Financial inclusion or confusion in Sahiwal

It seems that National Financial Inclusion Strategy (NFIS) launched by the State Bank in May 2015 is going nowhere.

The city of Sahiwal is the headquarter of an Administrative Division by the same name in Punjab. Walking through its streets the other day gave one the feeling that the next door Harappa had better streets some 3,500 years before Christ. The environment is polluted by the coal fired power plant and the maize fields around the city are being encroached by the real estate mafia. In the markets around these streets are seen the wretched of the earth trying to eke out an existence. A father and son vending samosas and potato chips, a mother and daughter managing a tandoor, boys and girls running hair and beauty salons and electronic copy-paste shops are some of the beneficiaries of micro loans provided by the National Rural Support Programme. These are really small loans ranging from Rs30,000 to Rs75,000. In the bazaar, however, the access to the interest free loan scheme launched with great fanfare is being eagerly awaited. The excitement is not just about zero interest rate. It is also about the size of the Tier 1 loan meant for the poor and marginalised with no collateral to offer. At up to Rs500,000, it is about seven times the upper limit set by the nonbank microfinance institutions like the NRSP. Such populist schemes have a history of sudden endings. But they have had the long run impact of gradually de-sustaining the microfinance institutions. Most are spending more time in recovering past loans than extending new ones. With the discount rate touching historic heights, the mark up charged is even higher at 36%. The borrowers are waiting to secure interest free loans from the PM scheme to repay the loans from the microfinance institutions.

It seems that the National Financial Inclusion Strategy (NFIS) launched by the State Bank in May 2015 is going nowhere. Like all donor-funded initiatives disregarding local wisdom, this World Bank-assisted project envisions that “individuals and firms can access and use a range of quality payments, savings, credit, and insurance services which meet their needs with dignity and fairness.” It targeted to expand, by 2020, financial access to at least 50 per cent of adults and increase adult females with formal accounts from 2.9% to 25%. Another target — 20 million active digital transaction accounts within a period of five years — was added in 2018. A line of credit was provided to Microfinance Banks (MFBs) and Microfinance Institutions including Non-Bank Finance Companies (NBFCs) for on-lending to micro borrowers. The government has not done any evaluation of NFIS, although the project has ended with a “moderately satisfactory” performance. Recently, the government requested an extension with some restructuring to prioritise improving access to microfinance, especially in the flood-affected areas where 18% of the micro borrowers are located. This was the only component that was fully disbursed. The achievement was largely because of the nonbank institutions. These institutions do better due to deep penetration into communities that ensures high recovery rates. In comparison, the MFBs wait for the customers like the ordinary banks rather than reaching out to them. Little wonder, all MFBs are struggling to survive. Despite their poor performance, policies and projects prefer these institutions over NBFCs.

Impressions gathered in Sahiwal suggest that short-lived interest-free packages and a bias towards MFBs throw sand in the oil of community based NBFCs. In the process, the most efficient and effective enablers of financial inclusion are left lurching. One cannot emphasise enough that the neglect undermines the ultimate objective of poverty reduction, especially in rural and remote areas of the country.

Published in The Express Tribune, May 26^th, 2023.

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