Microfinance Focus, Aug 31, 2010 (Farhat Abbas Shah) : Recent floods in Pakistan have further plunged the already reeling economy. The estimation of the total damage will take some time but the need to microfinance the victims are dire as the failure in this sector can create a famine in not too distant a future.The government is already cash-strapped and avoided default the last year with the help of IMF.
 
Another dilemma is the trust deficit due to which the enough aid is not coming and the donors are relying upon the non-governmental bodies. The real challenge is that of rehabilitating the destroyed businesses of the flood victims as through this process we can even fight the hunger and disease by reestablishing their productivity.
 
Pakistan is said to be a predominantly an agricultural economy and it was this sector that has been severely damaged. Through microfinance and SMEs, this damage can effectively be dealt with in a matter next 5 to 10 years. Millions of acres of agricultural land has presently been under flood waters. And the only redeeming feature is the fertility that the flood will leave behind.
 
Here comes the role of the microfinance and SME but with a difference as the damaged has been caused by various internal and external causes. No doubt this is the time when the investments are taking a very interesting twist from the conventional to Islamic and from microfinance to small medium enterprise as well. Although the various conventional MFIs are shifting their mode of financing also, but they could not have positive results and the mission rift issue is another tragic story, told by these MFIs.
 
As I ever admitted that only the microfinance could reduce the miseries of the vulnerable. However, the sector has to come with a new enthusiasm and an innovative paradigm.
 
As the current scenario of Pakistan demands a well planned agriculture based microfinance or SME financing to ensure the rehabilitation of the flood victim rural community of Pakistan. According to a study conducted by Farz Foundation, 50% population in rural areas of Pakistan earns livelihood from agriculture and 50% from other sources. The people involve in agribusinesses also do live stock as another source of income. While the other 50% population do the businesses like grocery shops, and transport, embroidery along with the labor on daily wages.
 
Instead of group methodology or village banking etc, the product of entrepreneur or SME village through the vehicle of Farz Methodology could have a far wider scope as the earlier methods could not reach out to a considerable number of people. That is the only way to have the long awaited trickle down effect so that it could lend economic stability at a macro level as well through “Twist Up Economy”(  Twist up theory emerges as a rejoinder to trickle down theory. It is a course with the notion that the sustained micro and small businesses assure the sustainability of the macro economics. It increases the numbers of consumers and their capability to buy. It also strengthens the markets and supports rich persons to expand their businesses. The Farz Methodology implements Twist Up Economy as its core strategic component).
 
One SME village would economically engage about 7000 persons from without the proposed village. This model could easily be replicated in a matter of 5 to 10 years, as pointed out earlier.  G20’s decision to promote the SMEs could not have come at the more opportune moment. Even President Obama’s emphasis indicates the importance of this method. Now we need to handle it in such a way that the maximum out put could be had in as less a time as possible.
 
One SME village could consist of 100 to 500 families. Now in Pakistan there are thousands of villages whom we can adopt and initiate economic activity over there.  We do have the option of building new model villages where livestock, poultry forms, garments and other businesses could be established.  They can be given the market linkages for their products.
 
The element of risk is eliminated with ownership of the provider whose staff would oversee the whole activity in the proposed villages. The government can also come forward as the partner through providing land and roads etc. The ownership of business and homes etc will gradually be transferred through diminishing Mudarbah or Murabaha, further mitigating the element of risk.
 
We have entered into very interesting times and the response must be intelligent and effective. It further adds to the responsibility of the World Bank, CGAP IDB and other financial institutions. As far as Pakistan is concerned, we need to move quickly before the next harvesting season. Government alone can hardly deliver in this regard. The stability of Pakistan is very important for the rest of the region, because the destabilized Pakistan next to Afghanistan could be a nightmare for the rest of the world.
 
(Disclaimer: The opinions expressed in the article are solely those of the author and do not necessarily reflect any views of Microfinance Focus)