Pakistan’s Microfinance Sector: Rebuilding the flood hit nation

By Anna Reitman and Asma Azmi,

Microfinance Focus, Sep 7, 2010: Pakistan’s torrential floods which were declared as one of the worst-ever disasters of the world by United Nations have submerged a fifth of the country and left more than 6 million of its people homeless.

The number of people suffering from the flooding exceeds 13 million which is reported to be more than the combined total of the 2004 Indian Ocean tsunami, the 2005 Kashmir earthquake and the 2010 Haiti earthquake. International funding for relief work is also not meeting the current levels of rehabilitation needs and there are fears of disease outbreak in standing waters of flooded regions.

Destroying villages, crops, livestock, roads, bridges, and leaving millions hungry, the floods have left a huge task for Pakistan’s microfinance institutions to step forward and provide relief and rehabilitation work in the affected regions. Many MFIs in the country have already started their relief drive and are channelling their efforts to restore livelihoods in the flood affected communities.

Speaking from Pakistan, CEO of the Pakistan Microfinance Network (PMN), Syed Mohsin Ahmed, says the top priority in the short-term is to work with civil society and NGOs to provide assets to clients instead of credit, while microfinance providers work towards the building up of capital for future credit services.

The network is working with donors and the State Bank of Pakistan to refinance clients, establish credit lines with other institutions and engage with creditors. PMN is in talks with the World Bank, UK Aid, USAID and the Asian Development Bank. Initial estimates for write-offs are Rs. 3 billion ($35mn) out of a total outstanding portfolio of Rs. 11 billion ($127mn).

Internationally, the Government of Pakistan is in talks with the IMF to restructure $11 billion in foreign currency debt and, according to a statement from Standard & Poor’s, there is no immediate impact on Pakistan’s sovereign credit rating as a result of large-scale flooding.

Mr. Ahmed added, “We need the West to know that this is a very difficult time for Pakistan, and we will need not just financial, but technical resources as well. We will need international experts to tackle the situation in ensuring proper resources and management.”

Although many microfinance organizations were affected by the floods including Kashf, Punjab Rural Support Programme, National Rural Support Programme, Sarhad Rural Support Programme, Sindh Rural Support Organization, Khush Hali Bank and First Microfinance Bank, these banks are well capitalized and collateralized and have laid foundations for credit facilities after the floods recede.

Tameer Bank for instance is in the process of making post-flood products available after raising funds from local and international sources. According to a statement released by CEO of Tameer Bank, Nadeem Hussain, four types of loans will be made available with expected liquidity requirements of $100 million. They will help provide financial means to buy livestock, support farming, housing loans as well as re-start up loans for business enterprise.

“My view is longer term. People will need to rebuild their lives from scratch. They will need capital for that. Housing loans to rebuild their homes, business start loans for earnings, health insurance, savings programs. The reality is that loans given post disaster have very high default rates because it takes time for people to rebuild their lives. We are working with the State Bank of Pakistan, which is in turn speaking to donors to provide protection for existing loans in affected areas as well as provide incentives in terms of credit protection and interest rate subsidy for issuance of fresh loans” said Mr. Hussain.

Tameer Bank is majority owned by the Norwegian telecommunications firm Telenor, the single biggest corporate donor for flood aid in the country to date. They have donated Rs. 60 million in cash and Rs. 40 million in airtime, goods, supplies and volunteer work.

The sheer scale of the disaster is further exacerbated by politicization of the issue due to on-going territorial conflicts with India over Kashmir and violence in the Northern areas near Afghanistan. Media reports of humanitarian concerns over loss of livelihood in the Indus basin for farming communities are interspersed with claims that the upheaval will strengthen a Taliban-led insurgency.

According to Roshaneh Zafar, Managing Director of Kashf Foundation, banks in the most flooded areas of the Indus basin are not stress-tested to handle the expected 30-40 percent losses in portfolios. The benchmark for banks is five percent and below.

The priorities, according to Zafar, are to give funds for write-offs to clients and institutions. The focus for practitioners should be to protect current portfolios and provide customer service.

Kashf Foundation is already distributing relief packages to 10,000 households in the most affected areas in Khyber Pakhtoonkhwa and South Punjab including Nowshera, Khushab, Bhera, Rahim Yar Khan and Bahawalpur. Its relief drive is estimated to cost US$ 750,000 and Kashf has appealed for generous donation for the drive.

A $ 29 million Reconstruction Fund is also in the offing form the Foundation. It will target 10 severely affected communities (5 in Southern Punjab and 5 in Khyber Pakhtoonkhwa). The average size of the communities would be around 1,500 households or 7,500 individuals. The overall project will therefore cater to 15,000 households or 75,000 individuals.

CFO of Kashf Microfinance Bank, Khalid Kabeer, further warns of mass migration and the resulting implications. “Commodity shortage, families accommodating migrant families and expenditures going up, things will get more complicated.”

The Pakistan floods are starting to attract international attention, but the on-set is slow. The death toll is at 1600 and expected to increase once the floods recede. According to Dr Farshad Rastegar, Founder, President and Chief Executive of Relief International (RI) – a humanitarian relief-to-aid organization with over 300 staff on the ground – public attention, at least in the US is inadequate as a result of low initial mortality rates.

In 2005, earthquakes in Pakistan killed almost 80,000 people immediately and the aftermath left 2 – 2.5 million people in need of aid. Now, ten times that many people are displaced after the floods. He has received reports that RI’s trucks are being attacked by hungry people, an unprecedented situation for the charity.

From the Los Angeles office of Relief International, Rastegar said, “Microfinance can be a strong platform for recovery, but the timing is going to be critical.”

Rastegar says there are obstacles to implementation within Pakistan due to a lack of understanding among different agencies, however, in other devastated regions, such as Darfur in Sudan, RI’s microfinance operations perform well.

In Pakistan, the widespread disruption to transportation and electricity, along with devastation to the agricultural sector means a lengthy rebuilding period that will require financing facilities.

And the faster those facilities are available the better, according to Vice President of Structured Finance, Robert Drumheller, at the Overseas Private Investment Corporation (OPIC) – a Washington based agency that aids private investment in emerging markets.

Speaking from Washington, he said, “Right now, in the middle of a humanitarian disaster priorities are food and shelter for a displaced population but in the next phase, we want to rebuild the economy. Many of our investors are socially conscious and have patient money”.

The Development Bank KfW Entwicklungsbank (Kfw) which has many projects underway in Pakistan is also restructuring them to help the flood victims. The bank in coordination with the German Federal Ministry for Economic Cooperation and Development (BMZ) is presently modifying five projects to adapt them to the current requirements. Projects underway in or near the disaster area are being considered for adaptation. These include projects for infrastructure development, water management and basic healthcare.

One of the Islamic microfinance organizations of Pakistan – Farz Foundation is carrying out relief efforts in 49 villages of Tehsil Atharah Hazari where about ten thousands houses have been destroyed and around 50 to 70 thousand have been severely affected in the floods.

Alongside the provision of foodstuff, the foundation is also providing direly needed medicine as there is a danger of disease outbreak in the affected areas. Through micro and small enterprise the foundation also intends to rehabilitate the livelihood of 70 thousand people.

Humanitarian organization, CARE International is also supporting health teams, mobile clinics and the distribution of emergency supplies in the wake of flooding. Working through a local partner, CARE has conducted eight mobile health clinics in the Swat Valley with a team of 4 doctors and 2 women health visitors. These are in addition to the four Basic Health Units (BHUs) operating in Behrain, Tirat, Mayedmn and Chail where CARE is providing primary health services. The mobile clinics and BHU’s will continue for at least the next four months.

CARE also is transporting emergency stockpiles of tents, shawls, mosquito nets, plastic floor mats, family hygiene kits and kitchen sets in the Swat, Charsaddah and Nowshera districts of Khyber Pakhtunkhwa (KPK). Initial distributions are expected to reach 5,200 people

BRAC, one of the largest development organizations, has also temporarily halted its microfinance and health operations in Khyber-Pakhtunkhwa and is focusing on providing emergency relief. BRAC Pakistan is delivering food packets which contain rice, lentils, flour, and water purification tablets. To combat the threat of diarrheal diseases breaking out, it is distributing Oral Rehydration Solution sachets.

“Many families that we serve have seen their houses washed away. Many houses of our staff members were also washed away. But as a BRAC staff member they can be effective in delivering relief to the families and communities that they serve every day,” said Mr. Faridhur Rahman, BRAC Pakistan CEO.

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