Non-Farm Loans in Rural Sector

Artisans working in cottage and small industries and other skilled labour in the rural sector, have negligible access to institutional credit. Purchasers of the goods produced by them and the middlemen in the market provide production credit, but buy the goods at exploitatively cheap prices. The rural labour are thus deprived of the full benefits of their hard work. Although the State Bank launched schemes for small loans for business and industry, the banks refrained from entering into small-scale operations. Cooperatives, which could have been an ideal institution to serve the small artisans, remained ineffective. Specialised credit institutions for financing income-generating activities of the rural poor, have not been developed in Pakistan so far.

A number of neighbouring countries, especially Bangladesh, Nepal and Sri Lanka, have established credit institutions for this purpose. These countries have adopted the philosophy that the rural poor are a good credit risk, especially if they are organised convenient sized, homogenous groups of those working near each other and preferably having the same occupation. Loans given to the group members are guaranteed by other members, thus placing them under moral, social and legal pressure against faulting in repayments. The same principle has been adopted by the FAO-sponsored group loan schemes with the difference that the loans are given to groups and not to individuals, and all the members are jointly responsible for their repayment. Grameen Bank project of Bangladesh was started as a small project in two villages. Initially, the credit operations were linked to two banks; Krishna Bank (Pakistan’s ADBP) and Janta Bank (former UBL). With the expansion of the project and its countrywide acceptability, an independent bank (Grameen Bank) was established. Majority of its shareholders are the rural poor themselves. In Nepal, the FAO-sponsored small farmers development project (SFDP) was started in the early 1970s. Its groups were linked with the cooperatives. At present, the production credit for rural women (PCRW) forms the major project in this sector. Its credit operations  have  been  linked  with  designated  commercial banks and also the Agricultural Development Bank of Nepal.

Besides helping the rural poor in obtaining credit facilities essential for improving their income-generating activities, the Nepalese PCRW and the Grameen Bank projects have, as a basic requirement, inculcated the habit of compulsory regular weekly / monthly savings amongst the group members. This has improved their capital base for raising loans and also given them the moral boost of being the owners of ever-increasing savings. The feeling that they are no longer paupers has changed their moral fibre and given them the confidence to continue their march towards social cohesion and prosperity. Their social status has also improved.

The World Bank, IFAD and ADB tried to assist Pakistan with a project for introducing group loaning system for the benefits of the rural poor. ADBP was designated as the main recipient of the foreign loan, valuing $150 million. The group loans, i.e. loans to members on the guarantee of all other members in the group, were to be disbursed directly by the ADBP, by organising group itself, or through groups developed by approved NGOs. A portion of the loan, (especially the IFAD component) was to be used for loaning to women. Unfortunately, the project had to be scrapped, mainly due to the reluctance of the ADBP to adopt group guarantees as an acceptable security for its loans. Pakistan has, therefore, neither developed a viable credit institution for loans to the rural poor, nor has accepted the group loaning methodology, employed most successfully by its neighbouring countries.

Another attempt to promote group loaning system in Pakistan was made by the UNIFEM (United Nations Fund for the Development of Women). It funded a number of study tours for administrators, planners, bankers and NGO representatives to Nepal, Bangladesh and Sri Lanka. These visits were intended to provide firsthand information on workable credit institutions so that Pakistan could suitably adopt successful models for its own rural poor. So far, there are hardly any visible ground results.

By far the most successful amongst the social and economic development programmes in Pakistan, for the rural poor, is the  Aga Khan Rural Support Programme (AKRSP). It started in Gilgit in 1982, and was later extended to Skardu and Chitral. The programme aims at building the infrastructure for at least one social service project, in each village, such as construction of schools, health centres, irrigation channels and link roads. These projects were funded by the Aga Khan Foundation (Geneva) and through them by other foreign donors. The project, therefore, has had no dearth of development funds. Operationally, the project adopted the group formation technique, though initially, each village formed one group. Later, groups of women were separated and of late, more than one group is being formed in each village. The villagers themselves worked as labourers for their village projects. This gave them sufficient income to raise their group savings. The AKRSP placed the group savings in high-in-come yielding investments, which formed a security for loans to the groups and from them to their members. The programme has been successful mainly because of the large savings generated through the village projects.

The AKRSP model is being replicated by three autonomous institutions; the National Rural Support Programme (NRSP) at the centre, the Sarhad Rural Support Corporation (SRSC), and the Balochistan Rural Support Programme (a successor to the Pak-German Help Project). These three corporations lack the basic boosters which were responsible for the success of the AKRSP, namely:

1. Large donor funds for initial infrastructure projects;
2. Large personal savings of members which subsequently formed security of loans for their income-generating activities;    
3. Most coherent religio-social [Aga Khani] village communities;
4. Guidance, support and technical assistance from international donors.

The success of the corporations in Pakistan has, therefore, to be watched with hope and fear. So far, their coverage is limited.

There  are  a  number  of  international  and  bilateral  agencies, such as FAO, Dutch, German and other governments, UNICEF, etc., which are running their own projects to develop income-generating skills and raise income of the rural poor. A large number of NGOs are also operating in this field. The linkage of NGO operations with credit institutions, however, is weak. The coverage of these agencies is not large enough to benefit rural poor throughout the country, as is being done by Grameen Bank and the PCRW.

Source: Poverty Alleviation in Pakistan: Present Scenario and Future Strategy, Mohibul Haq Sahibzada. Republished with permission.