|THE MALAYSIAN GOVERNMENT recently set up a special trust found to give interest-free loans to the hard-core poor. The hard-core poor is identified as a family of five persons that earns less than RM350 per month. There are three commercial banks which have taken responsibility to provide the interest-free loans to this group: Maybank, Bumiputra Bank and MBF Finance. The interest-free loans given are meant to involve them in small businesses and other economic activities which can help them increase their income.
The creation of this special trust fund is good news indeed, for credit to these people is quite important for survival, especially since we are living in the age of credit. Truly, credit operations have penetrated deeply across the lives of individuals, families, businesses and nations. It is, therefore, a duty of and a challenge to the bankers and financial experts to work out a comprehensive and workable solution to the problem of credit which is the other side of the lending operations based on interest charged under numerous deceptive terms.
The question that needs asking is, what will be the practical steps to effective utilization of the special trust fund. No doubt, the objective must be clear, that is, poverty alleviation in the country. And since the task of alleviation of poverty is scarcely an easy one, the strategy for implementing this programme must be clear. Consider, for instance, the following strategic plan.
The appointed project manager must identify the poor people. A taskforce should be formed and terms of reference should be clearly defined in order to carry out a feasibility study on the grass-root problems of the poor. This step will help avoid mismanagement of fund allocation even among the poor people. In fact priority must be given to those who are extremely in need of money.
Once the above task is accomplished, the project manager should give these loans first to the poorest of the poor because it may be difficult to manage, say 50 per cent of the population. It would be a good idea to initially help 10 per cent of the population. He has to reach out to the poor, who are usually keen to improve their standards of living as they often do have some knowledge and skills and self-disciplined enough to take advantage of good opportunities. Furthermore, they are not as lazy as sometimes perceived..
Lessons of experience from Grameen Bank in Bangladesh suggest that poor people can benefit immensely from a carefully thought-out credit policy. The Grameen Bank has been successful in providing credit for the landless without collateral and retain a repayment record of 98 per cent. Despite the fact that there is a 16 per cent interest imposed by the bank to the loanees, it has been proved that the trust reposed by the bank in them has not been wasted.
It is important to identify the suitable project for the target group. One must ask whether it is really socially productive. The project should be evaluated in terms of its benefits. For example, Terengganu which has the highest poverty incidence in Malaysia faces the constraints of traditional methods of fishing and inadequate access to assistance. Moreover, poor support in marketing the products also contributes to a low return on investment. Once their income earning capacity is low, it would be difficult for them to save and accumulate capital for further investment. Hence, there is a pressing need to provide credit facilities for projects in Terengganu.
Unless the poor are properly motivated, no system can realize either efficiency in resource use or equity in distribution. To motivate the poor to render their best and utilize the scarce resources with maximum efficiency, it is necessary that their self-interest be served by doing so.
Thus a new concept based on musharakah financing is a genuine opportunity to pull themselves out of poverty by means of their own efforts. This concept applies where two or more persons or parties participate in a certain business with a defined amount of capital according to a contract for jointly carrying out the business and for sharing the profits and losses in specified proportions. It consists of an agreement for association, on the condition that the capital and its benefit be common between the two or more parties.
Mudarabah is a kind of musharakah (partnership) on the condition that the capital is to be supplied by one, and the labour and work by the other. The owner of the capital is called “reb’l mal” and the worker “mudarab“. In the context of our discussion, the bank can act as a capital provider or “reb’l mal” while the workers (in this case, the poor people) will be the partners who will be running the project.
This system will give more confidence and incentive to the poor people to undertake such project which they think is profitable. Ahmed Elnaggar, an expert on Islamic banking wrote on the positive effects of musharakah financing in upholding unity and hard work among the society, which are as follows:
a. It achieves a just means of distributing the returns between the investor and the financing agency;
b. It links use of funds directly to social and economic priorities. Since no single rate of interest is given or taken, there is great flexibility in the cost of financing;
c. It directly rewards and provides more incentive to human labour, thereby drawing non-bankable classes into the productive circle of the economy; and
d. It has been tried and proven to achieve a higher rate of return to both parties. This is an incentive for investment in high-risk projects which hold benefit for the society.
The manager should make the credit application process simpler and easier. The credit process should not create difficulties for the target group. In the informal sector in most developing countries where the moneylenders play an active role in extending credit to poor farmers, the application procedure for credit is quite simple: the borrowers merely talk directly to the lenders about their financial needs. There are usually no forms to fill out, no references to submit, no land titles to present, no taxes to pay or stamps to buy.
The main purpose for extending loan is to allow the poor family to be self-reliant through the small income-generating project. Thus the loan given should be used as the capital to start a business.
After giving an opportunity to poor families to have their own businesses, the next step then is to raise their standard of living. This can be done by ensuring that the income received from the businesses can satisfy their basic needs and help them get better education and be healthy.
The project manager should group them together, and appoint group leaders. This is because collective work can yield more benefits. There must be weekly meetings to look into the progress of each participant. The group should be motivated through the introduction of partnership financing concept. Any profit or loss will be shared among the parties. In this way every participant will be likely to feel responsible for any shortcoming in the project. A full commitment from all parties is needed for the success of the project.
Monitoring and evaluation (M&E) is basically seen as a tool of project management for effective implementation and better planning and is indeed vital for effective utilization of the interest-free loans. The primary reasons for monitoring are:
a. To keep track of project progress;
b. To provide feedback on the project management;
c. To serve as a “warning” mechanism for project management; and
d. To help prevent or solve problems encountered during project implementation.
According to the International Fund for Agricultural Development (IFAD), the Mid-Term Evaluation have found the M&E arrangements at various levels have been slow in developing and demonstrating their usefulness to project management. This situation can be attributed to a number of reasons, such as a lack of trained monitoring and evaluation staff, lack of training facilities for new staff, and difficulties in retaining trained staff in the absence of good career development prospects.
Finally, one can say that in view of the steps taken to utilize this fund effectively by looking at the present Malaysian economic system, there is a special need for establishing a financial institution to help the poor by giving financial support. Such a support is invaluable for sustaining socio-economic development in rural Malaysia.
The operation of bank or any institutions must be based on musharakah financing without interest . Hence the system of profit sharing will be able not only to bring about greater efficiency in the allocation of resources but also reduce the concentration of wealth and power. The proposed bank for the poor in Malaysia would then become a strong force for socio-economic change and development.