This article was published in Daily Pakistan Today on 1st January 2014
( http://www.pakistantoday.com.pk/2014/01/01/comment/losing-its-lustre/ )
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Losing its Lustre
By: Omer Zaheer Meer
Winston Churchill once said that plans are of little importance but planning is essential. The aphorism can apply to institutions and states just as equally as to individuals. One of the most important things taught to any professional, especially financial and economic experts, is the significance of proper planning. While intent is important, it is the planning and proper execution that decides the ultimate success or failure of any venture.
Let us flashback to 7th December, the day Prime Minister inaugurated the youth business loans scheme and thereby instilled expectations among the desolated youth. He announced an allocation of PKR 100 billion for this programme for the ongoing financial year. The ambitious scheme entailed “accessible” loans of up-to two million for 100,000 youth (especially educated and unemployed) aged between 21 to 45 at a discounted rate of 8% for a maximum tenor of up-to 8 years with the first year being the grace period. 50% of the quota was reserved for females. What’s more, even 56 pre-feasibility studies and relevant information was uploaded on SMEDA’s website for all to access without any charge.
It seemed that finally a government will actually deliver something meaningful for the youth of the country. Even the detractors agreed that this can be a good scheme if properly executed on merit. There was however ambiguity as to how the scheme would actually work but neutral professionals were willing to give it time to see how it unfolds.
For those who are unaware, here is it how the scheme unfolded over the next few weeks. At first it was announced to be executed through National Bank of Pakistan (NBP) and First Women Bank (FWB). Application forms became available on the websites of SMEDA, FWB and NBP which seemed relatively straightforward. The applicants were required to have 10% of the total capital required for their business proposals. But it was not before long that the new requirements started pouring in.
First it turned out the grace-period meant interest only payments and not a total payment holiday followed by the requirements of two references and one guarantor. The guarantor could either be a BPS-15 or above Government Servant or someone with documented net-worth of at-least 1.5 times the loan applied. Considering the target market of the scheme of unemployed youth, this seemed tough. Reality was tougher as this requirement was followed by the prohibition on blood relatives including parents and siblings from becoming a guarantor. These are the very people who not only know a person best but would be best placed to keep a check on them. Instead the potential applicants are asked to look for others who may have no similar control over them. A “guarantor consent form” (GCF) was also issued by NBP. This form is not available on any of the websites but separately handed out by NBP.
Besides the pay-slip (in case of a Government Servant guarantor), bank statements or property papers (in case of non-Government Servant guarantor) and a copy of the CNIC of the guarantor, the GCF required submission of three post-dated cheques, duly signed by the guarantor amounting to the total principal and interest amount of the loan, in favor of the NBP. Making it more alien for the common man, verification of an ECIB report amongst others was also required. ECIB is a credit report which most ordinary people are unaware of. Furthermore GCF mentioned about the guarantor signing a guarantee agreement with the bank effectively assuming the role of the debtor. Perhaps owing to Government pressure, NBP withdrew the requirement for the post-dated cheques but all other requirements stayed intact.
Being a Chartered Accountant I had existing clients’ and new enquiries about preparing feasibility studies for Youth Loan programme. When I explained the “guarantor requirements” and advised them to ensure they met them before proceeding, almost all of those that fall in the actual target segment, young people trying to find their feet, got numb for a while. The most common responses were “from where can I, an unemployed person, arrange such a guarantor?” and “if I had such a guarantee available why’d I need this loan?” On the other hand those with already established businesses deemed it an opportunity for cheaper financing. Somewhere along the line things went so wrong to miss out the very segment intended to benefit.
On top of the stiff requirements for a guarantor, the consistent changes created ambiguity. While the Chairperson of the programme Mrs. Maryam Nawaz Sharif made a largely lauded announcement that the scheme would be made interest-free by conducting it through Islamic Banks, the most relevant functionary Secretary Finance Dr. Waqar Masood declared his obliviousness to this, further compounding the uncertainty. As if all this was not enough the NBP has now informed the State Bank of Pakistan that instead of PKR 100 Billion it can only invest PKR 15 Billion in the scheme. FWB is financing 10 Billion.
The government will certainly take appropriate steps to address the funding shortfall but much more is needed to be done if this scheme is to accomplish its stated goals. The youth loan scheme was seen as a ray of hope by the educated but unemployed youth. Dashing their hopes by making it inaccessible to them would be callous and against the objectives of the scheme.
The government should work on the lines of the interest-free graduate loans offered by banks in many western countries. While one can understand the reluctance of banks to lend without sufficient collateral, the government can certainly play an important role. With the ever-increasing huge profits reported by the banking industry this is something the banks can certainly do, even treating this as a new financial product for the longer term. Involving several banks will spread the risk making it less material for the overall portfolio of the banks.
As per policy the government has already borne half the risk by bearing 50% of the projected losses (10% of total loan portfolio is estimated to default) and 46.67% of the total interest costs (7% in addition to the 8% to be paid by the applicant).
Without any further allocation, the government itself can become a guarantor as well as effectively make the loans interest-free for the applicants. All that is needed is to reduce the total volume by half, either limiting the maximum loan amount number to PKR 1 Million or the number of loans to half (50,000) thereby reducing the total volume to PKR 50 billion. Since the government has already covered almost half the losses and interest costs for PKR 100 billion, reducing the volume to PKR 50 billion would mean that the same will now cover the risk and interest of the whole portfolio. This will make it easier for the poor and unemployed youth to equally benefit from the scheme instead of making it just an avenue for the well-off. The potentially huge positive impact on the economy of easy access to finance for genuine potential entrepreneurs requires a separate write-up.
The government can even utilize Insurance to immunize against the risk of default that it has already guaranteed. The insurance premiums can be funded by the Government through an investment fund, thereby also supporting the investment industry in the country.
This scheme can become a profitable venture for both the banking and the insurance industries in the longer term. Last but not the least, the terms and requirements of the loan should be clearly announced and regular changes confusing the potential applicants must stop.
If the government succeeds in doing the above it may be able to provide the youth the opportunity and the economy with the impetus required. Confucius said that a man who does not plan long ahead will find trouble at his door. It is indeed time that we avoid the pitfall by properly planning for the future of our country, our youth.
The writer is a leading economist who is also a qualified chartered accountant, financial analyst and anti-money laundering expert. He can be reached on Twitter and www.myMFB.com @OmerZaheerMeer or firstname.lastname@example.org