Micro-credit Pakistani, Buy Only Pakistani
When individuals and businesses cut down on the quantum of credit they take from the financial institutions, that is a clear danger signal for the economy. On the other hand, acquiring of loans beyond one’s ability to pay back is far more lethal. Defaults lead to liquidity crunch, threatening the viability of the financial institutions. Failing banks are a luxury no economy can afford. In Pakistan, there is an attitude of mind that makes even those with the ability to pay back seem to think that it is their God-given right not to do so. Prudential regulations were on the books of the State Bank of Pakistan (SBP), after Oct 12, 1999 there was greater compliance. Banks are now far more prudent over the past year in lending, collateral is looked at with greater cynosure. With a host of “untouchable” defaulters being “Nabbed”, businesses have become far more conservative in borrowing. As a cumulative result, economic activity is far below the optimum levels which one would term satisfactory for future development. Only when entrepreneurs begin to take calculated risks is such activity generated. With huge loans souring in the manufacturing sector, cash-starved financial institutions generally became gun-shy in giving out large credits, as the cash situation improves lending has not reached commensurate levels. To break out of this Catch-22 situation, i.e. to become profitable banks must lend monies and to avoid losses loans must be carefully engineered, some of the banks have created a new division as a sort of an investment arm, calling it the “Structured Finance Unit” (SFU). As opposed to the activities of the SFU, almost all financial institutions are turning to smaller loans/credits reaching out to a greater number of people. Citibank was a pioneer in consumer credit but indifferent management caused panic situations. And other financial institutions are rapidly catching up. “Khushali” micro-credit bank has been created in the public sector, whether it is effective on the “Grameen Bank” pattern has yet to be seen. Another way of indirect micro-credit is the credit card business, again pioneered on a mass basis by Citibank. Whereas leasing, securitization, etc are among the modes for financing vehicles, equipment, etc, the new financial buzzword is small-credit to individual consumers. Consumer hire/purchase activity of the middle-class fired the cylinders of the economies of the developed world. This easy access to small credit has now finally arrived in the heart of the Third World and has been grasped at with both hands by South Asia’s aspiring millions. One note of caution, if we do not exercise prudence in regulating the micro-credit idea, it can work as a poison pill that will destroy the economy.
Micro-credit is a handy way for the consumer to pay for such items that may be beyond his/her ability to pay in one go. Micro-credit payments range from 12 monthly instalments to 18 to 36 and even more. For the salaried class it is perhaps the only means to pay for basic household “luxury” items such as Refrigerators, TV sets, washing machines, microwave ovens, deep freezers, etc. Obviously paying in instalments is convenient for those who do not have great liquidity but even the cash-rich use this as a means. Micro-credit provides easy access to consumers for purchase of electronics and electrical products hitherto beyond the financial reach of many. Banks find it far less risky because the default amounts involved are small enough to be written off without the quantum of financial pain that the default of a collapsed industry brings. We live in a culture saddled with the evil of the dowry system, access to instalment plans are God-sent for the poor families who now have the opportunity to give reasonable dowries to their daughters on marriage, paying for that “privilege” by an instalment plan with moderate interest/mark-up in place of being beholden for life to the town/village moneylender, who charge an exorbitant amount on the principal amount as interest. Much of the evil in the land is because debt-ridden families have virtually been held hostage in the rural areas, being used as “bonded labour” because they could not pay back the exorbitant interest which multiplies at a compound rate. Micro-credit gives a ray of hope to the really downtrodden but in practical terms the salaried middle class stand to gain most. Micro-credit schemes are more than welcome to fulfill the aspirations of the large middle-class population without being forced to lose an arm or a leg. They make up a significant proportion of the population of the countries of South Asia.
Most of the population of the developing countries aspire for those manufactured products for their domestic use which they see in monies/TV screens being used in a routine manner in the developed world. In the 50s and 60s the western world was replaced by Japan as a source for vehicles, electronics and electrical goods for South Asia. In the 80s China emerged as the major player in Asia, ranking with Japan, the four Tigers and with the countries of ASEAN, Singapore being far ahead of the others in its region. While Pakistan made some effort at consumer manufacturing, the proximity of Dubai as a cheap conduit for smuggled goods virtually sabotaged us economically. When goods are available at cheaper than the landed rates, what is the problem? Over the years a corrupt bureaucracy conspired with smugglers to keep Pakistan as only a recipient/transit point for such goods, instead of a manufacturer country by the simple expedient of keeping duties high on components. The Afghan war and the heroin trade further complicated the situation with an unholy alliance to keep Pakistan a large debt-ridden consumer market. These smugglers have powerful connections throughout the hierarchy in Pakistan. In the 60s, vehicles had started to be assembled in Pakistan, electronics and electrical goods were being manufactured in small quantities, Bhutto’s mad rush to nationalization of the early 70s put paid to these efforts to achieve self-sustenance in a burgeoning consumer economy.
When we give micro-credit today to a citizen consumer of Pakistan, who are the beneficiaries? Barring the advantage to a few Pakistani products, in actual terms we are supporting electronic manufacturing factories in Japan, Malaysia, Singapore, China, etc. This allows them to force-multiply their profit and pay their labour better wages for each unit manufactured by them. We are in fact in double jeopardy, for each item imported from abroad, Pakistan first pays in foreign exchange and then again when our micro-credit is utilised for hire/purchase by domestic consumers, Pakistan gets nothing at all. Not only that, only 20-25% of these “imported” goods come through regular channels, i.e. paying duty after customs check, etc. the rest 75-80% is smuggled into the Pakistani market (and beyond) via Dubai. The small percentage that is imported is a deliberate facade to avoid checking on the open sales of smuggled electronic goods in all the markets of the country. Whenever a consumer buys an imported item on micro-credit, more often than not (1) he is financing some smuggler or the other and (2) Pakistan is paying through its nose in foreign exchange, a form of “foreign aid” in directly subsidizing the labour force throughout East Asia. If this is not madness, what is?
Micro-credit scheme must only be used to promote locally manufactured goods and a reasonable formula can be marked out as regards a phased deletion programme. SBP can ensure this through Prudential Regulations. Whatever the quantum of imported material used in the manufacture of goods, the fact that assembly/manufacture will be in Pakistan, will mean Pakistani labour will get employment. Our bureaucrats in the Ministry of Finance would have us believe that high duties gives protection to the local industries, that is in fact a bogey, deliberately engineered to make smuggling lucrative. For imported goods the custom duties should not be more 15-18% i.e. to cover the cost that the smuggler would spend in transportation bribes, etc before delivering the goods to the retail shops throughout Pakistan. To encourage local industry the custom duties on components should be brought down to zero. Without the “margins” of smuggling, importers would be encouraged to bring in the goods on regular basis through custom posts and pay the normal duties while avoiding the risks associated with smuggling.
A micro-credit scheme must be nationally oriented insofar that it should support local industry and create employment opportunities domestically. We must break the shackles of economic serfdom by pursuing pragmatic policies of using Pakistani micro-credit to buy only Pakistani manufactured products.
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