This article was published in Daily Pakistan Today dated 13th February 2014
Youth Loan Scheme: Game changer for Pakistan economy?
By: Omer Zaheer Meer
There’s an old wise saying that every problem presents an opportunity. Of-course it requires a positive attitude, willingness to adapt and an out-of-box thinking. The hurdles facing the PM’s Youth Loan Scheme presents a similar avenue of opportunities to turn it around into a success.
When I wrote about the snags hitting the Youth Loan Scheme earlier this month, I was hoping for a receptive information ministry and a positive change for the sake of Pakistan and our youth. It was therefore delightful when the proposal of allowing the close blood relative(s) to become guarantor(s) was made, thereby addressing a major flaw pointed out. It makes sense as not only the close blood relatives know a person best but would be ideally placed to motivate them while keeping a check on them too. Furthermore they are most likely to guarantee for a potential applicant. The debtor would also be more cautious as these people would matter to him more than a stranger or associate. Therefore this step is indeed one in the right direction. However this issue was pointed out as an example of the blunders committed and is not one of the ultimate issues. Unfortunately the real problem and the solutions suggested had been conveniently ignored by the who’s who of the scheme.
The real issues leading this scheme away from its stated objective of helping unemployed, preferably educated youth establish themselves by setting up businesses and instead turning it into a cheap finance scheme for SME’s rests elsewhere. There are two major obstacles preventing an ordinary unemployed person from being a beneficiary of this scheme, the guarantor requirement and the interest element. It is no surprise that these two are the most criticized and complained about by the intended beneficiaries.
Even more cumbersome is the guarantor requirement for an unemployed poor or lower-middle-class youngster who would already be doing some work or business if he had the required 1.5 times the potential loan amount or a guarantor with that sort of money willing to pledge it.
Granted that banks needs to secure their investments and the government faces a lack of resources specially in the wake of NBP denying to fund beyond a maximum of PKR 15 billion owing to the doubts about the “safety” of investment. But what if the government can address both the problems without spending a single additional rupee? Sounds good? Let us examine than.
Since the government is already bearing almost half the interest costs for PKR 100 Billion (7% of the total 15%), reducing the total portfolio size to approximately PKR 50 billion will effectively eliminate the interest cost for the borrower, making it interest-free. In addition to satisfying the faith prohibition, the interest-free loans would mean better cash-flow and hence better chances of success for start-ups which in due time will be contributing to the exchequer. Reducing the total portfolio size does make sense considering the low level of actual applications submitted, still short of 15,000 required for the first “draw”. There is no point putting out a PKR 100 Billion when it cannot be used for the intended purpose. This is even more pertinent considering that Mrs. Maryam Nawaz Sharif has pledged and been trying unsuccessfully to date, to accomplish the same.
Furthermore, as the government has also committed 50% of the expected PKR 10 Billion losses on a PKR 100 Billion portfolio in the policy document it can resolve the guarantor issue facing the potential applicants by using this PKR 5 Billion in a way to guarantee the investment of the banks while strengthening the investment and insurance industries at the same times, thereby creating additional jobs and revitalizing the economy.
The 5 Billion already pledged by the government should be invested in low-risk, capital guaranteeing investment funds or a separate portfolio along similar lines. The returns from this can be used to fund the insurance indemnification of the total portfolio (preferably PKR 50 Billion portfolio in the beginning as explained above) against defaults. This would not only strengthen the investment and insurance industries but the resulting boost in financial markets will inspire confidence in investors which can lead to further positive impacts for the wider economy by starting a cycle of economic activity, in addition to the upticks in the bourse. To protect insurance companies against major future losses, the indemnity purchases should be diversified across as many companies as possible.
The major counter-argument stating that the majority of these unsecured loans may never be returned needs to be examined in the context too. Firstly, it will be costing the government a mere PKR 5 Billion with the potential of getting hundreds of thousands of families on their feet. The insurance will already be protecting the banks’ investments. Secondly, unlike the hundreds of billions of bad debts of banks siphoned overseas by the rich and mighty generals, judges, bureaucrats, politicians e.t.c., even those “misusing” these loans would be investing it in Pakistan’s economy, be it by buying plots, cars or stakes in other running businesses. Last but not the least even if 10 to 20% of the businesses turn out to be genuine it can become the catalyst for economic revival desperately needed by Pakistan.
The fact that millions of application forms were claimed to be downloaded but still even 15,000 applications could not be submitted throughout Pakistan in almost seven weeks since the formal inauguration of the scheme, speaks volume about its “success” in its present form. This alone should motivate the brains behind the scheme to rethink their strategies and the requirements leading to the debacle.
Prime Minister Mian Muhammad Nawaz Sharif needs to decide whether he wants this “Youth Loan Scheme” to actually fulfill the stated purpose and help the most neglected segments of our society or would he be satisfied by a mere political gimmick, at the most acting as a source of cheaper finance for SME’s only.
This scheme, if adapted as outlined above, has the potential to be a game changer for Pakistan’s economy, society at large and political landscape. Whether it will actually be tailored to achieve the stated goals and a lot more, remains to be seen.
The author is a leading economist, a qualified chartered accountant and anti-money laundering expert with international exposure who is helping reshape businesses at Millennium Law Company. He can be reached on Twitter and www.myMFB.com @OmerZaheerMeer or firstname.lastname@example.org