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«The Pakistan Development Review 39 : 4 Part II (Winter 2000) pp. 771–792 NGOs, Micro-finance and Poverty Alleviation: Experience of the Rural Poor ...»

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The Pakistan Development Review

39 : 4 Part II (Winter 2000) pp. 771–792

NGOs, Micro-finance and Poverty Alleviation:

Experience of the Rural Poor in Pakistan



Non-governmental organisations (NGOs) continue to be the global ‘flavour of

the month’ in international development. They are regarded as “outside” actors perceived to work in the interests of the poor, and in the absence of the state, many NGOs have taken on vital role in the provision of basic services to the poor. The institutional and political environment is attuned to privatisation in whatever form it takes. NGOs are another expression of this trend, but in the case of NGOs no real disillusionment phase has yet set in. But still NGOs remain the favoured vehicle for grass-roots involvement and community development in many countries.

The present paper seeks to delineate the role of NGOs in micro finance and study their aggregate impact on poverty reduction in rural Pakistan as a result of micro finance efforts. The paper is organised in four sections. Section I commences with the concepts, promises and limitations of NGOs as a vehicle of micro finance.

Section II summarises the record of performance of NGOs in Pakistan. In particular, the role, achievements and set-backs of two noted NGOs in Pakistan, Agha Khan Rural Support Programme (AKRSP) and National Rural Support Programme (NRSP). Which are studied by examining aggregate impact of these NGOs on poverty reduction as result of their micro finance efforts. Section III examines the poverty profile and presents summary of the role of NGOs in the context of poverty lending and, finally Section IV concludes the analysis and proposes some policy recommendations.



In its simplest form, an NGO is a body of people who come together to provide help to those who fail to accumulate sufficient resources to survive. In its Khalid Mustafa and Zulfiqar Ahmed Gill are associated with the Faculty of Agricultural Economics and Rural Sociology, University of Agriculture, Faisalabad. Toseef Azid is Associate Professor in the Department of Economics, Bahauddin Zakariya University, Multan.

Mustafa, Gill, and Azid most ambitious form, an NGO is a private, not-for-profit institution dedicated to influencing the working structure of government and ensure the greater welfare of all citizens.

NGOs emerged in real numbers only after the second world war, concurrent with the dismantling of former colonies. Many such organisations have evolved from anti-colonial independence movements and are now dedicated to the upliftment of the poor and implicitly recognise that government alone can never solve the problems of poverty in general and of destitutes in particular.

The poor people in the developing world manage to mobilise resources to develop their enterprises and their dwellings rather slowly over time. Provision of credit could enable the poor to leverage their initiative, accelerating the process of building incomes, assets and economic security. However, conventional finance institutions seldom lend down-market to serve the needs of low-income families and women-headed households. They are very often denied access to credit for any purpose, making the discussion of the level of interest rate and other terms of finance irrelevant. Therefore the fundamental problem is not so much of unaffordable terms of loan as the lack of access to credit itself [Mustafa (1992) and Ghate et al. (1992)].

Successful experiences in providing finance to small entrepreneur and producers demonstrate that the poor people, when given access to responsive and timely financial services at market rates, repay their loans and use the proceeds to increase their income and assets. This is not surprising since the only realistic alternative for them is to borrow from informal market at an interest much higher than market rates. Community banks and grassroots savings and credit groups around the world have shown that the micro-enterprise loans can be profitable for borrowers and for the lenders, making micro-finance one of the most effective poverty reducing strategy [Aziz (2000)].

It has been argued that in most organisations designed to provide intermediary services between government, or resource providers for grass-roots development, power tends to be skewed towards the small minority that already holds more resources (usually land). This minority uses its power to pre-empt, for its own use, the bulk of scarce and valuable resources provided by governments. Consequently, the poorest (marginal and landless people) tend to drift away from these organisations because they have nothing to offer them. Then, the clear message for NGO is the importance of involving poor people in the governance and the delivery of the services for which the NGO has been created [Uphoff (1982)].

Two approaches have been advocated on the role of credit in poverty reduction. The supporters of the ‘income-generation approach’ maintain that credit should be provided mainly to the entrepreneurial poor to enable them to finance specific private income-generating activities to increase their revenues, while the proponents of the so-called ‘new minimalist approach’ argue that credit programmes would still be helping the poor fight poverty by giving credit to any poor person NGOs, Micro-finance and Poverty Alleviation 773 who is able to repay a loan without dictating to that person how and on what the loan should be used. Some studies have pointed out that the problem of the nonproductive use of credit, as advocated by the minimalist approach, lies in the fact that by consuming rather than investing their loans, the actions of such borrowers, if imitated by other poor people, could produce a negative impact on the future growth of microcredit [ADB (1999) and Yaron (1992)].

Several NGOs in many countries (e.g. Bangladesh, India and Kenya) have succeeded in reaching the poorest of the poor by devising innovative strategies.

These include the provision of small loans to poor people, especially in rural areas, at full-cost interest rates, without collateral, that are repayable in frequent installments.

Borrowers are organised into groups, which reduces the risk of default. These are also effective mechanisms through which to disseminate valuable information on ways to improve the health, legal rights, sanitation and other relevant concerns of the poor. Above all, many micro-credit programmes have targeted one of the most vulnerable groups in society-women who live in household that own little or no assets. The provision of opportunities for self-employment to these women, have lead to the conclusion in case of many that studies such programmes have significantly increased women’s security, self-confidence and status within the household [HDC (1999) and Narayan (2000)].

The development thinking is now characterised by a more pragmatic and cautious approach by NGOs. But on the government side, there is a reluctant admission to the idea that NGOs can play a useful role in stimulating grassroots involvement of the people in government development planning and implementation.

By collaborating with NGOs, governments can mobilise the support of local people and local resources to ensure that the costs of delivering government-supported development projects are sustainable and appropriate to the circumstances of the intended beneficiaries. This scenario of NGO involvement in development process is characterised by being less conflicting, a reduced adversarial mode of operation, and an advocacy approach to the pursuit of justice and greater resources for the poor [Narayan et al. (1999) and HDC (1999)].


Experience shows that small credits play a significant role in poverty eradication. Also, when these loans are used by women, the benefits have been observed to include better education and food and health care for their families. On the other hand, men have the tendency to utilise a substantial amount of their income outside their homes, on social activities and personal enjoyments.

Rural supports programme (RSP) have been initiated by the Govt. of Pakistan in order to improve the social and economic conditions of the rural masses. The largest among these is the National Rural Support Programme (NRSP) followed by Mustafa, Gill, and Azid the Sindh Rural Support Corporation (SRSC), Balochistan Rural Support Programme (BRSP) and Punjab Rural Support Programme (PRSP). All these follow the successful model of Aga Khan Rural Support Programme (AKRSP) based in Pakistan’s Northern Areas and Chitral. Performance of two of these ProgrammesAga Khan Rural Support Programme (AKRSP) and the National Rural Support Programme (NRSP) is critically assessed in the following pages.

The Aga Khan Rural Support Programme (AKRSP) The Aga Khan Rural Support Programme (AKRSP), a non-profit project initiated by the Aga Khan Foundation, started operating in 1982 to improve the extremely poor socio-economic conditions of about one million inhabitants of Pakistan’s five northern mountain districts. AKRSP derives its success from a two pronged focus on institution-building and community participation.

AKRSP has worked to accomplish its mission through several types of operations, including: (1) organising village-level institutions; (2) funding physical infrastructure projects; (3) promoting natural resource management in agriculture, livestock and forestry; (4) training and human resource development; and (5) marketing and enterprise development. By the end of 1994, 1,834 Village Organisations (VOs) and 763 Women’s Organisations (WOs) had been established with 101, 304 total members. These VOs and WOs covered over two-thirds of the rural households in the programme area. In addition, 1,501 productive physical infrastructure projects had been initiated to the benefit of 85189 households; 986 training courses had been given to villagers, 200 hectares of forest and more than 2,000 forest nurseries had been established; and nearly 2.5 million fruit trees had been planted [HRD and NRSP (1998)].

Since its start and through 1994, the total expenditure of the AKRSP programme has been US$7.4 million. The funds are largely arranged from donors and the Aga Khan Foundation network provided 65 percent of the funds in the programme’s first year, which declined to 30 percent in the 1984–87 period, and to 7 percent in 1991–94 (see Table 1).

The provision of saving and loan services is central to the many other instruments used by AKRSP to accomplish its mission. Savings services have been offered since the programme’s inception, however, AKRSP’s credit operations did not begin until 1989. As of the end of 1995, AKRSP had mobilised $7.5 million in deposits and had $5.6 million in outstanding loans. AKRSP’s financial services reach more than 100,000 households-over-two-thirds of Pakistan’s estimated rural population in the programme areas [World Bank (1996).] Loan and deposit services are not part of every AKRSP activity, however, they are integral parts of VO/WOs. Cumulative (to the end of 1994) loan disbursements totaled Rs 350 million. The outstanding loan portfolio at the end of 1994 was Rs 123 million and the deposit balance was Rs 211 million. As part of Table 1 AKRSP Donor Support, 1982–94 (in US$ 000’) 1982-83 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 Total %

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With the VOCP/WOCP structure, credit operations of AKRSP have been decentralised: VOs and WOs take on the responsibility for approving and issuing loans to members. Frequently, groups delegate loan approval authority to a credit committee consisting of up to seven members. The programme also links loan amounts to savings. The VO/WO can borrow from AKRSP up to a limit—making all loans fully secured by members’ own savings balance, plus that of his or her guarantors when the loan is larger than the borrower’s own savings balance. To be eligible for the programme, groups must also establish a reserve fund, distribute profit proportionately to savings and remunerate officers for their services.

Part of the contract between a community and AKRSP is the formation of a VO and the undertaking by members to make a deposit at every meeting, which is usually semi-monthly. Some VOs agree on a minimum deposit (such as Rs 5) and other allow members to decide upon the amount which can vary over time. In those cases where an equal amount of savings are prescribed, this may be a symbol of solidarity or, less positively, a way to exclude the poorest members of the community. VOs have a membership in the hundreds whereas WOs, which follow the same system, usually have 30–35 members. For both, savings efforts have produced impressive results (see Table 3).

Certain procedures have been used by AKRSP to ensure transparency and also to focus on members’ performance. Individual members are supposed to be informed of their savings balances at each meeting. Members are supposed to be apprised of any changes in the status of their collective savings and investment in a bank time deposit; for example, about the profits or interest earned on these assets, and about any pledges against these that have been used to secure VO/WO borrowings. Final statements of accounts are to be prepared every six months and these have to be submitted to the VO or WO for its approval. Books are to be audited at least once a year by an AKRSP Field Accountant. Although AKRSP core staff have been

–  –  –

entrusted the task for overall guidance and control central records and systems, they often depend upon the records of Village Accountants and the Field Accounts. It was reported that one third of the VO/WOs lacked village account assistance and the Field Accountants were still too few to implement accounting controls effectively [Potter and LeBreton (1992)].

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