Microfinance in Pakistan: Stymied Future?

Microfinance in Pakistan has been the subject of much discussion. It was one of the important initiatives of the last decade, seeking as it did, to reach out to the millions of poor people particularly in the rural areas who lack access to formal mechanisms for financing their needs. Financial and technical support from the ADB and World Bank and leadership from the State Bank of Pakistan helped establish several institutions, most notably the Khushali Bank, as well as put in place a regulatory framework for the sector.

Did all of this work?

If you listen to industry practitioners such as Roshaneh Zafar, founder of Kashf Foundation, there is much to rejoice about. In an interview recently published in the daily Dawn, she outlines Kashf's rise from a small organisation to one that now has over 150 branches and has disbursed over $202m in loans to over 300,000 families. Kashf claims to be a sustainable organisation and its efforts have been lauded and supported by various international organisation. In her interview, Ms. Zafar paints a fairly optimistic picture for the organisation itself, if not the sector.

But independent analysis of the sector and its future is not as rose-tinted. One analysis by Rauf and Mehmood published in the Pakistan Economic and Social Review points out that the sector is charactersied by operational and financial sustainability, the overall cost per borrower is high and increasing, while productivity ratios are low. The outreach and size of the sector is also small and growing slowly, with only 1.14m active borrowers in 2007. The cost per borrower at 32.5% suffers in comparison to 18% in South Asia as a whole.

The study identifies several problems, including overambitious outreach and expansion programs, particularly of the Microfinance Banks (which the study highlights as being the most inefficient) and points to the need for consolidation before expansion. In her interview, Ms. Zafar also points to the impact of the economic downturn as a constraint for growth.

Despite its problems, investment in improving and expanding the microfinance sector in Pakistan is important, given the extremely low coverage of the banking sector of the rural areas. However, there are a few other considerations: one, the firewalling between the social and commercial aspects of microfinance needs to be defined further and understood by all players. Microfinance is a business and should be run like one. Confusing it, as some politicians and bureaucrats tend to do, with alternative pro-poor initiatives such as cash transfer schemes such as the Benazir Income Support Program (BISP), would only exacerbate some of the difficulties the sector faces in terms of policy and political support under populist governments. Lest this be misconstrued, let me state that I believe the cash transfer initiatives like the BISP to be effective short term means of reducing the impact of poverty. Despite issues of poor targeting and potential for rent seeking which Ms. Zafar points out, the BISP offers a complementary mechanism for poverty alleviation. However, it is NOT a business and hence its operational model has to be necessarily different from that of Microfinance institutions. The pressure on MFIs (I use the term here to cover microfinance banks, rural support programs and micfrofinance institutions) is therefore that much greater to raise their efficiency and to become more sustainable. I often get the feeling the sector is dissipated in its efforts, with too many small players. Mergers and consolidation, as well as partnerships may be the way forward.

There is another angle to the need for strengthening MFIs: social enterpreneurship. In order to promote the concept in the rural areas, MFIs would need to be able to support entrepreneurs through microloans and other products like microinsurance. At the moment, that is an untapped, virgin market but one which will hopefully come under the radar of the MFIs sooner than later.

Nestle Pakistan Talks CSR

Pakistan is the world's fourth largest milk producer so its understandable that Nestle has such a large dairy operation in the country. Nestle not only has a community-based milk purchase system which entails collection of milk twice a day from over 150,000 dairy farmers, but has also a program in collaboration with UNDP to train over 4000 women livestock workers in rural Punjab, Pakistan's largest province, in primary animal healthcare. Nestle also has several other CSR programs ongoing.

More recently, Nestle has come under immense fire due to its bungling of the 'no logo fiasco' on Facebook, which really does amaze one as to how wrong even the best of corporate entities can go when dealing with the consumers and also how poorly some large corporations understand the new social media.

Eversince, Nestle has been trying to do damage control. And although not directly aimed at addressing the logo (or no logo) fiasco, this podcast of an interview with some senior Nestle Pakistan executives, makes for interesting hearing. Have a listen.

Calls for Stronger Monitoring of the Extractive Industry

Participants at a recent conference on the oil and gas sectors called for stronger legislation that empowers the government for assuming a stronger role in monitoring of extractive practices in these sectors. The range of recommendations was quite diverse and included providing provincial and local governments with a enhanced role in development of projects in their geographical jurisdictions, better oversight of CSR fund uses and reduction in 'payments' (read bribes) to fedual lords.

The oil and gas sector is an important part of the Pakistan economy, attracting substantial Foreign Direct Investment ($612m in 2008-2009). By most accounts, there is huge potential for expanding the size of this contribution and the Government has taken several measures to promote further investments including allowing for 100% foreign equity, easy repatriation of profits etc. (see www.boi.gov.pk for details). For all these efforts, critics including the Oxfam supported Participatory Development Initiative have argued that the extractive industry regularly and blatantly violates provisions for CSR as contained in the Petroleum Concession Agreements, which legally bind companies in the sector to undertake CSR activities in the regions where they are extracting oil and/or gas.

Civil society discontent against the extractive industry, both in terms of its impact on the environment and its implications for local population, is not limited to Pakistan and the sector has been at the centre of much heated debate and resulting in the Extractive Industries Transparency Initiaive, a global call for action for responsible practices, established in 2003 and which outlines a set of principles for the industry to follow. Pakistan, despite its sizeable sector, is not a part of the EITI and it's about time that it should.

No Child's Play: Tackling Child Labour in Pakistan

The serious issue of child labour is as multifaceted as it is serious. It follows then that resolving this issue requires concerted, often collaborative and always non-sequential effort from several stakeholders across the public, private and civil society sectors. These efforts have a new entrant: the Federal and Provincial Ombudsmen in Pakistan. In partnership with a wonderful team at UNICEF Pakistan, I was privileged to have led the initiative of establishing a Children's Complaint Office as part of the institution of the Federal Ombudsman of Pakistan and later in the offices of the Sindh Ombudsman and Punjab Ombudsman. These Child Ombudsmen offices will help protect and promote child rights and fill a massive void in the justice system by providing access to children to have their grievances redressed. Hitherto, the only recourse was to approach the courts, which are largely inaccesible to children, costly and time consuming. The Ombudsmen, by their very nature, resolve disputes and redress rights through mediation and are therefore quicker and their services are free to the public. The Federal Ombudsman has already started offering an online complaint service and others will follow this model soon. Moreover, the Child Ombudsmen will address systemic issues and hold public agencies accountable for their acts of omission or commission in relation to child rights.

The Punjab Ombudsman recently held an official launch of its services in Lahore. The occasion served to remind everyone of some grim facts: there are over 3m child labourers in Pakistan; the enforcement of existing laws and compliance with the UN Convention on Child Rights is poor; and agencies dealing with child rights tend to under-resourced and on the fringes of priority of policy makers. Although not discussed at the event, one also has to realise that the Child Ombudsmen's jurisdiction does not extend to private sector organisations. In that respect, its work on child labour will be focused on holding public agencies accountable for their actions to prevent and reduce child labour, including in the private sector.

Ofcourse, child labour continues to be tackled by other stakeholders. Ever since Life Magazine broke the story in 1996 about Nike using child labour to produce its footballs in Pakistan, Pakistan has come under scrutiny. Nike owned up to its mistake and has since launched a rehabilitation program and now requires its supply chain vendors to not employ any child labour and if they do, to take him/her out of the factory, provide education and re-hire them only when they were legally employable. The story scarred both Nike and Pakistan.

Subsequently, the ILO in Pakistan has implemented several industry specific and broad based projects, aimed at reducing child labour. These projects have had strong allies in the respective industries and have helped clean up the country's image a tad, if not remove the scourge of child labour.

Two issues arise from this overview: one, to address child labour issues in private sector organisations, what should be done? Establish private sector Ombudsmen or extend the jurisdiction of the public sector ones? Get the SECP involved through its Code of Corporate Governance? And what about using SMEDA to tackle this issue as a priority?; and two, what steps can or should companies take to prevent use of child labour not only in their own factories, but also down their supply chains? Export-driven industries have to meet certification requirements from buyers, but what about companies catering to domestic markets? The new National Child Protection Policy is under finalisation, but it too does not offer any answers to either of these issues. The UN Global Compact's Pakistan network also has little to show for its efforts on this front, although it counts the Employers Federation of Pakistan as a member.

The search for solutions to this issue, it seems, shall continue.

Bringing Better Corporate Governance on Board

Absence of adequate professional capacity is a persistent bane for efforts aimed at developing a strong corporate sector anywhere and Pakistan is no exception. Along with cross-representation of family members on Boards which tends to lead to conflicts of interest and to a hazy corporate culture, the fact that members on Boards of Directors are not always up to speed on the cutting edge of knowledge, international best practice and even the country's own laws and regulations, weakens corporate governance. The promulgation and enforcement by the SECP of the Code of Corporate Governance in 2002 has helped raise standards but has a supply-side bias and does not stress capacity building of Board members enough. Now it seems the regulators may finally be taking steps to correct this.

According to a report in the daily News, the Karachi Stock Exchange has been directed by the Securities and Exchange Commission of Pakistan to amend its listing regulations to include a provision that members of the Board must possess a certification under a Board Development Series, an internationally accredited Director Education Program developed by the Pakistan Institute of Corporate Governance. This regulation would be implemented in phases, with at least one member of the Board to have this certification before 30 June 2011 and thereafter, every following year minimum one director on the board "shall acquire the said certification under this programme".

The Pakistan Institute of Corporate Governance was established a few years back as a not-for-profit company and hopes that this Business Development Series, which is accredited by RiskMetrics Group of USA, and allows for due recognition by rating companies when evaluating the participant’s organization, will strengthen corporate governance in Pakistan.

Time will be the judge of whether this aim is met.