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Microfinancing an effective tool to help alleviate poverty

Poverty is like punishment for a crime you didn’t commit – Mathematician Eli Khamarov

It’s a hardcore fact that a country in debt will not be able to afford good schools, and a poorly educated workforce will be less capable of fixing problems and creating conditions that will attract foreign investment.

As per International Monetary Fund, World Economic Outlook Database (April 2019); Pakistan ranked 54 in the list of poor countries with $ 5,839 per capita, preceding by Bangladesh ranked 50 ($ 4,993). India ranked 68 with per capita $ 8,484.

Microfinance services have emerged as an effective tool for financing micro-entrepreneurs to alleviate poverty. It is considered that non-governmental microfinance institutions (MFIs) as the leading practitioners of sustainable development through financing micro-entrepreneurial activities. Which means that the micro-loans have a statistically significant positive impact on the poverty alleviation index and consequently improve the living standard of borrowers by increasing their level of income. As per UN’s Sustainable Development Goal, poverty alleviation is one of the most important components. Financing micro-entrepreneurs for job creation and income generating activities shows some success in many developing countries. The link between poverty and natural environment is often mentioned in the ‘sustainable development’ debate. Subsequently, poverty alleviation is necessary to deal with by any effective program related to sustainable development. One fifth of the world population are living in extreme poverty. About 2.5 billion people live on less than $2 a day.

Sadly more than half of the world’s working-age adults (about 2.5 billion) still do not have access to financial services of regulated financial institutions. Therefore, to start or maintain a micro-enterprise, they have to depend upon informal moneylenders for loans. It is estimated that there are more than 3100 microfinance institutions (MFIs), providing loans to over 100 million clients to lift them out of poverty. Financing micro-entrepreneurs with small, but collateral free loans, has emerged as a promising and effective tool for alleviating poverty.

It focuses on providing credit services to the poor, yet income generating ventures without collaterals.

In the past 25 years, microfinance service has been considered as one of the most significant innovations in development policy around the world. Beside, microcredits, the microfinance service also offer services such as consulting and training for the microenterprise, along with market information. They also provide access to wider market which is very often not in the reach of micro-entrepreneurs due to their lack of knowledge and other administrative steeplechases. We have witnessed the role of microfinance, since the few years, has received significant attention, from both policy makers as well as academics Hence the microfinance can contribute to the sustainable development goals such as gender inequality by empowering women through microfinance, by establishing the financial capital to promote sustained and inclusive economic growth. Purposefully, the microfinance plays a vital role for the poor to raise their own microenterprises to escape from poverty.

For example, the micro-credit scheme of Grameen Bank of Bangladesh, providing micro-loans to landless poor women in rural areas of Bangladesh became a successful equitable and sustainable development initiative. Similarly, in Pakistan the microfinance institution-Kashf Foundation’s successful approach is exclusively lending to women and increases their empowerment. The role of women cannot be ignored, as women are the central actors in the rural livelihood of Pakistan. Women centric income generating activities strengthen their role in sustainable development. The poor people invest micro-loans in their micro-enterprises to generate income that ultimately help them to reduce their poverty. These microloans are directed towards funding both existing and start-up enterprise.

Many microfinance institutions offer value added services like training, savings facilities, family planning, health services and education. Therefore their interest rates of micro-loans are usually higher than those of commercial loans, but still they are far below than the interest rates of informal money lenders. High interest rates are justified by the non-existence of any collateral, high administrative costs and the costs of accessing borrowers in rural environments. Interestingly the repayment records of micro-loans are higher; whereas the default rates are often lower than in commercial lending. A very good example is Bangladesh’s Grameen Bank, which have achieved repayments at the rate of as high as 98%; as compared to 27% for the Bangladeshi commercial banks. Since 1970s, the development theorists and practitioners have considered NGOs as leading practitioners of rural development.

All good things also has darker sides. The microfinance is often seen as a concept useful for achieving sustainable development, but criticized as it is not regulated and lending often happens informally and many potential borrowers are not aware of the benefits and risks of products and services offered by microfinance institutions. Furthermore, many are not able to access loans, mainly due to their illiteracy. The credit evaluation procedures of institutionalized lenders are often stricter than those of informal lenders, and therefore prevent borrowers from asking for loans at microfinance institutions having established stricter credit risk assessment procedures. Hence, the microfinance is criticized for not serving the poorest of the poor.

Many researchers contended that the commercial microfinance institutions have the same outreach and impact as their non-commercial counterparts. Some sees it as a mission drift towards a more commercial direction that focuses on financial returns for microfinance institutions rather than on poverty alleviation. Some evidences has been found for a negative correlation between the financial efficiency of microfinance institutions and the outreach to the poor. Their results suggest that a pure commercial approach has less impact on sustainability goals, such as poverty alleviation and empowerment. The commercially-oriented microfinance institutions tend to grant less but higher loans to richer borrowers in order to decrease costs.

 

The microfinance and sustainability has three aspects:

  1. It is connected with the financial sustainability of the microfinance institution. It focuses on whether the microfinance institution is able to conduct the business without being supported by donor monies.
  2. It is about the long-term effect of microfinance on non-financial goals such as poverty alleviation and empowerment.
  3. It deals with the connection between economic, environmental, and social effects of microfinance.

According to the financial sustainability of microfinance institutions, there are two main categories of microfinance institutions. The first group follows a poverty alleviation approach while the second group is based on the financial sustainability approach. Many institutions from the first group are dependent on donor subsidies to manage the high costs of lending in order to maximize poverty alleviation efforts. The costs are higher because the institutions attempt to provide small loans to as many borrowers as possible. Therefore, until to date, investments in microfinance have been mainly done because of philanthropically motives. Resulting that these institutions are not able to sustain financially without financial donors.

Corporate Social Responsibility (CSR) is an evolving concept and is generally understood to be the way in which a company achieves a balance or integration of economic, environmental and social imperatives, whilst at the same time addressing shareholder and stakeholder expectations. It should be seen as the corporate sector’s contribution to sustainable development that is consonant not only with the best corporate practices. The need for CSR to take root in our corporate culture is all the more acute given the prevailing economic and social conditions of Pakistan.

However, the government cannot be expected to successfully meet all the challenges in Pakistan and it is now imperative for civil society to supplement and complement the government in a concerted effort to uplift the increasingly alienated segments of the population.

As being an integral part of civil society, the contributions from the corporate sector is required and CSR initiatives should be facilitated; including by the government in the shape of increased incentives, co-funding and tax relief.

It is therefore hoped that a majority of Pakistani companies will be encouraged by the recent initiatives taken by institutions and some leading corporate leaders to introduce a viable and flourishing CSR culture in Pakistan. As a first step, efforts should be made to encourage companies to publish their CSR policies and practices and such statements or reports should be made a voluntary part of the Code of Corporate Governance for listed companies. This will help establish CSR standards and promote competitive culture amongst companies in the field of corporate social responsibility.

A very good example is the labor agencies operating in the football industry of Sialkot. These labor forces experiences to thrive in the challenging environment of Pakistan. The empirical results revealed that the trainings created dissonance in the behavior of employees. However, it revealed positive results such as employee motivation and establishing a good image of the corporation.

There are considerable improvement in CSR issues such as child labour, health and safety in textile and leather industry in Pakistan. In term of numbers, academic research is limited but growing. However, methodological and theoretical scope is still limited.

The writer is a freelance columnist and is an educationist by profession. He could be reached at nazir_shaikh86@hotmail.com.

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