Muhammad Anwar Bhatti & Zenebe Uraguchi
Financial inclusion ensures the ease of access, availability and usage of formal and informal financial products and services for all members of a society. It is widely acknowledged that financial inclusion can effectively address the bottlenecks that prevent poor women (and men) from reaching their potential. Enabling disadvantaged women to benefit from financial inclusion has been more challenging, particularly in communities dominated by powerful middlemen where women have marginal roles and restricted rights. This is what the Livelihood Hindukush Programme (LPH) in Islampur valley of District Swat, Pakistan tried to sustainably address.
The context and main constraints
For LPH, it was important to build local capacities and service delivery systems around specific resources and products for empowering communities to deal independently with various service providers. One of the potential economic activity in the area is the handloom sector, the main source of income for people living in poverty, and especially for women. Women’s mobility is confined to the home and handloom weaving is an appropriate income generation activity, allowing work within the home.
The challenge was most of the skilled women did not have capital and therefore they were bound to middlemen called Naik, who own the handlooms. Even if it was possible to take a loan from banks, they were generally not interested in so doing as repaying a loan with interest is considered to be against their religion. In this context, the project sought to introduce an Islamic model of financing.
Furthermore, floods and militancy badly hampered the smooth flow of business in Swat. Militancy in particular had a very telling effect on the livelihood of most of the people related either directly or indirectly to their daily business.
The assessment by the project found out that underperformance of the financial sector was linked to other key functions. Marketing was weak as transactions were made verbally, and strong actors in the handloom sector (e.g. wholesalers and retailers) did not purchase products in cash. This created difficulties for weavers in selling their products and get paid in cash. For their daily needs, weavers took loans from the Naik in the form of grocery or cash in case of emergency; they paid back in-kind giving to the Naik shawls at lower rate.
Furthermore, production season starts in August/September and remains until December/January. During the rest of the months, production either halts or middleman with capital continue producing and maintaining stocks for the next season. Raw material dealers also import mixed woollen yarn of low quality, which did not bring good income. Similarly, there was no local facility (spinning unit) that could produce woollen yarn obtained from sheep for weavers.
Islamic finance has its core principles based on risk sharing, asset based/backed finance and strong emphasis on social justice. However, availability of micro finance is not the only issue to tackle with but the acceptance of interest based financing was also more challenging in the project area.
The model stimulated by the project therefore called for risk sharing in which lenders receive their returns in line with the risk they bear, rather than receiving fixed payments regardless of the outcome of the investment, which is the case for “conventional finance” – a risk-transfer system.
The project started experimenting with ten weaver families by providing them a “matching grant” for purchasing their own handlooms. Results of eight handlooms were quite remarkable, prompting other entrepreneurs to ask for provision of more handlooms. The project could have attempted to tackle the main problem by continuously providing matching grants, information and training to the weavers. Even if successful, the interventions could lead to one-time gains, but the process of change would likely have stopped when the project ended.
Strategy and action
The focus of the project’s strategy was making the financial system, particularly the development and strengthening of functions around the system, works better – that is, enabling the system to respond to the demands of weavers and enhance their competitiveness in the market. The project looked around for different micro finance institutions fulfilling two key principles: interest free financing and financing based on cash flow of the business. After a thorough process, Asasah was identified as a partner. Three types of products were developed: musharaka (partnership for working capital); murahaba (asset based financing); and Qarz-e-Hasna (benevolent loan exclusively for marginalised women and widows).
The main difficulties encountered in this process were:
- Initially, the handloom weavers had understood the offer as a conventional mode of financing, but after thorough orientation in the form of training sessions, they realised that it was basically a partnership on profit and loss basis.
- Micro finance institutions were reluctant to come forward as a result of previous experiences of poor loan recovery (due to various disasters in the area).
- Weavers were used to a project approach and considered Assasah as a project, not a market actor – meaning that they did not initially think they had to return the loan.
The monitoring system of the project showed that the financial system was less prone to crisis (e.g. default) because its risk-sharing feature encouraged better risk management on the part of both financial service providers and users (weavers). Case studies also indicated that there was a shift in attitude, confidence, and entrepreneurship of weavers. A number of women reported, including those who belong to jolah gaans (a lower caste), financial independence, and increased capacity and opportunity to diversify their livelihoods. Income of households on average increased by 60%.
The partnership on profit and loss basis has increased reaching more women. Indeed, the process demands high time investment in order to reach women; house to house visits must be made by the financial service providers to collect loan repayments. Disbursement is made on a family basis and thus the whole family is involved in making the partnership profitable. Management of the daily expenses at family level is possible due to various training (record keeping, financial literacy).
Improved financial literacy has contributed to capacities to acquire business entrepreneurship skills to make better-informed financial decisions and contribute to their well-being. Compared to the problem before the intervention of the project, most women are no longer reactive and they responded well to immediate problems and needs with enough time to consider options, trade-offs and longer-term consequences of over-indebtedness and erosion of assets.
The LPH project understands sustainability and ultimately scale of results/impacts to come through encouraging behavioural changes among those with commercial or institutional durability. In this sense, the project is a temporary facilitator upon whom actors in the financial sector should not begin to rely. As part of this “facilitation” role, the project identified supplementary actions in order to stimulate more changes in order for the successful practices to spread and strengthen post-pilot:
- A women’s Market Development Forum (MDF) is planned as women cannot sit with men in community level meetings
- Up-scaling in adjacent areas where the handloom sector is relevant and offers opportunities in terms of better income
- Introduction of other Islamic micro financing products by Assasah
- Capacity building of Assasah staff and clients on different Islamic micro financing products
Muhammad Anwar Bhatti, an Agriculture Economist, is the National Programme Officer in the Local Economic Development domain of Intercooperation Pakistan. Bhatti has a wide range of practical knowledge gained in the past 18 years working for a number of development organisations across different regions of Pakistan. He has extensively been involved in designing and implementing projects applying Market Systems Development (MSD) approach.
Zenebe Uraguchi is a development economist with multi-country experience working for a multinational private company, an international development bank and a research institute. He currently works with HELVETAS Swiss Intercooperation, based in Switzerland, as Programme Coordinator for Eastern Europe and Senior Advisor in market systems development.