In a Technical Assistance Consultants' Report, which was prepared by Fincon Services Inc Canada for Ministry of Finance & State Bank of Pakistan with the financial assistance of Asian Development Bank (ADB), revealed that the Savings & Credit Unions (SCUs) provide an ideal way of gradually improving skills of both owners, managers and customers to improve liquidity management of the Micro-Credit Institutions (MFI) and of the poor rural customers.
Furthermore, the unions would support the individual member SCUs in improving their organisations, controlling them, provide advocacy (and legal) services, and it would be able to manage excess liquidity (for safeguarding purposes or between deficit-and excess SCUs), Consultants observed.
According to Consultants report, appropriate products and services in specific communities and with specific realities and (economic) activities have different income and spending patterns, as well as different expectations.
Especially poor and rural citizens that have been shunned by commercial banks or had experiences with earlier failed financial services programs are also distrustful towards financial institutions.
To get their trust, MFIs need to know them well and be capable of developing the right, concrete, deposit, transfer and credit products and services that their target clientele needs. As SCUs are owned and controlled by their members, this creates a close and dynamic relationship that ensures the development, distribution and marketing of such exactly required services. Members will ensure that management of SCUs understand specific needs and are skilled in developing adequate responses.
SCUs also ensure that the prices of products and services are set in a way that they are considered affordable and equitable for the members who are also the clients.
Member-clients will also ensure the most successful way of marketing, which is from mouth-to-mouth, pilot testing and evaluation, they recommended.
According to Consultants report, the most important benefit of SCU's is that they can provide a service that is basic to people. People need cash, money to pay for food, housing, health services, education, transport, today, this week, next month.
There is clear evidence that even the poorest people in rural areas (although some do pass through extreme crisis periods) have money to live from day-to-day and that they need a safe place and assistance to manage that money prudently.
Especially, poor people live in an unstable, unsafe environment and prefer not to keep much money at home. Poor people also benefit from financial services to avoid spending their money easily, from "hand-to-mouth". In order to keep money safe and manage it well, commercial banks invest a lot in buildings, security and personnel.
These investments need to be paid by customers in the form of fees, commission payments and interest rates on loans, in order to create a "yield", the interest margin that banks decide on between deposits and loans, they added.
According to Consultants report, as in low income and rural areas the potential for such income seems to be low as compared to higher income and urban areas, and also taking into account risk considerations (an environment is considered safer in a well-developed location, with modern roads, electricity, communication and other public services such as the police nearby), commercial banks have few incentives to open branches in rural, remote, poor and unstable areas. Safety and performance of SCUs depend on the members themselves.
Experience in Pakistan with credit programs, ADB Consult-ants highlighted that the multi-sectoral NGO's and development programs show that such structures that do not aim to operate as financially self-sustainable financial institutions do not and will not attract depositors and especially rural and poor citizens.
As they have become MFB's, regulated as financial businesses by the central bank, some MFB's have attracted depositors, in particular First, Network, Rozgar and Tameer.
Kushali Bank's dependence on ADB and the government support, especially its concessional loan funds for onlending, seem to be responsible for not being able to attract any public deposits. KashF's strategy seems to be strongly influenced by Grameen Foundation's and CitiBank support to undertake women group lending.
It is interesting to note that only a grameen bank-type group lending organisation that only takes compulsory savings (as part of the lending methodology, thus not legally defined as savings) seem to be financially sustainable.
The next 2-3 years will show whether loss-making MFB's will continue to attract savings, whether GrameenBank group lending NGO's will transform into what is called "GrameenBank II" that now depends on individual clients' savings and profits for growth. According to Consultants report, people only entrust their money to institutions they consider safe and professional. Safety of money is essential to all people, which became clear from the failure and respective nationalisation of UK's bank Northern Rock when depositors stood in long lines to withdraw their money following rumours about its insolvency.
Thus, people need to be sure that their money is kept in a safe place and protected and managed by reliable competent people. That is why SCUs, especially in areas where there are no banks and for the benefit of customers with no or bad experience with banks or credit programs, need to be voluntary member-based, member-owned and member-controlled financial institutions, they added.
According to Consultants report, Safety of SCUs is enhanced by the following factors: (i) Considering all local possibilities and pooling all local potential of capital (labour, existing buildings, infrastructure, money) members think, collaborate and decide on how to optimise safety of their money in their particular community.;
(ii) Such community initiatives may receive support from local, provincial and national public authorities as SCUs are operating in areas where there are no banks or no banks that serve large parts of the community serve an important public interest.
(iii) Because these SCUs manage an important part of the money (in the form of shares, deposits, savings and possibility of lending) their lives depend on, members will establish rules and conditions that in their community will combine availability, competence and democracy (including regular meetings, reviews, changes) to ensure that a dynamic process is at the heart of optimising safety according to their local realities.
(iv) When SCUs grow, more SCUs will be created who will at some point establish second-level unions, federations and finally maybe even a national confederation that would support SCUs and their member-clients to improve their safety measures and liquidity management capabilities.