Page 30

Good

Bye Microcredit

At the international level, no doubt the efforts of CGAP to strengthen the sector of microfinance are remarkable. How ever these efforts also need committed and honest partnerships. As Farz Methodology offering the 100% Social Performance Based microfinance approach, it looks a bright future of the sector and this time the sector appears to grow from Pakistan through Farz Methodology. -------------------------------------------------------------------------------------

FARZ FOUNDATION

Page 31

Good

Bye Microcredit

WHITHER MICROFINANCE

I was going through the host of facts and figures before offering an analysis of socio-economic conditions in Bangladesh when I stumbled to an observation about poverty by an expat Ashley Wheaton. I decided to discard all the figures and instead quote the following observation by the above-named person in the Third World Review: “Living in a country like Bangladesh constantly forces me to redraw the lines around my mental conception of poverty. A factory worker seems hard done by until you meet the construction worker. The construction worker earns your sympathy until you see the child collecting trash. The child is then outdone by a disabled beggar... When I was not immersed in this reality it was easy to treat them all as poor, to condemn all of the conditions they faced as equally bad. But in reality the poverty here is extremely complex and it isn't realistic or meaningful to treat each person's poverty as if it were the same.” Lets see another expat’s observation, “With an estimated 80% of the country surviving on less than $2 a day, Bangladesh is sharply divided between those struggling to survive and those living it up. Being rich, in Bangladesh typically means being insulated and detached from the tragedies that fall upon the country”. These lines speak volumes about the economic conditions of Bangladesh. Grameen Foundation alone has invested about $ 1.4 billion to target poverty, along with 72 other institutions grappling

FARZ FOUNDATION

Page 32

Good

Bye Microcredit

with this mammoth crisis. To date, 80 percent of Bangladeshis earn dollar 2 or less in a day. Despite all the good intentions, it seems, the sector has paved its way to hell. To save the sector we need to have a clinical analysis of the efforts made so far in this direction. The picture in the rest of the region that include India, Pakistan etc is not different from Bangladesh. With each passing day the set backs in the sector are being reported in the international media. The Indian sector is faced with a severe crisis of liquidity and looming default. It requires a lot of labour to put together an estimate of all the efforts and funds spent in the sector at large to lessen poverty. But the overall results, which are hardly enviable, demand a kind of thorough inquiry and lead us to the conclusion that all was not done properly over the last 25 years. Instead of helping the macro economy during its worst recession in history, the microfinance posed another problem and further complicated the situation. One solution that is being offered to fight this menace is Islamic banking and finance whose mainstay is partnership instead of simple lending on the basis of interest. This option is even being seriously considered in the first or developed world where sub prime loan crisis has dismantled mammoth institutions which are being bailed out to cope with the liquidity crisis. What so far bars the conventional or even Islamic banks from extending facility on partnership basis is the risk factor. What greater risk could be awaiting us than the conventional sector took through traditional methods.

FARZ FOUNDATION

Page 33

Good

Bye Microcredit

Now the traditional microfinance organizations which somehow, are responsible for the debacle in countries like Pakistan and India, seem poised to practice Islamic method. Even CGAP initiative of Islamic Microfinance Challenge 2010 preferred older organizations in the name of innovations, with making public the reason why certain orgs qualified and why didnâ&#x20AC;&#x2122;t the others. This calls in questions the transparency of the methods used to make vital decisions. In Pakistan, there is a mysterious silence over a questionable performance of partner organizations, even by the likes of PPAF and PMN. There was a much talk about a Credit Bureau System but unfortunately there hardly seems any positive change. Many organizations have acquired funds for MIS, but are not implementing it for reasons best known to them. Now it is being alleged in the media that even Grameen misspent about $ 100 million. Similarly, a Pakistani organization Asasah has allegedly invested money acquired for poverty alleviation in a mobile oil business. PPAF though stopped them from resorting to this practice, but failed to take punitive steps to avoid such practices in the future. Quite recently probably USAID approached National Accountability Bureau to investigate misuse of funds. It goes with saying that such practices has plunged the whole sector and without taking care of this sorry factor, we will be doomed even in the future. It is very unfortunate that the tax money of the western tax payers is not being spent to realize the goals of Barak Obama and other countries of G-20. There were many instances in India where desperate borrowers committed suicide, while in Pakistan staff of

FARZ FOUNDATION

Page 34

Good

Bye Microcredit

microfinance sector was forced to hang themselves to death because of cruel and ruthless practices. In line with the US policy, a careful selection of the new players and through monitoring the process of spending, still a lot could be achieved and, particularly in Pakistan, the wrecked agri sector could be turned into an opportunity, by avoiding the malpractices of the past. "With an estimated 80% of the country surviving on less than $2 a day, Bangladesh is sharply divided between those struggling to survive and those living it up. Being rich, in Bangladesh typically means being insulated and detached from the tragedies that fall upon the country. ___________________

FARZ FOUNDATION

Page 35

Good

Bye Microcredit

BRIDGING DEVELOPMENT AND MICROFINANC NEED OF THE DAY

Results are always the best yardstick to measure the affectivity of any endeavor. It is not a matter of blame game or trading charges. To fight poverty all over the world requires stock taking of all the efforts made so far. Letâ&#x20AC;&#x2122;s take the example of Pakistan and Afghanistan. Pakistan, of course, differs from Afghanistan as the microfinance sector at least took off but, much to our chagrin could not bear the expected results. Afghanistan still desperately looks for even the initial stage. In Pakistan the performance of the sector betrays a kind of rift of vision and mission. The facilitators at local level also failed to recheck the

FARZ FOUNDATION

Page 36

Good

Bye Microcredit

strategy in cases of utter failures and continued reckless financing. In doing so, the real players at local level were automatically ignored. Then, consciously or unconsciously, undesired results of the microfinance sector were attributed to the world economic crisis. The fact is that at least so far countries like India, Pakistan, Bangladesh and China maintained healthy growth rates despite the economic downturn in the first world. No doubt, there were problems like inflation but failures cannot be attributed to a single factor. A business-like relation was required between the local facilitators and Partner Organizations (Pos) instead of personal one. It created a kind of complacency on the part of POs while the sector began to suffer. The registrations of more than 1,000 police cases also indicate the violation of Customer Code of Conduct. Then there occurred a crisis of confidence between the senior management of POs and there staff. In certain instances the management began to demand security checques from their staff. This breach of confidence also disillusioned the customers and cast doubt upon the sincerity of purpose, with which initially the whole exercise of the sector was launched. Though Islamic finance has offered a viable and effective method, even this direly requires a sincerity of purpose. Islamic finance, if taken up as a methodology could help tap a huge market which desperately needs a response from the sector. The aspect of Amal-e-Khair (Social Performance) could off set the crisis of confidence between the POs and customers while hugely contributing to the success of the sector. Farz Methodology made healthcare, environment and education its components to ensure the sustainability of the sector, which cannot be had without the sustainability of the customer. By bridging the development and microfinance sectors, we can successfully realize the goal of poverty alleviation. The countries like Afghanistan and Haiti also require this kind of combination. Poverty alleviation and development should simultaneously take place to

FARZ FOUNDATION

Page 37

Good

Bye Microcredit

isolate the elements who thrive on poverty, destruction and lack of education in countries Pakistan and Afghanistan. The prime goal of the Farz Methodology is rapid and peaceful social and economic change. This goal requires integrated approach with a four bottom line Social Performance package. Poverty is at the heart of all the ills and problems. I have personally seen the cases where poverty has pushed the individuals to an unthinkable extreme. After a lot of work with the sector, this methodology was formulated. A tremendous initial response gave a great deal of encouragement convincing us that through determination, sincerity of purpose and means, we can make a difference. ------------------------------------------------------------------------------------

FARZ FOUNDATION

Page 38

Good

Bye Microcredit

FARZ METHODOLOGY: MAKING IT BIG THROUGH SCARCE MEANS

Achieving financial goals in such trying times is no mean business. Farz Foundation took up the task of fighting poverty when the microfinance world was giving in to one of the most unique and deep sustainability crisis. Much to our amazement, the initial outcome was quite encouraging.

FARZ FOUNDATION

Page 39

Good

Bye Microcredit

Quite interestingly the whole operation was initiated with a small amount of Rs 2.5 million raised by the staff itself. Another NGO Akhuwat contributed Rs 0 .3 million. Out of this amount about Rs 0.7 million was disbursed among its 63 clients. Total number of beneficiariesâ&#x20AC;&#x2122; amount to 409 persons who were provided healthcare and education. This step was aimed at restoring the confidence of people on the microfinance sector. So far, the foundation has two offices including one central and one branch office. The staff in the branch office consists of 3 persons, one branch manager, an accountant and one field officer. The central office the staff of eight which consists of a CEO, GM operations, Manager Monitoring, Finance Officer, Manager Entrepreneur, Social performance Manager and a office boy. The process was accompanied by the research operations, development of a unique methodology constant assessment of the success rate, development of SOPs, setting up of the internal control system, monitoring and evaluation, expansion plans and social performance management. What needs a special focus in all this process was the fact that simultaneously a partnership was developed with Pak Qatar Family Takaful Pakistan for Islamic insurance, achieved first time in Pakistan. Another partnership developed with The Akhuwat to promote Islamic Microfinance operations. Out of the whole invested amount of Rs 735,000, the receivable stands at Rs 892,820, recovered amount at Rs 152, 300, outstanding balance at Rs 722, 520 while Rs 18,000 was written off owing to the death of the client. Now, after the agreement with the Pak Qatar,

FARZ FOUNDATION

Page 40

Good

Bye Microcredit

such a risk has been taken care of once and for all. The recoveries are 99 percent on time with zero percent PAR. So far 7 training sessions were conducted that include a workshop on Islamic Banking and Finance, Islamic products, principals of Murabaha, time management, client appraisal techniques, Farz Methodology, leadership and team building and translating social into mission. The clients training sessions were conducted separately on health awareness and business education. There was another traditional method of saving, locally known as committees, was introduced to knit the clients with each other as well as with the foundation. This kind of method helps build the assets of the clients. This already existing system of saving was made secure by formalizing it through incorporating it with the other Fraz Foundation operations. So far, 115 community members are participating in the process. This product is attracting increasing number of members with each passing day. The first challenge that the foundation faced was the demand of clients for hard cash instead of assets. Knowing pretty well that the cash extended is mostly spent on immediate needs instead of initiating a productive activity, they were taught to understand how they can rid themselves of bad loans through using the assets provided by the foundation. They even were never shy of telling their intentions of using the cash on their immediate needs.

FARZ FOUNDATION

Page 41

Good

Bye Microcredit

There were only two clients who mismanaged their business. We event didnâ&#x20AC;&#x2122;t gave up on that and gave them out of the routine training. One important internal challenge was changing the mindset of the internal staff to adopt to the principals of Islamic Microfinance. That was taken care of through intensive training sessions. It is pertinent to mention that most of the staff so far works on voluntary basis. But the greatest challenge that we face is the direly needed finance to tap a huge market that desperately awaits support. -----------------------------------------------------------------------------------------------

NEW PARTNERSHIPS TO ENHANCE OUTREACH, POVERTY REDUCTION, AND SOCIAL PERFORMANCE IN MICROFINANCE

FARZ FOUNDATION

Page 42

Good

Bye Microcredit

Despite colossal efforts, the poverty has emerged as the single most problem in the contemporary world. Microfinance has been one of the major tools to fight it, but it still needs restructuring, particularly, in the wake of the worst recessions in the history of prevalent economic structures. This situation also requires us once again to look at all the efforts done thus far and to achieve the noble goal of reducing poverty to the possible extent by reaching the ultra poor. Before dwelling on what is needed to be done to fight poverty, one must analyze the methods applied hitherto in this field. What goes without saying is that despite all the good intentions, the sought after results could not be had through microfinance. One needs to look at the sub prime loan crisis in the most developed economies to understand this dilemma even in the underdeveloped world. Simply lending money without understanding the milieu in which an individual is placed has kept us away from the desired goals. The person who was lent money through microfinance was and is far more handicapped than those of the developed world. If the method that was adopted to extend credit in the advanced world couldnâ&#x20AC;&#x2122;t work, how could it bear results where the subject was far more vulnerable? So what happened was quite natural. The extended cash was mostly misused because of the subjectsâ&#x20AC;&#x2122; most urgent needs which resulted in the late night recoveries and the registration of cases in the police stations against the delinquent borrowers in the countries like Pakistan. Naturally, one could not retrieve money from somebodyâ&#x20AC;&#x2122;s expenditures or losses. Having gone through this experience, a new concept known as Farz Methodology was adopted, which simultaneously aims at social performance through the provision of necessary education, health

FARZ FOUNDATION

Page 43

Good

Bye Microcredit

facilities and finally the provision of income generating and productive assets (MURABAHA), instead of extending cash. The repayment was further made easy as it comes out of the profit instead of interests. Interest may work pretty well in other instances, but here we need to give the sense of participation as well through the social performance as a trust -building tool. Recovery in this way is even more than 99 percent. Secondly it also helped the individuals through their economic uplift. What made a real difference was that through the process of social performance, considering the borrowers as external staff of the organization, a general assessment of the person was also ascertained regarding his capability to become a productive member of the Farz Foundation. Secondly, the recovery is made through very easy installments. For instance, one person who was given a cart, is making Rs 700 per day, and he only pays back Rs 700 twice a month which is not at all a bad bargain for him. This is only one incidence out of many. Another important factor was the transparency with which the whole exercise was launched. It also gave the confidence and wish to the borrowers to stay forever with the organization, because a kind of cold relationship with the borrower cannot inspire him and a lack of guidance results in the wastage of the amount extended. Resultantly an inspiration engendered a hope and a wish to come out of the misery of poverty. Another thing that served as a lag was the peculiar conditions that exist in the third world. Usually any activity to alleviate poverty was taken with a certain amount of suspicion from the borrowers. The workshops and training sessions held with the borrowers gave them confidence through the Farz Methodology. Another confidence building measure was the health camps for Home Based Micro

FARZ FOUNDATION

Page 44

Good

Bye Microcredit

Entrepreneurs. Those with eyesight impairment were provided, for instances, with glasses to see well. This may look like a small step but by removing their impairment, we witnessed a huge change in the borrowerâ&#x20AC;&#x2122;s attitude towards microfinance. To inculcate a sense of harmony, a traditional system of saving, known as the committee, was also introduced through which each member contributes to a common fund which is given to one member each time with a draw. It not only knits them into one community, but it also helps them save money. It is quite obvious that the whole world of finance is going through one of the most critical periods in history. In the recent scenario, it has become far more imperative to fight the menace of poverty. Hard times always require innovative and creative solutions, and definitely new partnerships with ground breaking mechanism. At the macro and micro both levels, the times demand joint and concerted efforts on the part of various world institutions. In other words, need of the hour is to bridge traditional as well as modern methods to create a possibly balanced financial world. To put it more concretely, Islamic and modern finance should be brought together. The best of both experiences should keenly be analyzed and incorporated to have greater success in this very vital field. What goes without saying is the fact that we are fast running out of time. All the means available should be put together. The methodology recommended here could hugely contribute towards the goal of poverty alleviation through the integrated approach of Farz Methodology. The future of all the liberties achieved through the market economy hinge upon the fact how successfully we tackle this issue.

FARZ FOUNDATION

Page 45

Good

Bye Microcredit

It is being claimed by the critics of the prevalent economic structures that world of finance in general is in uncharted waters. This may partially be true but as far as poverty is concerned it could only be drastically reduced through the kind of participation and togetherness that Farz Methodology offers. Farz Methodology also suggests a partnership between microfinance industry and development sector. This partnership can work miraculous in achieving an ever illusive poverty free world.

Part 11 New partnerships are inevitable to begin a new era of global economy. How ever, hence there is a question of continuity of previous partners which could not achieve the mutually agreed targets. As Dominique Lesaffre said responding to my previous article under the same name as part1, â&#x20AC;&#x153; I personally believe poverty is the major outcome of (economical if not political) injustice, not only a matter of lack of access to (financial) services. For example, in my own country, a supposedly 'rich' one, France, a recent survey has shown that nearly 22% of the population has gone through poverty over the last 7 years. 22%!! In the meantime, the same investigation by â&#x20AC;&#x153;Le Mondeâ&#x20AC;? mentions that the

FARZ FOUNDATION

Page 46

Good

Bye Microcredit

richer ones have never been as rich as now and the 'crisis' actually did not affect them. I mention that as "microfinance for the poor" is no longer a mere instrument of "poverty alleviation tool for developing countries", it has become, by default, one of the global answers to compensate the effects of structural injustice. Even in France, microcredit has come high in the public agendas as a policy and instrument for 'poverty alleviation', meaning that the welfare state is no longer able to bring about the requested social compensations. The point here is not to judge whether good or not, but to take act of it.â&#x20AC;? I may disagree with â&#x20AC;&#x153;Le Mondeâ&#x20AC;? coat. However, we will have to accept that the microfinance instrument could not provide the expected results during last two or three decades. If I see the players working in Pakistan, there cannot be finding any healthy partnerships, particularly at bottom level. MFIs never ever even think that the poor can be their partners at any level. As for as top level partnerships are concerned, there is again a first come first get policy seems to be making faces of us. In Pakistan MFPs are seems to be compelled for working with even constant in sustained institutions for un known reasons. They even neither try to build the trust between

FARZ FOUNDATION

Page 47

Good

Bye Microcredit

each another nor to fulfill the responsibility to meet the objective of poverty alleviation by there hearts. Monitoring and evaluation claims and exercises have been proved fail. Partnerships remained limited within the files, papers, business plans, so called capacity building and fake audits. I have still a strong belief about microfinance as an effective most instrument to alleviate poverty, but not just micro credit. According to my observation the people sitting in the institution made their efforts not with commitment and enthusiasm required by the donors and investors which were agreed to spent a handsome part of their investments for Best practices and capacity building as well. It is an encouraging stride to find out the ways of new partnerships but if the faces will remain the same at evaluation level the successes will remain doubtful again. -------------------------------------------------------------------------------------

FARZ FOUNDATION

Page 48

Good

Bye Microcredit

A WORD ON CGAPâ&#x20AC;&#x2122;S REPORT

We all know a success has many fathers and failure remains orphan. Crisis does come, and when they come, the best strategy always is to identify the factors contributing to it so that the past mistakes are not repeated, and the best remedies could be offered. While not denying the contributions made by microfinance, we must begin stocktaking and re-evaluating our methods so that the best possible results could be had, in a not very distant future. The Fraz Methodology, which has been extensively explained in this paper before, is a method which has practically knitted together different communities, while creating their relationship of trust with the primary lender. It goes without saying that Fraz Foundation, (FF) has a couple of people on its board and in management belonging to different minorities and first-ever branch of the foundation was opened in the area where mostly non-Muslims live and they are among the beneficiaries. One good thing about Islamic finance is that it offers partnership without any regard to caste, colour and creed. And the minorities at their end never mind being helped by whosoever takes up this noble

FARZ FOUNDATION

Page 49

Good

Bye Microcredit

job. As explained in the earlier articles (Reinventing Microfinance in Pakistan), we learnt our lesson from the experience in microfinance loan repayment crisis. We found it far more imperative to adopt an asset-based methodology, instead of cashed-based strategy. Another important fact regarding this crisis was that politicians only stepped in when it (crisis) had already brewed to an unsustainable level. The very fact that finally a couple of politicians at a local level in their individual capacity had to be involved indicates unrest among the borrowers. The senior politicians at both the federal and provincial level even came to the rescue of lenders. CGAPâ&#x20AC;&#x2122;s (Consultative Group to Assist the Poor) assessment that the rapid growth in the field resulted in the crisis, is perhaps an undeniable fact. But, of course, there never is a single factor behind any crisis or failure. First and the foremost factor was irresponsible lending practices, for instance, weak screening of clients and selection criteria which depended on the middleman (activist) instead of direct approach. Secondly the treatment of the staff with borrowers raised many eyebrows. Another important factor was the primary lenderâ&#x20AC;&#x2122;s attitude towards its own staff. This further led to a kind of distancing of the borrowers from the top management of the lending organizations. Now there is a general realization that even the international economic crisis owes itself to the rapid growth and irresponsible lending practices.

FARZ FOUNDATION

Page 50

Good

Bye Microcredit

Another negligence on the part of lenders was the absence of any data-based record of borrowers which now is admitted on all hands. Now realizing it is perhaps a bit too late as crisis has already been caused. Pakistan Microfinance Network and Pakistan Poverty Alleviation Fund have already taken up this vital task which in future would help secure the sector. A key to every success in any kind of community-related work requires building a relationship of trust, while observing strictly certain principles. Anton Simanowitz, Director Social Performance Network, once said that microfinance practitioner must have a mind of banker and a heart of a social worker. A cursory glance over the plight of minorities in Pakistan indicates nothing substantial. For instance, a minority area in Lahore known as Yuhana Abad has been declared a red zone by organizations that claim to have worked in this community. No one can deny we are passing through very difficult times. What is needed is to join hands for not repeating the mistakes of the past. It is not the question of any individual success or credibility. Fraz Foundation and its methodology have embarked upon the tasks of proving the usefulness of microfinance sector in fighting the curse of poverty. To be brief, Fraz methodology emphasizes such products which are market-driven, and are according to the borrowersâ&#x20AC;&#x2122; needs. As stressed earlier, microfinance borrower is not a consumer in the traditional sense of the word. He is an already handicapped individual who needs finance and also help in the form of capacity-building to make that

FARZ FOUNDATION

Page 51

Good

Bye Microcredit

financing

income-generating

process.

Through its experience the FF has proved the usefulness of its method by working in sectors already abandoned by other lenders. We have, in short, turned these red zones into green ones. Sooner than later, Farz Foundation will demonstrate its work in Yuhanna Abad through Farz Methodology. The poor, of course, want to change their lives. All that we need is to initiate the process with commitment, honesty, and a flawless method.

________________________________________

FARZ FOUNDATION

Page 52

Good

Bye Microcredit

CRISIS OF MICROFINANCE LEADERSHIP

It is important to stand on the foundations of an appropriate Ideology to sustain for centuries. Otherwise any scenario can not be persistent for a worth able period. Although I use to be involved directly or indirectly with different researches, I have got during diverse surveys and other field works lot of side information about microfinance sector. Different scenarios teaches me a lot and mostly it is in the perspective of Pakistan. Other than researches I spend most of my time in studying about microfinance world. As well as Pakistan is concerned the chances to have direct and first hand experiences being availed by me are meaningful and consequential. Since last two years I have been implicated in microfinance borrowers, community, intellectuals , police, bureaucracy, politicians and microfinance leaders as well. The first impression I got that the Pakistan is a very fertile country for microfinance. People are very responsive towards the sector(microfinance sector). Apparently, Pakistan is a religiously fundamental country but any issue never occurred regarding interest or interest rates. Even the commercial banks are still more successful than the Islamic banks. Though there is a large untapped market exists like a full-grown crop and anxiously waiting for any Islamic financial product. According to my humble philosophy of

FARZ FOUNDATION

Page 53

Good

Bye Microcredit

microfinance, it should be at the basis of â&#x20AC;&#x153;PARTNERSHIP WITH POORâ&#x20AC;? which we may call Parallel Capitalism. Parallel Capitalism can be defined as an ideology of distribution of resources of the countries among the poor in the shape of providing them basic facilities of Shelter, food, health, education, respect and business opportunities to grow up at the level they can reach. PARTNERSHIP WITH POOR IS the methodology which can be the extra ordinary long term, successful, profitable business. The life cycle of this methodology can stay alive and triumphant until hundreds of years. Because it has a very natural and true ideology behind and has a very strong philosophical basis of Parallel Capitalism. Every human being living on this earth has rights to live (as the charter of human rights tells ). They have rights of ownership of natural resources of their home lands and the other parts of the earth where they are living with productivity. If I am not wrong, this is the actuality of microfinance. Definitely poor are the share holders of the natural resources but their productive level will determine. the size of there share. The country like Pakistan where the governments have not been able to provide to the poor people of the country even a lean sort of fulfillment of basic needs. The helpless poor need a strategic way or source to claim for their rights of the natural resources. It can be evaluate the worth of natural resources and after turning them into liquidity they can be pay back to the poor in the shape of standard health facilities, education, food and microenterprise on partnership basis. So that they become productive with sufficient capital. Only the microfinance with the methodology of PARTNERSHIP WITH POOR and with all its social performance package is the mode which can assists the governments to make a justified

FARZ FOUNDATION

Page 54

Good

Bye Microcredit

distribution of resources of the universe among the poor particularly destitute. Mean to say the poor people of the third world have also the rights to live with dignity and self respect. They have their own capital as well in the shape of natural resources of their countries where they have born but their governments have not technology to exploit and utilize these resources even to fulfill their basic needs. So United Nations or World Bank or any committee along with the representative of that country can play the roll to rule out this responsibility to operate the assets of the poor for the poor and should directly pay back the poor in the shape of â&#x20AC;&#x153;fishing rodâ&#x20AC;?, on the basis of entrepreneurial partnership. In the case of any loss, especially by the natural disasters must be protected by an innovative insurances product. As well as the methodology of Partnership with poor is concerned, this is the only attitude can also accomplish the requirement of Islamic Microfinance. The country like Pakistan becomes a leader of Islamic Microfinance by availing this methodology. If Saudi Arabia or Pakistan will take the initiative they may set an example for other different countries. Any of Saudi Islamic Bank and Pakistani Market may be a good combination for the success of this true Islamic product. There is an interesting thing that the methodology of partnership with poor is simultaneously It is a product also as well as a methodology. It is not such difficult to develop partnership with poor on investment and labor basis. Microfinance to invest money , partner (poor) to invest skills and third party to insure the loss, and the other modalities can be easily placed. In this methodology the ratio of profit &loss can vary according the settlement between two parties. The micro market of Pakistan has a lot of potential of such a

FARZ FOUNDATION

Page 55

Good

Bye Microcredit

type of innovations and initiatives. However, the over all present leadership of microfinance in Pakistan is more than a submissive rather apologetic and not ready to come out openly to stand with poor community. Thatâ&#x20AC;&#x2122;s why there is not a single leader in Pakistan like professor Mohammad Yunus, while the Pakistani society is a personality worshiping according to their sociopolitical mind set. Pakistan, Being an agricultural country is also a vast potential agricultural market which is waiting for custom made financial products , can meet the needs of the farmers and poor peasants exactly. Most of the people living in rural areas have been growing and cultivating as their basic source of income. While during the seasonal unemployment they start other businesses like fruit shops, milk shops, labor on daily wages, e.t.c. A few of them start travel to the cities. Similarly urban citizens run their micro enterprises. Poverty and unemployment are a carnage for them. More than seventy percent people are like a yield for microfinance even during seasonal unemployment. And the area of SME is ready to reassure a long-term profitability for investors too. These facts are not any secret but the behavior of microfinance Leaders is very contrite and clandestine by their attitude. They are running their institutions like passive organizations. A few have sustainable microfinance institutes are successful but their success is only because of the need of the poor people and by the miracle force of microfinance. Other wise the leaders could not prove their selves as spot on leaders, Even they hesitate to face the public. They put out of sight their selves like blameworthy persons. Excluding only 3 to 5 microfinance leaders, rest of all of them is not making the grade to promote microfinance as a life changing phenomenon and even do not have any popularity

FARZ FOUNDATION

Page 56

Good

Bye Microcredit

among the community and even donâ&#x20AC;&#x2122;t have any social and political influence. The main reason of this malfunction is lack of a strong ideological foundation. While the notion behind the social performance movement is a strong philosophical base of microfinance to bring a universal social change by poverty alleviation. To work for a largest population of the world, with the will to provide them not only basic facilities as food, education, health, shelter but also awareness and training to make sustainable their lives by their own. The exquisiteness of this Ideology is to place them on the way of individual economic successes and achievement as well as collective. If a destitute has a will to do and also have the basic capability, Microfinance is happy to facilitate him or her to become a business or societal tycoon. This is also the gorgeousness microfinance. Government of Pakistan has called for expression to start corporate forming. According to the ministry of agriculture â&#x20AC;&#x153;out of total 79 million hectares survey of57million hectares had been done and documented, while 22 million hectares had not been surveyed. Paksitan has about 8million hectares of fertile and cultivable land in four provinces besides hectares of barren land, which can be used for crop production by developing corporate farming and for maximization of agriculture production in the country. Now this is a very lofty opportunity for microfinance sector to come in this field and to win millions of possibilities to engage the poor in productivity and facilitate them with all basic need fulfillment. The government of Pakistan has not shown any interest to serve the poor by corporate the land. It can be an occasion in the shape of strengthen the microfinance sector to avail the chance of designing new products and income generating side activities. If this corporate

FARZ FOUNDATION

Page 57

Good

Bye Microcredit

farming occurs, millions of entrepreneurial businesses would begin. The future of microfinance is golden in the country but there should be a high level leadership of ‘Parallel Capitalism’, which can negotiate for poor on every step. This Leadership can be emerged but only by performing the social responsibility of microfinance industry. According to my point of view where the governments are working for only some money making politician’s networks and like minded groups, the third party should play a pivotal role to manage the natural resources of that country for the benefit of poor community and that country’s development also. Third party may be a committee consist of the representatives of poor, government and international community. In this perspective UNO or World Bank can play the role of a watch dog because for long term sustainability of poor it is inevitable to strengthen the mission of poverty alleviation. Some how to fulfil this very noble cause, it needs a strong and deep rooted microfinance leadership having a sound Ideology and commitment. Although it cannot be seen in Asia, particularly in Pakistan, but it can be built. Especially when the slogan of partnership with poor would be phrased. The Ideology will come up automatically when the leaders will stand with poor and will develop the strategies for them and their homelands to make the world paradise for them being the true leaders of microfinance and poor community as well with the power of Parallel Capitalism. __________________________________________________

FARZ FOUNDATION

Page 58

Good

Bye Microcredit

THE ALTERNATE ECONOMY OF PAKISTAN

A few years before when the economic sanctioned were imposed on Pakistan owing to continuing her nuclear program. The experts of imposing such type of sanctions became very disappointed by unexpected results because in spite of there efforts to put into effect, Pakistan was not ready to put her knees down. According to reliable sources the authorities or the forces behind the scene to analyze that the two sectors in Pakistan were providing strength to the country as a safe guard. One was the agriculture sector and the other was private sector. That were the reasons Pakistan survived under the international economic pressures.

FARZ FOUNDATION

Page 59

Good

Bye Microcredit

After the recent global financial crisis Pakistan has again come under the heaviness of financial disaster. But at this time there is no such parallel economy existing to prop up Pakistan. More over the fall down of energy has enchained the country as a whole. Unfortunately Pakistani government like former governments is not paying its full attention and still not willing to design any proper and reliable strategy. Pakistan is most lucky piece of land because when ever any difficulty comes towards her, the nature pull her out of that; for example for last 40 years the microfinance industry has been emerging through out the world as a parallel financial system as it is for the missing persons ( unbanked) of the world who were not any where in the global banking and were not able to get financial services and those were poor people of the world. According to a rough estimate approximately 33% to 35% of Pakistanâ&#x20AC;&#x2122;s population is living bellow poverty line and 70% is poor. Fortunately due to a few enthusiastic persons like Roshaneh Zafar CEO Kashf Foundation, Tabinda Jaffery CEO of Asasah, Dr. Bajwa CEO of NRSP, Mis Naghma CEO of Dameen, DR. Amjad Saqib of Akhuwat and some other microfinance institutes have successfully materialized all over Pakistan. More then 1.8 million poor house holds have started getting benefits out of it. They have getting 10,000 to 150,000 rupees per households as a borrower yearly in the shape of loans, investing in their small enterprises, businesses and entrepreneurships. These are the microfinance institutes under the leadership of the persons mentioned abovewho have disbursed more than 30 billions rupees to these poor households with a very valuable

FARZ FOUNDATION

Page 60

Good

Bye Microcredit

package of non financial services like basic education, entrepreneurial trainings, cleanliness and healthcare related awareness. Although the State Bank of Pakistan is taking initiative and trying to stream line the rules and regulations regarding microfinance sector but at the government level still there is a lack of awareness about the sector and even the higher authorities are totally unacquainted of the perspective. There is an other bad luck is making fun of Pakistani poor is unconsciousness of members of parliament of Pakistan about the microfinance while the country like Indonesia and Bangla Desh have setting the bench marks of microfinance. The value of Bangali currency is 100% high than Pakistani rupee, only because of microfinance, its international stake holders and donors. They are bound to secure the economy of the country due to their own interests. The current economic situation of Pakistan needs very serious attention with full global financial awareness but the high ranking officials are seemed totally blind from the importance of microfinance for Pakistan. Surprisingly the finance minister also never look around in spite of IMF. Otherwise there can be an economic cushion in the form of microfinance to support the mainstream financial system. International political scenario regarding terrorism and the threats of war from the neighbor is also creating very crucial situation for Pakistan. Investors are hesitating to invest their money in the country. Even the local investor is also in search of opportunities outside Pakistan and most of them have already shifted their money from

FARZ FOUNDATION

Page 61

Good

Bye Microcredit

local to foreign banks, but only the microfinance sector is growing with all its social responsibility. High rate of food prices, continuous increase in inflation and suicidal trend by hunger and poverty are the constant pressures pushing the poorest community as well as the lower middle class to the wall of helplessness and vulnerability. In these critical circumstances and very sensitive monetary conditions the microfinance sector is providing financial and non financial services as well to the poor and not ready to take a step back, while they do not have noticeable support from public sector, on the contrary some MNAs and MPAs are encouraging the borrowers of microfinance to break the credit discipline only for the sake of their vote bank, un knowingly the sensitivity of their unlawful and un ethical act. However, the Prime Minister of Pakistan has taken a positive step and appointed Mis Hina Rabbani Khar, the advisor on the request of Pakistan Microfinance Net Work to look into the issue and sort out the solution. Still it is necessary that a strong massage from The Prime Minister of Pakistan must be delivered in favor of microfinance sector to educate the parliamentarians as well as the public, because the 40 million poor are still existing as the potential market in the country waiting to be productive and to become financially sustainable. It is obvious that the government of Pakistan cannot support the poor alone. Government has chance to help the poor through microfinance sector only by facilitating it. _______________________________________________________

FARZ FOUNDATION

Page 62

Good

Bye Microcredit

THE TRUTH OF MICRO FINANCE IN PAKISTAN

FARZ FOUNDATION

Page 63

Good

Bye Microcredit

Not even in microfinance, every second institution in Pakistan is facing internal and external turmoil of different kinds. Although the Pakistani culture is full of values and morals but unfortunately since Pakistan has taken birth, the sociopolitical environment has wrecked gradually and contaminated every walk of life. After partition of subcontinent there was a gigantic gap of skilled human resource. In order to control and drive the systems properly, improper human resource came into the field and a chain of malpractices started. Particularly leading people did not run the institution according to the rules and regulations but implemented their own personal and subjective principles, and put their focal mind set into the practice. As a result the individual temperament has turned out to be a key tool to operate the systems and procedures of the institutions, and no one seemed ready to change this culture. This practice has become very common phenomena in public sector as well as in private sector. As the private sector depicts its management style, there is a very narrow space to breath for staff. Only a few organizations have modern approach of management and rest of all are only a portrayal of a saith(Sole proprietor and typical money oriented and only personal profit focused business owner) culture. There is merely a vague concept of workers betterment and good deed in these organizations. There has a credible change has occurred in Pakistan particularly after globalization owing to emergence of multinational companies in Pakistan but it is still invisible at

FARZ FOUNDATION

Page 64

Good

Bye Microcredit

country level. Although the World Bank, CGAP and their retinue like PAKISTAN POVERTY ALLEVIATION FUND (PPAF) are providing, facilitating and offering capacity building opportunities as well as resources continuously, but it has come into observations that most of the high managements of the MFIs are driving their organizations with typical Pakistani style called â&#x20AC;&#x153;one man showâ&#x20AC;?. Most of the organizations which have changed their legal status from NGO to a limited company, they themselves have not accepted this change even and still not ready to delegate necessary decision powers at even senior and middle management levels as per company functional policies. On the other hand there are numerous handicaps at staff level too. Because there is a prevailing concept that the well educated human resource prefer to go with commercial Banks rather than Microfinance Institutes, where as the shortage of quality training and educational institutions of management and leadership as compare to population of the country can be make out easily. The microfinance sector is about thirteen years old a playful financial teenager in Pakistan, while it is rapidly getting maturity in rest of the countries like Bangladesh, Malaysia, Indonesia and India. With reference to Pakistan, sector is facing still the stereo type style of management of Pakistan. The leaders of microfinance have different approaches to run their organizations. Particularly those microfinance institutes witch have become limited companies are still working like NGOs and they argue that only NGOs can work for community with the social responsibility, and the MFIs or the

FARZ FOUNDATION

Page 65

Good

Bye Microcredit

Microfinance Banks can not fulfill the mission of poverty alleviation with the full package of other services. They emphasize that the microfinance can not execute with the view of commercialization, because it is not just a micro credit rather full package of financial services along with social services like consultancy on health and education. At the same time a few leaders of the belief that it can not be done without a clear cut and transparent commercialization for the reason that there is no harm in it to announce all the practices which are being done by the MFIs i.e service charges rates. They claim that commercial banks and corporate sector is also performing their social responsibilities and they are not irresponsible in that respect. They contend that sector can grow more by lucidity and clearness, even it is necessary to explain the flat rates which are being charged by MFIs. But in the rebuttal of this point of view NGOs inclined leaders articulate that the clients of microfinance never bother about the service charges. Their major concern is to avail financial services for their businesses. ď&#x201A;ˇ In spite of all these debates no one can refuse the unpleasant way of late recoveries, when the front line staff of MFIs has to play even every possible tactics to pull through there overdue. There is nothing personal in business. Every product have its own life cycle and still there is not any scientific standard to measure the age of any product exactly. With reference to the current situation of a leading MFI of Pakistan â&#x20AC;&#x153;Kashfâ&#x20AC;&#x2122; can be coat as an an indicator about the decline of group lending methodology. But it can be refine and can be

FARZ FOUNDATION

Page 66

Good

Bye Microcredit

modified. If we will close our eyes may be it become a major threat and the microfinance world will has to stand with Kashf to save the credibility and durability of ‘GROUP LENDING METHODOLOGY ’because there is nothing infinite in this universe. The day by day tightening clutches of inflation, high food pricing and continuous deterioration of currency against kinds and commodities demand any new sort of methodology and requires some sort of fresh microfinance manner for a long term sustainability.  Since every passing year Pakistan is facing the issue of Currency Exposure Fx Risk and convertibility, because the us dollar went very high and rupee fell down with the ratio of 20% to 25%. Mainly during the last four month and inflation got high as 25% also. Definitely it showed very bad impact within the sector. The current situation is going very bad. The customer stimulated adversely. They have become even violent and most of them have started refuse to pay back.

Although PAKISTAN MICRO FINANCE NET WORK has declared the code of conduct for customer protection and the all member organizations have signed without any difference of opinion and Though it is a mile stone in the history of Pakistan microfinance sector but even then it is very late, because the whole market has come into an enormous jumble. A chain of delinquency has occurred in Punjab… the biggest province of Pakistan. Thousands of microfinance clients have refused to repay and have started agitation against the largest

FARZ FOUNDATION

Page 67

Good

Bye Microcredit

MFI of Pakistan. More over some of the parliamentarians have issued the letters to these defaulters whose are their voters and supporters also, about not to pay back their debts to the MFIs(as mentioned in above paragraph). This delinquency is spreading like a disease. While one fake and illicit NGO is providing shelter to the delinquent clients and maneuvering their demonstrations on the roads as well as in front of media. This virus is also thinning out within the other MFIs. It has come into observation that most of the field staff is unaware of even the definition and importance of client satisfaction as well as the real objectives of microfinance. They are also unaware of vision and mission of their organizations. The perception of target clients and loan port folio quality is an other ‘question mark’. Over stressed, de motivated, and the unsatisfied staff or internal client has been found involved in cash fraud and other mal practices. Though there is a demand of sixteen thousand front liners according to PMN but the already working staff has not has been not allowed to rotate from one to another organization professionally, although PPAF (PAKISTAN POVERTY ALLEVIATIN FUND) always encourages and suggests the staff as well as managements but most of managements are reluctant to free or accept the staff with open arms for the betterment of the sector. Pakistan Microfinance Network is required to work on ‘staff protection code of conduct also’. Otherwise a precious human resource may be mislaid and inept. In spite of a few leading MFIs the most of them have become suffocated, hodgepodge and some sort of sandwich

FARZ FOUNDATION

Page 68

Good

Bye Microcredit

between eastern and western cultures. There is a need to customize their working style according to geographical and demographical segmentation. Especially it is needed to disburse only target client conditioned with the use of loan in businesses. Over lapping should be prohibited and blindly outreach must be stopped. Because the race to increase outreach is another cause of loosing internal controls of the organization, while the 90% MFIs are not focusing exactly on the targeted poor client suggested by WORLD BANK. Still there is a large potential market is available for microfinance in Pakistan principally with integrated approach because the area of â&#x20AC;&#x153;integrated microfinanceâ&#x20AC;? is still vacant, but the MFIs and NGOs already working are not so capable of make it viable. It is highly recommended that the new organizations should be encouraged in this field with modern and psychographic approach as well as segmentation. H.I.V+,M.S.N and spatial persons area can be targeted because there is a room for it in Pakistan. Observations reveal that these very sensitive turning points for Microfinance in Pakistan and higher managements have to think upon. They have to resolve these issues seriously and will have to come out of their personal shelves. P.M.N will have to set some criteria for model organizations and should start annual award ceremony for best organizations in different organizational aspects building them high and professional. Excellent clients and best efficient staff should also be considered.

FARZ FOUNDATION

Page 69

Good

Bye Microcredit

------------------------------------------------------------------------------------

FARZ FOUNDATION

Page 70

Good

Bye Microcredit

REJOINDER TO RUTH DAVID’S PIECE ON MICROFINANCE

Like any other sector microfinance is also going through difficult times. Ruth David in one of her articles ‘Worrying Signs in India’s Microfinance Boom’ published in Business week reveals, on 17 th of June 2010. “Microfinance markets in Nicaragua, Morocco, and Pakistan have seen default levels climb to more than 10 percent, the threshold that marks a "serious repayment crisis," according to a February report from policy and research firm Consultative Group to Assist the Poor”. This, of course, coincides with the subprime loan crisis which has necessitated bail outs amounting to billions of dollars all over the developed world. Naturally, the strategists look for new methods and strategies to fight this economic malaise to protect all that is still good in this world of economic and financial systems. I, however, intend to look into what can be done to avoid a full blown crisis in this sector in this piece. What has been demonstrated after

FARZ FOUNDATION

Page 71

Good

Bye Microcredit

the arrival of this crisis was a kind of disconnect between the lenders and borrowers. This disconnect, in particular, can have devastating impact in the microfinance sector where the recipients are far more backward and poverty-stricken. Having thoroughly looked at the crisis in the microfinance sector as mentioned above in the quotation, it was concluded that the idea of simply handing over the money to the needy expecting them to be productive by themselves didnâ&#x20AC;&#x2122;t work. Then we (The Farz Foundation) decided to provide productive assets on partnership basis to the clients, instead of cash. This however, was the first step. Leaving alone the client even at that level could be as hazardous as the subprime loan turned out to be. This facility was coupled with the business training and market linkages. This served a double purpose. On the one hand the foundation kept an eye on borrowers business activities along with providing support to make his or her business activity sustainable to the possible extent. All that borrowers have to pay for all this assistance was only 24 per cent as profit on sold asset. It, of course, is more than pertinent to mention that the usual practice has been to charge up to 120 per cent. The Farz Foundation, along with all this, also began providing health facilities by conducting health camps. Much to our amazement, the provision of eye glasses transformed the lives of clients, who in the poor neighborhoods of Pakistan were even deprived of this basic facility. The underlying aim behind all these activities was to create a relationship of trust with the clients that tremendously inspired them. They felt being a part of the whole exercise. The outcome in this age of rampant default was 98 per cent recovery. The two percent default owed itself to the death of some clients whose loans were writtenoff. To manage this risk in the future the Pak-Qatar Family Takaful Company was convinced to step in which insured our clients. This partnership with Takaful Company was first of its kind to be introduced in this sector of Islamic microfinance.

FARZ FOUNDATION

Page 72

Good

Bye Microcredit

This whole experience was thoroughly dealt in my three earlier pieces namely, Reinventing Microfinance In Pakistan, which can be read at Microfinance Gateway( http://www.microfinancegateway.org/p/site/m/library/template.rc? P1=reinventing+microfinance+in+Pakistan&F1=%24all&O1=nea&hFor m=Global&type=SearchPortlet&Submit.x=23&Submit.y=12&Submit=S earch and Microfinance Focus. As pointed out earlier, new challenges require innovative response. we also introduced a traditional method of saving, locally known as committee. This method offers a unique opportunity to the participants to save a certain amount together with regular intervals. That amount is handed over to one of the participants after a lucky draw. The client is also offered to invest that amount with the Farz Foundation for further benefits as an other source of income. Another interesting aspect of this method( Farz Methodology ) is that the client sees his or her survival and sustainability along with the sustainability of the microfinance provider. According to an estimate, there are 2.5 billion people who still are unbanked in the world. WE still do have a huge market to be tapped. This may go a long way to off set the crisis triggered by all pervasive poverty on this globe. During these testing times, we must rethink our strategies and avoid the mistakes of the past. A stubborn adherence to the old modes may further complicate the things, endangering even the achievements of the sector. We need to preserve all that was good in the past experience while getting rid of the dead wood to reinvent the sector. Despite setbacks, all definitely has not been lost. --------------------------------------------------------------------------------------

FARZ FOUNDATION

Page 73

Good

Bye Microcredit

MICROFINANCE INDUSTRY IN SEARCH OF TARGET PRODUCTIVE POOR

Some times we have only dreams and suppose that we have a clear concept about our vision and mission. We consciously or unconsciously neglect the difference between the dream and concept. Although it is the spontaneity of the nature that demolishes our plan much time, we call it external risks and try to minimize them but we donâ&#x20AC;&#x2122;t come out of this wishful thinking.

FARZ FOUNDATION

Page 74

Good

Bye Microcredit

The experts of microfinance industry have conducted so many researches and designed different modules for poverty alleviation but they are still not in the position to understand the ground realities witch are being faced by the poor. Actually there is a huge conflict between any desire of poverty alleviation and a strong wish for continuous growth of profitability. In developing countries there are many reasons of poverty. According a research conducted by a microfinance institute of Pakistan the main causes of poverty in Pakistan are lack of intention of the governments to even minimize poverty, instable political system and feudal structure of the country. There is a myth in Pakistan that the rich is becoming richer and poor is becoming poorer. The experience or wisdom behind this myth is that the sources and resources are always remain in the hands of rich people and as well as in the clutches of opportunists. Even at low level when an oppressed gets money by any mean, he or she him or her self becomes also an exploiter. The other aspect of this tragic scene is the uneven distribution of economic opportunities. As a human being even the poorest has also the equal rights to live with respect and dignity. There should be surety of fulfillment of his basic needs. About this there is an impression in the microfinance market that the microfinance providers are tactfully avoiding by their actual responsibility and continuously trying to set such type of definition which align their financial mission. The donors and the microfinance providers are of the opinion that the sustainability is the most prior only. However the perspective of the poor or client is also not less important than any other aspect. Some other experts consider only entrepreneurs as target clients who have already a reasonable business.

FARZ FOUNDATION

Page 75

Good

Bye Microcredit

Here lies a question whether the poorest who is not the real client of microfinance can contribute any productivity to commercialization or not? The poorest also has at least natural capabilities of productivity, which requires to be explored according to the micro finance scenario of the day. Although the human being has already proved his multidimensional productivity even in the stone ages. It is true that the quality and quantity of productivity varies person to person but it can not be even think that the poorest is totally non productive. Actually this is the real social responsibility to reach at the line of the productivity of the poorest; otherwise all the industry is only beating about the bush in the perspective of poverty alleviation. The confusion of target client is the main cause of making microfinance detract because the industry is claiming about poverty alleviation but changing its direction, whereas the poorest can be a man power at least if one could organize and direct. It is true in the third world countries like Pakistan mostly government could never prove their sincerity to the poor to give them minimum fundamental rights. Government remain fail to carry out their minimum basic needs. Now it is the social responsibility of corporate sector to motivate the authorities towards the vulnerable communities of the society. The microfinance industry is the only one system that has very strong and direct access to the poor and poorest. Now it is a great opportunity to make it social cultural and democratic sense. If microfinance industry ignores the poorest and does not manage the situation it means the claim of poverty alleviation is merely an airy slogan. We will have to also analyze that how much microfinance industry has yet reduce the poverty in the world during last forty and

FARZ FOUNDATION

Page 76

Good

Bye Microcredit

fifty years. It has to clarify that whether microfinance industry is going to fulfill its real social responsibility or it will focus on only profitability. There is another question of possibility of targeting poorest with sustainability. Whether the sustainability can be achieved by targeting the poorest or not? In this contest the indirect targeting way can be adopt like designing a product for those whose engage a particular number of poorest with their businesses and secure their economy and put them on way of productivity. The other modalities can be settled after proper conceptualization and research. The world where animals can play their productive role why not the human being can contribute. Last but not the least point is that the nature is sustaining the human being since the birth of first life but human being is not ready to sustain him self without profitability. ----------------------------------------------------------------------------------------------

FARZ FOUNDATION

Page 77

Good

Bye Microcredit

Microfinance, A Sincere Effort By PMN But late Pakistan is a very abundant country for the yield of microfinance. The main reason is that the actual population of Pakistan consists of about 180 million people, which is anticipated by experts and acknowledged by almost every Pakistani. But the concerned departments still believes it is not more than one hundred and sixty million. Unfortunately, due to a continuous economic instability, governments including present, could never come out of the jigsaw puzzle of â&#x20AC;&#x153;how to resolve and what should be implementedâ&#x20AC;?. The bureau chairs could never concentrate even on a reasonably short and modest period to pursue the core issues of the country, and there is not any serious effort can be seen for setting or achieving any long term objectives to pull out the country from the financial crunch. The chaos of terrorism is another Anaconda of international conspiracy has tightly encircled the innocent people and the system of the country also. All these issues tightened the poor community of Pakistan to the extant of death. Since 2003 the suicidal rate has been getting as high as inflation. The financial instability has crushed the will to live. The society where human being becomes ready to kill or die for the sake

FARZ FOUNDATION

Page 78

Good

Bye Microcredit

of only bread and butter of a few days, one cannot imagine how the life is difficult for poor in Pakistan. According to a survey (The Access To The Finance Study) conducted by the Pakistan Micro Finance Network has revealed that the most of the poor population has trend to save but only for the bread and butter. The same has also discovered that the majority of the people want to save their money but at the same time they donâ&#x20AC;&#x2122;t like to get loans. For their daily needs they depend upon shopkeepers and borrow the grocery as well as other things to have both the ends met. Study exposed the facts and figures about banked and unbanked, the ratio of financial awareness among different segments and the consumer perception has been done also. There are lot of aspects require further studies especially about the poor' borrowing aptitude towards shops and it is necessary to study that whether shop keepers are charging any extra amount on lending or not.

The poverty line is also needed to redraw for the countries like Pakistan because the international poverty score card does not match with the rapidly changing level of scarcity in the country. Mark Schreiner the poverty score card guru, principally agreed on that in a one on one discussion at Bali, Indonesia on Asia Pacific Regional Micro Credit Summit 2008. Actually there is not any profound research and study system in the country to evaluate the sensitivities for resolution and development. Thatâ&#x20AC;&#x2122;s why the relevant departments of the country have nothing to do as such. The country like Pakistan is no

FARZ FOUNDATION

Page 79

Good

Bye Microcredit

doubt, full of resources including human resource but the futuristic approach among the leaders to build the nation and the soil seems lacking at all levels. Who doesn’t know that the whole world is occupied in designing and redesigning the plans and strategies to meet the economic challenges but the Pakistan is still unaware of how many people are unbanked in Pakistan. As the above mentioned survey has been conducted by the Pakistan microfinance network, named “Access to Finance Study-Pakistan” even reveals very attention-grabbing and surprising facts and figures about the financial trends of women towards banking, surprisingly it is as minimum as nothing. This information were represented in a meeting in Islamabad, arranged by Pakistan Micro Finance Network, Headed by the Governor State Bank of Pakistan with the companion ship of Swedish Ambassador in Pakistan and a representative of World Bank. The governor of the State Bank of Pakistan embedded very high spirits of the State Bank of Pakistan regarding importance and growth of microfinance in the country. The finance minister has already made many public announcements to define microfinance sector as an important part of global economy and Pakistan’s as well. It is the first time that the government of Pakistan taking very positive steps for the sector but still needed to pay more and bold attention upon this very area. Within the sector there is a major deficiency of innovative and customized saving products, because it has been a culture of savings for centuries. People especially women have a natural temperament of saving in their housing and with their trustworthy dear ones. Since

FARZ FOUNDATION

Page 80

Good

Bye Microcredit

last twelve years MFIs were focused only on micro credit but now a days they are showing their interest in savings. Although this is a good sign but when till the time they cannot come with creative and tailored saving products while the State Bank of Pakistan has forbidden MFIs to collect savings. There is another very interesting facet is that the women are more familiar with MFIs than commercial banks because the community officers or front line officers of MFIs are working direct with the community within their well defined place and position. This situation must particularly be understand for State Bank of Pakistan, because almost 90% clients of MFIs are women and most of them even don’t know the name of any commercial bank which is authorized to collect savings from them and MFIs are not according to law. The second thing is that the premises of commercial banks are usually situated not at the reachable place for poor and they can not afford to come over to open the accounts and to continue debit credit activities. Although the commercial banks have potential to dig up this market and can get a levelheaded share but they have to understand the psycho political and socio economic conditions as well as requirements of this sector. After a long time the microfinance gurus have able to come to touch only as social scientist, but not as economist. The Pakistan Micro Finance Network has announced the “Code of Conduct”, after understanding the concerns of self respect of this underprivileged and destitute community. Here is the original content regarding “Code of Conduct” released by PMN as mentioned below,

FARZ FOUNDATION

Page 81

Good

Bye Microcredit

Commitment Statement In keeping with the fundamentally consumer-centric nature of microfinance services, microfinance organizations operate with the purpose of creating social benefits and promoting financial inclusion for the low income and previously disenfranchised population. The past few years have seen the microfinance industry grow to become more complex and more closely linked with the mainstream financial sector in Pakistan. As a result of this growth, competition in the sector has increased which is a positive development but can also lead to the use of unethical and illegal practices by organizations in order to gain competitive advantage. Such situations often lead to government intervention to impose stringent regulations in order to curb such practices. However, in the case of microfinance, regulations of this nature often do more harm then good; and invariably detract from the basic goal of microfinance by impeding the creativity and flexibility required for the provision of such services. This â&#x20AC;&#x201C; added to the characteristic vulnerability of recipients of microfinance â&#x20AC;&#x201C; highlights the increasing importance for microfinance institutions to self regulate and ensure that best practices in terms of consumer protection and consumer rights become institutionalized. Therefore, Pakistan Microfinance Network (PMN) has developed a voluntary code of conduct for its members centered on the core values necessary for the provision of microfinance services. By becoming signatories to this code, we, the members of PMN commits to: 1. Adhere to both the letter and spirit of the values and practices outlined in this code.

FARZ FOUNDATION

Page 82

Good

Bye Microcredit

2. Apply this code a. In all categories of member organizations regardless of their constitution (microfinance banks, NGO MFIs, RSPs or CFIs). b. To all types of microfinance activities carried out by us. 3. Promote and strengthen the microfinance movement in the country by providing low-income clients access to mainstream financial services. 4. Conduct our activities by means of fair competition, and not seek competitive advantage through illegal or unethical practices. 5. Display this code prominently in our premises; make copies of it freely and readily available for stakeholders, and put measures in place to ensure compliance. Core Value # 1: Transparency The dissemination of transparent and truthful information to clients is at the heart of microfinance services. Clients deserve to be provided with complete, accurate and understandable information regarding the products offered to them. To adhere to this core value we agree to: 1. Provide the terms and conditions of all our financial services in writing in a language that is understood by the client, avoiding technical and legal terminology to the extent possible. 2. Before provision of services, disclose to clients: a. Written terms and conditions related to opening and operating a deposit account, how it works and the costs to be incurred while using it. b. Written terms and conditions related to a loan, including the Effective service charge applicable, the repayment

FARZ FOUNDATION

Page 83

Good

Bye Microcredit

schedule detailing the period and amounts to be paid in fees, principal and mark-up, and any affiliated products. c. Details related to any and all extra fees and charges that may be applicable to the services (loans, deposits, insurance and payment transfers) provided. d. Details of potential factors which may induce changes in fees and service charges, especially where these changes may impact the repayment schedule. 3. Inform clients if and when there is a change in fees and service charge. This information may be conveyed: a. By letter, phone calls, emails or other personal notices. b. By putting notices in strategic places such as branches, newspapers, notices etc. 4. Educate clients about their responsibilities towards us as clients (payments and otherwise), as well as any and all facets of our services. Core Value # 2: Fair Practices In order to fulfill their core objectives, we believe that microfinance services should be completely devoid of unethical, illegal and/or unfair practices. It is our duty to provide these services to our clients in a manner that is legal, ethical, nondiscriminatory and free of deception. To adhere to this core value we agree to: 1. Incorporate ethical and nondiscriminatory values into our daily operations and act fairly, responsibly and reasonably while conducting microfinance activities.

FARZ FOUNDATION

Page 84

Good

Bye Microcredit

2. Ensure that our services are provided using the most efficient methods possible to enable access to financial services by low income households at a reasonable cost. 3. Act as competent and responsible lenders and make sure that all loans are made based on a sound and thorough assessment of a. Ability of borrowers to repay the loan b. Proof of identity c. Legal borrowing age 4. Never pressurize a client into an agreement if, based on the aforementioned assessment, they feel the client will be unable to fulfill the payback terms of the loan. 5. Carry out energetic pursuit of defaulters but remember to treat customers with dignity and make every attempt possible not to deprive them of their basic survival capacity as a result of loan repayment. 6. Market our products and services in an ethical and legal manner and avoid using illicit, fraudulent and misleading advertisements to wrongfully influence clients. Core Value # 3: Dignified Treatment We are cognizant of the need to be fair, disciplined and respectful in the provision of our services. We realize the necessity of preserving our clientsâ&#x20AC;&#x2122; dignity at all times as well as being respectful of cultural and gender differences. To adhere to this core value we agree to: 1. Provide microfinance services to low income clients regardless of gender (unless so stated in our vision and mission), religion, race, sect or language.

FARZ FOUNDATION

Page 85

Good

Bye Microcredit

2. Avoid inappropriate occasions such as bereavement in the family or other such calamitous occurrences for making calls/visits to collect dues, and waiting for a period of no less than 7 days before making these calls/visits. 3. Interact with clients in an acceptable language and dignified manner and spare no efforts in fostering client confidence and building long term relationships. 4. Maintain decency and decorum during a collection of dues visit to a client and scrupulously avoid any demeanor which would indicate any kind of threat or violence. 5. Be considerate of a client’s need for privacy when they come to us with any queries or problems. Core Value # 4: Privacy and Fair Disclosure We realize that, given the nature of our business, it is our responsibility to safeguard client information provided to us and maintain client privacy and uphold fair disclosure. To adhere to this core value we agree to: 1. Keep personal client information strictly confidential, implement privacy measures with respect to information disclosure and not pass it on to external users – including fellow members – for use in marketing or other such purposes. 2. Explain the purpose of obtaining this information to the client prior to collection. . 3. Not divulge client information to a third party, except in any of the following circumstances: a. client has been informed about such disclosure and permission has been obtained b. it is legally required to do so

FARZ FOUNDATION

Page 86

Good

Bye Microcredit

c. the party in question has been authorized by the client d. this practice is customary amongst financial institutions and available for a close group on reciprocal basis (such as a credit bureau) Core Value # 5: Governance We realize that in order to provide our clients with services that are fair transparent and efficient we must act in accordance with the highest standards of governance and management. To adhere to this core value we agree to: 1. Practice high standards of governance within our organizations and strive to maintain an environment of fairness, integrity and transparency. 2. Ensure that all officers and employees of our organizations are aware of, and adhere to, the values and practices outlined in this code. 3. Mandate our respective internal audit department/division to audit compliance with this code of conduct and submit a report to our Board of Directors at the end of every financial year detailing the extent of compliance, specifically indicating any deviations and reasons thereof. 4. Include a compliance requirement certificate as part of our external audit. Core Value # 6: Client Satisfaction We feel that in order for microfinance services to capitalize on their full potential, formal channels of communication should be in place

FARZ FOUNDATION

Page 87

Good

Bye Microcredit

for clients to provide their feedback and for us to track client satisfaction. To adhere to this core value we agree to: 1. Establish effective and efficient feedback mechanisms. 2. Inform clients about the existence of these mechanisms and how to access them. 3. Make our telephone numbers easily accessible for clients in case they have complaints and/or suggestions. 4. Set up complaint handling systems which will take steps to correct any errors and handle receive complaints speedily and efficiently. 5. Provide details of the external complaint handling process as well as contact numbers for the complaint handling body to the clients in cases where we are unable to resolve the complaints. 6. Conduct a biennial client survey in order to gauge the effectiveness of our practices and client satisfaction levels.

No doubt this is a tremendous effort to strengthen the sector in Pakistan but till the true and sincere implementation, it is just a peace of paper. There must be an appellant court where the accusers and complainant can appeal for their rights. In spite of all haphazard the sector is seemed be on the verge of making progress by leaps and bounds]

------------------------------------------------------------------------

FARZ FOUNDATION

Page 88

Good

Bye Microcredit

FARZ FOUNDATION

Page 89

Good

Bye Microcredit

CHALLENGES TO THE MICROFINANCE INDUSTRY IN PAKISTAN

FARZ FOUNDATION

Page 90

Good

Bye Microcredit

Micro finance industry is almost forty-two years old but in Pakistan It is merely a grooming plant as started from 1982 and still has a number of areas to pay full attention and pull this industry out of problems. Although it has a significant take off but there are so many fogy and mist full aspects waiting for appropriate solutions. The major flaw of this very industry is the concept whether it is a NGO based activity or a commercial institution. This dilemma can be observed generally in the whole world and especially in Pakistan. In this perspective it is not a difficult job to analyse that why it is happening and what are the issues being generated by this. Categorically speaking these were the NGOs, which acquired this project and try to serve the people with the passion of social responsibility, but it generated adverse affects. The basic reason is when a non-commercial organization tries to sell money by calling it financial services and start getting interest with the title of services charges, people took it negative and never accepted the services as poverty support and productivity oriented. With reference to a recently conducted research by Asasah a Micro finance institute of Pakistan, not a single Microfinance institute has even a countable numbers of loyal clients. All clients are acquiring services from every accessible MFI. The role of activist (non-declared intermediary) is another off shoot of this turmoil and the MFIs are still facing helplessness in the field regarding client management relationship. During a social performance audit conducted first time in pakistan by a MFI, the main cause of clientâ&#x20AC;&#x2122;s lack of owner ship towards microfinance industry came out as delinquency .Clients are not ready

FARZ FOUNDATION

Page 91

Good

Bye Microcredit

to accept it as any sort of social service. Their sensitivity becomes stronger when they face a very nasty behaviour during problematic recoveries. They see the very different look of loan officer with flat face soft words but unkind heart. This very contradictive attitude has been taken by the poor clients as a typical conduct of a SAITH or a BUNIA who ever gives money with smile but recovers it by any means. It accurse especially during the days of political or environmental disasters. According to an international microfinance expert from I L O (this is an international phenomena with this industry, even the donors are unhappy). The transformation of Micro Finance institutes to microfinance banks is also at the agenda but sustainability and human recourse is the major obstacle to make it succeed. There is an other issue has been measured of legal steps required by State Bank of Pakistan. Many of microfinance institutes have not legal authority to deal with financial matters like that but in spite of all these irregularities MFIs are busy to increase their out reach. P M N (Pakistan microfinance net work) has taken so many steps to align the system and regulate different channels to make this industry smooth and sustainable especially in the area of human resource regarding capacity building by organizing different training programs. Pakistan microfinance network is also emphasizing on partnership between commercial banks and MFIs. The mutual information sharing system between all MFIs is also on the agenda of Pakistan micro finance network. There is another development can be seen in the area of information the MFIs are transferring their data from manual to digital (micro

FARZ FOUNDATION

Page 92

Good

Bye Microcredit

information system). According to a senior official from PMN the information, sharing system is at the final stage of launch. The united nation had proclaimed 2005 as a year of microfinance with the main objective of raise the public awareness and sharing the information exchange between working people for the poverty alleviation. However, in fact there is a lot of need to improve the pace of work and increase of resources, although the growth rate with the latest figures of 1.5 million clients declared by Pakistan microfinance network is worth able and is an arrow to success. PMN has also a high hope to achieve the target of three million active borrowers till 2010.Increas of outreach may indicate the growth of the industry but the understanding of the clients about the MFIs is still there, which needs a full fledge opinion changing program with serious effort of implementation. -----------------------------------------------------------------------------------------------

FARZ FOUNDATION

Page 93

Good

Bye Microcredit

THE PARTNERSHIP WITH POOR

There is an established principle among all civilized societies that stigma and discrimination should be discouraged at every level and at every caste. For example in the mental health sector, it is strictly banned to call a person suffering from psychological illness a patient and seriously advised to call him or her a client. Also in the health sector there is a continuous struggle to secure people who are HIV positive from stigma and discrimination. Even people living with any sort of handicap like deafness or blindness are typically called special persons and never called handicapped. Another aspect that is, although an ideological facet of my point of view, inevitable to discuss is the dialectical materialism of Marx.

FARZ FOUNDATION

Page 94

Good

Bye Microcredit

According to this theory, there is a big distance between the rich and poor classes and the majority of resources are in the clutches of a few people in the world, who are in fact the ruling class, while the rest of the people are deprived of access to all the facilities they have right to enjoy. This is true with respect to basic necessities. It is the responsibility of every individual, organization and state to provide basic necessities according to their limitations, but my opinion differs partially from Marx. According to my belief every individual should have a right to earn and maintain fairly because the state cannot evaluate and measure creative capability of any genius. For this reason, it cannot implement economic justice regarding extraordinary people in society. When the microfinance field describes the definition of poor individuals and claims to help not assist them, the discrimination begins. It is reality that the ultimate goal of the microfinance industry is sustainability and after that profitability. Without that the industry cannot survive, but it should be transparent and clear that a cup of tea is a cup of tea and a business is a business. In this respect, the microfinance industry has to decide whether a poor person is a needy person seeking help from the resourceful world or simply a customer. There is another question, which is: Is the poor customer not similar to a rich customer, and is that poor customer not purchasing products just as a rich customer would do so? Then why is the industry insisting to help the poor? This is only a difference in product design, the design which is principally different from macro product.

FARZ FOUNDATION

Page 95

Good

Bye Microcredit

The claim to poverty alleviation is an other dilemma to clarify. Poverty is a relative term. Although we are measuring it with tools invented by the non-poor, when we achieve our targets all previous definitions will have to turn into new ones and you must be introduced it according to the new circumstances, scenario and environment. After more than four decades of struggle, the microfinance industry must resolve some basic issues still. In particular, the industry should change its conceptual dimensions and should rise above discriminatory behavior with respect to the poor. If the industry wants to own the claim of poverty alleviation along with the target of sustainability and profitability, then it has to admit that the poor are not only the clients but also the partners. When we discuss helping the poor, we create stigma and discrimination against the poor. We are earning money from them and even then claiming to help them. Actually, the poor are our business partners and we should accept their status as such. The parameters and modalities can be reset. We should give respect and honor to our clients and declare them our partners. By doing that, not only will we achieve lifetime loyalty from the poor, but also we can fill the psychological gap between the working and business classes. The poor will become secure and remain out of the exploitations of the old-fashioned and unsuccessful economic theories as well. -----------------------------------------------------------------------------------------------

FARZ FOUNDATION

Page 96

Good

Bye Microcredit

FUTURE OF MICROFINANCE

Recent floods in Pakistan have further plunged the already reeling economy. The estimation of the total damage will take some time but the need to microfinance the victims are dire as the failure in this sector can create a famine in not too distant a future. The government is already cash-strapped and avoided default the last year with the help of IMF. Another dilemma is the trust deficit due to

FARZ FOUNDATION

Page 97

Good

Bye Microcredit

which the enough aid is not coming and the donors are relying upon the non-governmental bodies. The real challenge is that of rehabilitating the destroyed businesses of the flood victims as through this process we can even fight the hunger and disease by reestablishing their productivity. Pakistan is said to be a predominantly an agricultural economy and it was this sector that has been severely damaged. Through microfinance and SMEs, this damage can effectively be dealt with in a matter next 5 to 10 years. Millions of acres of agri land has presently been under flood waters. And the only redeeming feature is the fertility that the flood will leave behind. Here comes the role of the microfinance and SME but with a difference as the damaged has been caused by various internal and external causes. No doubt this is the time when the investments are taking a very interesting twist from the conventional to Islamic and from microfinance to small medium enterprise as well. Although the various conventional MFIs are shifting their mode of financing also, but they could not have positive results and the mission rift issue is another tragic story, told by these MFIs. As I ever admitted that only the microfinance could reduce the miseries of the vulnerable. However, the sector has to come with a new enthusiasm and an innovative paradigm. As the current scenario of Pakistan demands a well planned agriculture based microfinance or SME financing to ensure the rehabilitation of the flood victim rural community of Pakistan. According to a study conducted by Farz Foundation, 50% population in rural areas of Pakistan earns livelihood from agriculture and 50% from other sources. The people involve in agribusinesses also do live stock as another source of income. While the other 50% population do the businesses like grocery shops, and transport, embroidery along with the labor on daily wages. Instead of group methodology or village banking etc, the product of entrepreneur or SME village through the vehicle of Farz Methodology

FARZ FOUNDATION

Page 98

Good

Bye Microcredit

could have a far wider scope as the earlier methods could not reach out to a considerable number of people. That is the only way to have the long awaited trickle down effect so that it could lend economic stability at a macro level as well through “Twist Up Economy”( Twist up theory emerges as a rejoinder to trickle down theory. It is a course with the notion that the sustained micro and small businesses assure the sustainability of the macro economics. It increases the numbers of consumers and their capability to buy. It also strengthens the markets and supports rich persons to expand their businesses. The Farz Methodology implements Twist Up Economy as its core strategic component). One SME village would economically engage about 7000 persons from without the proposed village. This model could easily be replicated in a matter of 5 to 10 years, as pointed out earlier. G 20’s decision to promote the SMEs could not have come at the more opportune moment. Even President Obama’s emphasis indicates the importance of this method. Now we need to handle it in such a way that the maximum out put could be had in as less a time as possible. One SME village could consist of 100 to 500 families. Now in Pakistan there are thousands of villages whom we can adopt and initiate economic activity over there. We do have the option of building new model villages where livestock, poultry forms, garments and other businesses could be established. They can be given the market linkages for their products. The element of risk is eliminated with ownership of the provider whose staff would oversee the whole activity in the proposed villages. The government can also come forward as the partner through providing land and roads etc.

FARZ FOUNDATION

Page 99

Good

Bye Microcredit

The ownership of business and homes etc will gradually be transferred through diminishing Mudarbah or Murabaha, further mitigating the element of risk. We have entered into very interesting times and the response must be intelligent and effective. It further adds to the responsibility of the World Bank, CGAP IDB and other financial institutions. As far Pakistan is concerned, we need to move quickly before the next harvesting season. Government alone can hardly deliver in this regard. The stability of Pakistan is very important for the rest of the region, because the destabilized Pakistan next to Afghanistan could be a nightmare for the rest of the world.

____________________________________________________

FARZ FOUNDATION

Page 100

Good

Bye Microcredit

FARZ METHODOLOGY THE FIRST ISLAMIC MICROFINANCE BRAND

Poverty certainly emerged as the single most crucial problem lying at the heart of modern day crises despite many unproductive efforts to fight it. Microfinance is an efficient tool to combat distress and community hardship but with little success. There is always room, however, for innovative approaches to microfinance for it to be introduced gainfully to already existing benchmarks. The danger always lies in the fund recipients spending their cash on daily needs, owing to extreme poverty, instead of investing it. What in fact is required is the provision of certain services that may enable the person concerned to become a self-earning unit. So the first and foremost thing in this regard is not to simply extend credit. It is more advisable to do a kind of asset sharing, along with a provision of services which could lead to an economic activity at an individual level. Certain experiences in this regard bore good results. For instance women who were provided with the necessary material and skills are successfully running their businesses of making and selling artificial flowers. What worked was the fact the instead of extending credit, they were provided the raw material along with the competence. What could further be added to that is the provision of health and

FARZ FOUNDATION

Page 101

Good

Bye Microcredit

education facilities to the community so that each individual keeps on learning during this process. By adopting this method, microfinance becomes a well-organized business as well as a community service whereby defaults are greatly reduced. At a time when world economies are shrinking and people at large are losing their jobs, this method could be used to offset the impact of recessions in the poorer world. Whereas government agencies did not meet peopleâ&#x20AC;&#x2122;s expectations and the supply side or trickle-down economic theories are being looked at with suspicion, what is needed is more non-governmental structures to fight this growing menace. Pakistanâ&#x20AC;&#x2122;s GDP is expected to grow by less than 2 percent and its government is facing many other challenges including a war on terror, diminishing its focus on the economy. Here comes the role of economic and social empowerment of the people. So the success of microfinance is the success of the forces struggling for peace and betterment of the country. Recently, Farz Foundation, the First Islamic Microfinance Organization, has completed its two-year pilot project in the area of Shalimar Lahore, Pakistan, in two phases called the Farz Methodology. It enshrines in its philosophy the passage to the relative wellbeing of the person concerned through social as well as economic empowerment. Another technique that this methodology carries is that it does not allow the direct access of the poor and the vulnerable to the hard cash. What is suggested instead is educating the poor along with providing them with necessary tools such as the stuff they needs to initiate an economic activity. Our initial experience was a clear testimony to the potential that this method carries. Our success rate in our projects remained at 80

FARZ FOUNDATION

Page 102

Good

Bye Microcredit

percent despite having a long list of volunteers who were ready to work without compensation in the early stages. What made a clear difference was the realization that microfinance is not a mere business. Different studies suggest that the week impact of different microfinance methodologies already in place demand an innovative microfinance mechanism to be implemented at a large scale. The efforts made to link microfinance with Small and Medium Enterprises (SMEs) and SMEs to Medium Enterprises and so on are still behind the goals they are trying to achieve. The right approach requires the introduction of a business skill, an understanding of the world in which the poor exist and a deeper insight of their limitations. We achieved this by looking at the world through the eyes of the poor. Farz Methodology as an innovative economic mechanism ensures the long-term profitability of microfinance. We need to help the borrower make his business successful. The micro trade cycle technique of Farz can ensure not only the sustainability of the sector but the long-term profitability as well. There are many researches that demonstrate that funds spent and efforts made are being wasted. What the Farz methodology ensures is the maximum possible empowerment through basic health and education without which a micro finance program cannot be a successful. The strategies of AHAN(Aik Hunar Aik Nagar) and SMED(Small Medium Enterprise Development Authority) focus on making the trade facility productive through The capacity building of clients like skill development , business development, training in credit discipline, basic marketing skills, and business feasibility preparation are of paramount importance within Farz, while also bridging Islamic microfinance and Islamic banking.

FARZ FOUNDATION

Page 103

Good

Bye Microcredit

By kick starting an economic activity through the empowerment of the poor with non-financial services as well as financial, we would bring them closer to the institution of microfinance, in a process which in turn is enhancing their productivity and also infuses a sense of responsibility among them. One can achieve success in micro finance by not so much relying on undue compartmentalization and division of work but rather integration. No business, credit facility or financial system can be sustained in isolation. This is the core philosophy of Farz Microfinance Methodology. What goes without saying is the fact that consumption is the key to all types of production. Dwindling consumption means a stalled or hampered productive process. Thriving need-based local markets can become a gateway to micro productivity. At the micro enterprise level there are a lot of things that need to be addressed like the role of the middleman and the wholesalers. Farz methodology emphasizes providing a just economic system for the productive poor according to their needs and requirements. The productive poor will have to be facilitated as a wheel for the international trade cycle. The role of currency should also be minimized and would have to be replaced by income generating kinds like tools and assets, etc. The artificial expansion of businesses or trade should be checked through asset-providing mechanisms. The Farz Methodology achieved positive outcomes in poor neighborhoods like, Chongee Amarsidhu and the Meu Colony in Lahore. Previously about eight micro finance institutions targeted this area and six left by declaring them red (negative) areas. For the first time in Pakistan microfinance is being customized according to cultural and religious considerations simultaneously unlike various prior practices. The Farz Foundation has also launched a savings scheme that requires each member to pool a specific amount on a monthly basis which is given to one member or the other on the basis of a lucky draw. This is a practice known as â&#x20AC;&#x153;community rotating fundsâ&#x20AC;? which develops saving habits and also

FARZ FOUNDATION

Page 104

Good

Bye Microcredit

works as a trust-building measure. What Farz Foundation initially did was to survey some of the poor families and took the responsibility of paying for their children's education. Through further penetration into these areas it was learned that the previous borrowers were lending money at even a higher rate of interest, which defeated the very purpose of the whole exercise. In the future, the foundation intends to provide direct market linkages to eliminate the role of the middleman that will further increase the rate of profit of the homebased women entrepreneurs. As the first Islamic microfinance organization of Pakistan with a fullfledged Islamic vision of trade and business which not only can cater to a huge Muslim market but to other non-Muslims as well, the Farz Foundation has provided an Islamic solution of the non-productive micro loans. The main aim of this exercise is to kick start the demand at a micro level which will initiate an economic activity at the supply side. Even agricultural sectors lie untapped and the efforts made so far did produce desired results. As mentioned earlier, through adequate financing, the expectations assigned to the microfinance sector could easily be fulfilled. At a later stage it wonâ&#x20AC;&#x2122;t even involve a great deal of finances as through market linkages an economic activity would be initiated on credit basis between the venders and sellers and all that would be required is to monitor and guide it to more productive directions. However currently this needs the support from institutions working on the promotion of Islamic or conventional microfinance as a poverty reduction tool. Farz Foundation Also offers the Islamic Microfinance Institutional building, product development services and the implementation of Farz Methodology as A to Z solution to the new players along with the old who have planned the shift. _____________________________________________

FARZ FOUNDATION

Page 105

Good

Bye Microcredit

FARZ FOUNDATION

Page 106