'Make CPEC about the people and then it'll be a game changer,' CEO PPAF

An economist by profession, Qazi Azmat Isa is serving as the Chief Executive Officer at the Pakistan Poverty Alleviation Fund (PPAF). He has previously worked for the World Bank in Pakistan and Afghanistan and at the UNDP. BR Research recently had a detailed sit-down with Mr. Isa in Islamabad. We discussed with him the state of microfinance sector, issues of poverty and inequality, and any role that CPEC can play in community development.
Selected excerpts follow:
BR Research: PPAF has been supporting the microfinance sector for over a decade. Now, after the formation of its Pakistan Microfinance Investment Company (PMIC), where is the sector headed?
Qazi Azmat Isa: A little history is very important. When PPAF started, there was really no microfinance sector: there were only 60,000 borrowers and four microfinance institutions (MFIs). We were very clear that microfinance is a very good instrument, but it is not the solution to poverty. So, we created a company which looked at the social aspects, but also looked at the financial aspects and both go very closely together. Later on, PPAF developed the Poverty Scorecard, which clearly identified people based on poverty levels, and it has since been adopted by the government and donors as well as the BISP. So, we segregated the market such as that microfinance is for those people, who have some business acumen, know where markets are, and they are situated in katchi abadis, but there is no institution willing to lend them money.
Development has been incremental. After 15 years, the sector had touched about four million borrowers and 60 MFIs. We had a regulatory environment which was quite benign. We were not risk averse. We believed in nurturing the process. Fifteen years on, Pakistan is now rated as one of the best microfinance sectors in the world by the Economist Intelligence Unit. In 2012-13 we were rated as third best. Now the ranking has slipped because Pakistan is the fifth-largest country in the world, with a market of about 20 million potential borrowers, but we have coverage of 4 million. We have lost numbers on financial inclusion.
BRR: Is that why the need was felt for a specialized entity such as PMIC?
Isa: We had hit a plateau at 4 million borrowers and we couldn't see more growth unless this sector got a lot more resources. The game plan for PMIC is that we want to go from 4 million to 10 million borrowers in the next five years. We would be touching 50 percent of the market in next five years. It's a bold vision. But I don't think that it is over-ambitious, because there is money already committed to MFIs and they can also raise funds as a private, for-profit entity. MFIs can reach 10 million borrowers in five years.
BRR: How much capital will they need to service the extra 6 million?
Isa: About $3 billion more.
BRR: You have not been a supporter of direct lending to MFIs. Has your thinking evolved over the last three years?
Isa: I haven't wavered in the sense that the institutions have matured significantly. The regulators now feel that because this is attracting a lot of capital, and foreign investment, so it needs to be better regulated and we thought a specialized entity is required.
We have to look at these things as a process, the development of institutions. At certain points in time, certain things are needed. For instance, in the beginning there was hardly any regulation needed, but now the sector has matured and we feel this is the right time to do it.
PMIC has about Rs6 billion in equity: Rs3 billion is from the federal government and Rs3 billion from KfW and DFID. We are now handing over our portfolio of Rs14 billion to the PMIC because we have a non-compete agreement. The Germans and the British and the Pakistanis will not compete against each other and they will not have competing programs which can undermine PMIC. So, we have handed over our portfolio in that spirit. So, that's Rs6 billion, plus Rs14 billion, which is 20 billion. Also on the horizon is about $100 million, so another Rs10 billion will be there in debt. So, you have a PMIC capitalization of about Rs30 billion which makes it an institution that is hitting the ground running. There is already interest from other commercial lenders as well.
BRR: How about local commercial banks? Do they show interest?
Isa: We are also talking to them. So, we are very hopeful that we can meet that target.
BRR: You earlier spoke about segregating the market. Is there some sort of graduation strategy at work to work on poverty alleviation?
Isa: In Pakistan, we fortunately have a very clear and well-structured graduation strategy. We have the social protection safety nets for people who have a poverty score between 0 and 16 on the Poverty Scorecard. Then we have asset transfers and livelihood interventions for those people who fall between 16 and 23. The people below 40 on the score card require interest-free loan schemes, such as the Prime Minister's interest-free loan scheme, which we have been doing for two years and now have 250,000 recipients so far. And then people, who are 40 or above on the Poverty scorecard, graduate to conventional microfinance and microfinance+ facilities. So, we feel we have graduated people once they start becoming clients with PMIC.
Now what we need to do is come together with BISP. It would be a natural partnership, which we are trying to broker. Then we can say that these clients of BISP have graduated from poverty instead of completely relying on handouts. Every society has to support the poorest of the poor. For people who are disabled or for single-female headed households, there has to be a vision to take them out of poverty.
Coming back to microfinance, Pakistan has the highest rates of recovery in the region, even better than Bangladesh or India. There are two Bangladesh NGOs here, BRAC and ASA, and they report that the poor of Pakistan, in spite of climate change and all these other things they have to deal with every day, they have the highest returns in the world. BRAC is working in 44 countries and they confirmed that yes, Pakistan has the highest returns in the world. That is something for us to be proud of.
BRR: But high recoveries may imply that microfinance lenders in Pakistan are overly risk-averse.
Isa: No, I think you are making a fair point, but when I look at the climate, for me it is about the triple bottom line. And that is not just a fancy word to use. I truly believe in it. What is the profile of the client? We did all of this lending without any collateral. We are not risk-averse at all. These are the values we are trying to promote in this venture. Our message is that you are not suddenly becoming Citi Bank. Stay grounded. At the end of the day, you should have first-hand knowledge of the ultimate borrower.
Coming back to your question, we would like you to see that it is not about risk averseness. Commercial banks take collateral; but we don't take collateral. These are things we have to be constantly wary of. We cannot become smug in this because we must ensure our client is doing well. We have to constantly renew this pledge to ourselves that we are serving the people who need our support.
BRR: Then how do you see this situation where individual borrowers currently have to go to multiple financiers in order to fulfill their micro-financing needs?
Isa: That is a very valid observation. The individual probably needs Rs50,000-Rs60,000 and these MFIs are more comfortable with Rs20,000 because they don't want to expose themselves. So, this is an issue, yes, I totally agree with it. It is a difficult path to tread because I don't want to micromanage my institutions. These values are inculcated into them, and I believe we should let them be the judge of the amount to lend. My confidence in you as a businessman comes when I see you doing well. If you had one goat before, and now you have four or five, I will feel comfortable lending you more.
BRR: But it is not just about confidence as a lender, is it? A lender may also be limited by the amount of capital it has. It goes back to that argument that the sector is severely under-capitalized.
Isa: I know. It is a vicious cycle. Institutions now need to develop their own comfort level. However, another rationale for the PMIC is that MFIs have hit a plateau now. So, we put out everything in the market. They have the capacity; they have the confidence to say that we can give Rs40,000-Rs50,000. Hopefully PMIC will address some of those issues.
BRR: Will PMIC be interested in raising more funds via stock IPOs?
Isa: Firstly, the PMIC balance sheet is already really strong: it is hitting the ground running with Rs30 billion. There is interest from banks and from potential equity partners. There has been a lot of interest and excitement about this new entity, and the potential for increasing the money in the market for microfinance. But it is important to make sure that we remain true to our ideals. We are sitting on the board with three seats. So, I'm very hopeful.
BRR: What kind of products will the PMIC offer?
Isa: So, among new product lines the PMIC will start with, out of the three or four products that they will launch, one will be the microfinance credit guarantee facility (MCGF). As part of the non-compete agreement, DFID had to withdraw the previous MCGF facility and we had to withdraw the PRISM facility. So now we are hoping that this credit guarantee will be parked in PMIC.
BRR: Let's pivot to the issue of inequality. Now that multidimensional poverty is on the decline, inequality is a becoming bigger issue. What are your thoughts on that?
Isa: We have been saying that please, end this mantra of growth. Growth will only impact people who have resources. Relying on trickle-down is ridiculous. Inequality is at obscene levels. Okay, it is a worldwide phenomenon but Pakistan is our concern. If you look at the regional picture, it is truly scary. The more you travel the more you realize, especially in areas like Balochistan, FATA and Southern Sindh, how their sense of deprivation is increasing. The worst district of Punjab, which is Rajanpur, is better than all the districts of Baluchistan, except Quetta.
Inequality rises from this whole poverty dimension. Only when you create opportunity for people who have not had opportunities can we rise up from poverty. The devil is in the detail. Like we say, our fundamental investment is in people. We believe in inclusion. It is exclusion which leads to poverty. We want to make sure that women are included, the poor are included, and we have articulated our mandates very clearly.
There are other dimensions, too. In the 1998 census, there was only 2 percent disability reported in Pakistan. There is no country in the world with such low levels of disability. Even the US has 10 percent. That is the norm. This time around they did not put in a question on disability in the census. They say that they have already printed the forms so they cannot do this anymore. We did a house-to-house survey of ten districts and we discovered that close to 9 percent of our population is disabled. The highest form of disability is visual impairment. Now they will not even be mentioned in the census, so they are likely to remain unseen and therefore not included.
This is something we are very conscious of and whenever we get a forum we do talk about these issues. But there is no catharsis. We are saying that the more inclusive you make the community institutions, the more representative they are, the more voice that they have. And now we are layering it. We just signed an agreement with the Law and Justice Commission because we believe that people should know their rights and responsibilities under the Constitution. We are starting a pilot from Rajanpur. Everything PPAF does, we start with a pilot. And we are constantly addressing the inclusion issue. I say that whether it is Waziristan or Dera Bugti, if there are no women's organizations, I will not work with you. It is a part of my faith; I will not work where there is no inclusion.
Inclusion and poverty are closely linked and inclusion can be facilitated by providing voice. And voice comes through aggregation because no one will listen to the poor man. With microfinance we created an ecosystem where people have voice and we want to do that for other sectors. Next we want to focus on the energy sector, as 40 percent of the people are off the grid. With the cost of renewable coming down there is a huge opportunity. We have already done 50 micro-hydel programs.
BRR: In your view, how would the presumed CPEC-led growth impact the existing inequalities?
Isa: CPEC could be a game changer, but not by itself. It has to be done in a way that everyone has a buy-in from the federation. Dera Bugti has been giving gas to the rest of the country for half a century, but there is no gas for locals there. There are no mobile phones. I have travelled in one of the three tehsils. There was not one school in any of its five union councils, not a single BHU was functioning, but people have been drawing salaries. CPEC should not go down the same route, where we talk about infrastructure but there is no mention of the people.
CPEC is a great opportunity. There are a few things that we have been talking about. I have been advocating setting aside 5 percent of the CPEC investment amount for community connectivity. Wherever the alignment goes through, all the union councils must feel that they have a stake in this economic corridor. If it bypasses them and they see that they stand at the same place, there is a sense of resentment. CPEC is about the people, not about the economic corridor. If the people are benefiting, and the industries are benefiting, and they have a stake in this, then yes, CPEC is a game changer.
But we have to be conscious about this. We have such low levels of literacy, which if we start working now, then something will happen in the next few years. Otherwise these people can only work as labourers. They will not be working at the port because they don't have the education or skills or capacity. We need to think in the long-term while taking the short-term measures as well. It's not like we don't know what to do.
There are things that work, tried and tested things, but we have to make a conscious choice to make CPEC about the people and then it'll be a game changer.