Rejoinder to Ruth David’s piece on Microfinance

Farhat Abbas Shah

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 17th 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 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 didn’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 written-off.  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.
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&hForm=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.