High food prices threaten existence of microfinance
Thursday, May 08, 2008
LAHORE: High food rates threaten the existence of microfinance institutions. Beneficiaries have to bear a 40 to 60 per cent hike in food prices, so they
find themselves unable to service their micro-loans. Now food consumes the major proportion of their budget.
Even government statistics reveal that prior to the hike in food rates, an average Pakistani consumed 42 per cent of the monthly budget on food. For poorer segments of the society, food accounted for 60-80 per cent of the total monthly expenditures of a family.
Micro loans are provided to the poor to facilitate them in earning some additional amount to supplement their regular incomes. The poor work for over 12 hours a day to service the micro-credit, and at the same time earn some additional income from the loan that carries a mark-up of up to 24 per cent.
Now after the increase in food prices, the poor, particularly those residing in urban areas would not be able to afford three square meals. Now, instead of having 40-20 per cent of their income spared after food consumption for everything else, they would be left with none.
Even the best-case economic scenario in the country fails to address the challenge to microfinance. In fact, it cannot even address the pain of individual borrowers, which are the ones hit hardest by the food crisis.
Experts point out that the basic approach of the government about the factors that cause poverty is flawed. They said that it is emphasised on all forums, the people are in a poverty trap because of poor health, poor education and poor infrastructure. These factors are in fact the final outcome of bad planning, corruption, and ineffective execution that is hindering development in Pakistan.
Governments, international agencies and donors have spent billions of dollars to address poverty. For example, successive governments in Pakistan have spent significant funds on subsidies (for electricity, fertiliser, fuels, etc.), food rations, price supports, land allocation/distribution, job training and financial assistance for initiatives in agriculture and small businesses.
The beneficiaries in most of the cases have usually been corrupt officials who manage and distribute funds, and landlords and powerbrokers who directly or indirectly extract benefits for themselves. Many poor farmers now do not have the resources to cultivate their own land. They depend on informal lenders that know how to recover money not only from the borrower, but also from his next generation. This is in fact, is the main reason of their poverty. Micro-credit was a ray of hope for these poor.
The assumption is that poor people can be rescued quickly and easily with a modicum of money. Micro-credit is intended mainly for starting or expanding small businesses run by borrowers. The claim is that micro-credit (loans of around $100) has lifted tens of millions out of poverty in the developing world. However, assertions that more than 90 per cent of the people who receive micro-credit are poor, that most of them succeed in businesses started with these loans, and that they repay the loans at 24 per cent annual interest or higher, go unchallenged.
So far, there has not been any outcry on the high rate of interest. The poor do not have any voice in, or understanding of, financial markets. They are happy to get loans to meet personal emergencies such as expenses toward surgery, marriage or dowry, or to pay off financial obligations to local money lenders who charge even higher rates. Micro-credit intermediaries claim that this is social entrepreneurship, and not living on the backs of the poor.
However the extraordinary increase in food rates would change the perception of poor borrowers about micro-credit. Their first priority would be to feed their family, with high interest rates only a haunting concern. The micro-credit institutions might for the first time face large-scale defaults, which might threaten their existence.
High food prices threaten existence of microfinance
