NHDR Core Message # 6

PAKISTAN NATIONAL HUMAN DEVELOPMENT REPORT 2003

POVERTY, GROWTH AND GOVERNANCE

INDEBTEDNESS OF THE POOR FOR CONSUMPTION NEEDS DEEPENS POVERTY*
 

The loans taken by all the three types of households in the urban, as well as the rural areas have been predominantly for meeting consumption needs. The proportion of loans used for consumption purposes is 56.8% in case of the extremely poor and 65.1% in case of the poor, in the urban areas, and 69.0 and 57.5 percent, respectively, in the rural areas. Since institutional creditors would not officially provide loans for consumption purposes, friends and relatives are the major lenders.

Data on the annual mark ups provide interesting insights: average mark-up is only 2.1 percent and even lower for the poor and the extremely poor. However, this is because they receive loans from relatives which are interest free. By contrast the average mark-up by the money lender is around 48 per cent. It rises to 58.8% in the case of the extremely poor and 60 percent in the case of the poor, but falls sharply to just 17% for the non-poor. In the very few cases where NGOs are providing loans to the extremely poor, they are interest free. The interest rate rises to 19% for the non-poor. The same pattern is observed in the case of ADBP. Here the rate of interest for the extremely poor is 8%, which rises to 17% for the non-poor. However, access to a public sector development bank such as the ADBP or even NGOs is rather limited. The commercial banks on the other hand do not provide any loan to the extremely poor. The rate for the poor is 19% and for the non-poor only 10%. The mark-up charged by factory/mill owners is 13.0 percent for the extremely poor, but it falls to 3.0 and 5.1 percent in the case of the poor and the non-poor.

That 70% of the rural households never applied for any loan is significant and may be mainly the result of a lack of collateral. While 75 percent could not provide the collateral, the lack of awareness relating to the procedure of obtaining loans has been another problem. At least one-quarter of the extremely poor households reported that their loan application was rejected because they did not pay any bribe. In some cases, however, the loan application has been rejected because the household has not returned the previous loan.

Further, the loans have been a high percentage of their incomes especially for the poor. Since the loans have been used to meet the consumption needs by an overwhelming proportion, there is little likelihood that they will be repaid. Therefore, the indebtedness in both the rural and urban areas has increased sharply. The extremely poor persons on average (all Pakistan) are indebted to the extent of Rs.28,137 and the figure rises to Rs.57,780 in the case of the non-poor. Indebtedness as a proportion of income shows the acuteness of the problem. The indebtedness of the extremely poor is 276.1% which declines to 75.8% for the poor and 53.2% for the non-poor. The high indebtedness is a major hurdle in poverty alleviation programs based on credit alone.