Addressing the poverty problem
By AMANULLAH BASHAR
Feb 28 - Mar 06, 2005
Micro finance is recognized as an effective tool to fight poverty by providing financial services to those who do not have access to or are neglected by the commercial banks and other financial institutions.
Today, the world faces the major challenge of reducing poverty. Of the world's 6 billion people, 2.8 billion live on less than 2 dollar a day and 1.2 billion live on less than one dollar a day. Of these 1.2 billion, 500 million live in South Asia. General Assembly of the United Nations has also recognized the positive impact of micro finance in poverty reduction.
The micro finance tool has been successfully used to generate economic activity at grass root level in Bangladesh, Indonesia, Ghana, India, Philippine and Bolivia. Though the government of the day recognizes significant role of micro finance in fighting poverty, yet practically speaking, the government seems focusing more on macro-economic growth which has rendered the sensitive issue of poverty alleviation as neglected area. This assessment can be substantiated with the fact that hardly 6 percent of the poor household facilitated by the micro finance schemes so far as against 94 percent poor families benefited in Bangladesh.
Poverty, one of the most serious issues faced by Pakistan today, has been identified as a major contributor for growing street crime, tension and anxiety which consequently leads to the health problems and behavioral diseases in the society. People at the helm of affairs would have to pay more attention on poverty alleviation program instead of using it as a mere slogan for political gains. Though human memory is short but not too short to forget the much publicized slogan "Roti-Kapra aur Makan" raised just to pull the crowd for political gains.
Unfortunately, the economic managers, excited by the zeal to collect more revenues have allowed unrealistic government levies and taxes on essential items like POL products, electricity and gas which have raised the price of these essentials which consequently generated back breaking price inflation in the country.
Micro finance impact studies have demonstrated that it helps poor households meet basic needs and protects them against risks. The use of financial services by low-income households leads to improvement in household economic welfare and enterprise stability and growth. By supporting women's economic participation, micro finance empowers women, thereby promoting gender-equity and improving household well being. The level of impact relates to the length of time clients have had access to financial services.
Micro finance helps in reducing poverty by providing the poor with credit facility to start a small business. It not only supports the economic condition of the poor but also has positive impact on their social life through better standard of living with greater access to education and health facilities and empowerment to participate in decisions of the society.
The concept of micro finance in Pakistan is comparatively new and emerging discipline but it is gaining importance fast as a tool of social mobilization and poverty alleviation. Though impact of micro finance sector in Pakistan is yet to be evaluated, yet globally it has shown a positive impact on poverty reduction that is significant enough to be recognized.
A World Bank study found that percentage of Grameen Bank, Bangladesh borrowers living in extreme poverty was reduced within 4.2 years of joining. The study also revealed that profit from Grameen financed business increased borrowers' consumption by 18 percent per year. Another study revealed that more than 91 percent of the borrowers reported positive impact of Grameen on their living standards.
Research conducted by the Consultative Group for the poor in Indonesia, found that micro-credit borrowers increased their incomes by 12.9 percent compared to 3.0 percent by the incomes of non-clients.
An impact study of KASHF Foundation, Pakistan revealed that 94 percent of its borrowers have experienced positive economic and social changes in their households and 75 percent of them feel that without this loan it would have not been possible for them to undertake business activities and to generate employment and income.
Study conducted by Bunyad Literacy Community Council, Pakistan found that its clients have increased their income by 63 percent. Beneficiaries of micro-credit were not only able to increase their earnings, but more importantly, were able to spend more on the education of their children.
Freedom from Hunger an organization in Ghana experienced that its clients in Ghana were found to have increased their incomes by $36 per annum compared to $18 per annum for non-clients. Beneficiaries of micro finance were not only able to increase their earnings, but also to diversify their incomes.
Another study of Bank Rakyat Indonesia borrowers of the island of Lombok reported that the incomes of clients had on average increased by 112 percent. Consequently, 90 percent of households had moved out to poverty. Similar success stories are reported by various micro finance organizations from India, Bolivia, Bangladesh and Philippines.
The finding of these studies confirms the positive role of micro-credit in poverty alleviation.
Although MFIs are emerging as an important player in Pakistan's banking and financial system, a substantial segment of the poor population remained underserved. In Pakistan, only 0.5 million or 7.5 percent of the poor households were provided with loans out of 6.67 million poor households through the existing micro-credit schemes so far.
On the other hand, in Bangladesh 9.79 million or 95 percent of the poor household out of 10.2 million poor households were provided loans through such schemes so far which seems to have reduced poverty significantly.
If the government aims to reduce poverty, it should also focus on the expansion of micro-credit schemes to poor since economic growth alone is not enough for poverty reduction. Along with expansion of the micro finance services to the poor, the need to monitor and examine the impact of its existing schemes on the living standards of the poor cannot be overlooked.
In Pakistan, micro finance is gaining importance as an effective tool of social mobilization and poverty alleviation. Currently a variety of institutions ranging from Non-governmental Organizations (NGOs) to private and government sponsored rural support programs are delivering micro finance services to the poor. Two commercial banks i.e. First Women Bank and Bank of Khyber are also providing lines of credit for the micro finance sector.
This sector has the largest potential clientele base, comprising of 6.5 million poor households. However, the micro finance service market in Pakistan remains underdeveloped and serves only 7 to 8 percent of these potential clients. If micro finance is to serve a large share of the market, practitioners must improve their programs by enhancing their outreach access to the potential clients. The Pakistan Micro finance Network (PMN) is an effort to address these issues by arranging specialized training and creating awareness among policy makers.
It is unfortunate that a large majority of the poor household usually acquire loans from informal sources in the absence of access to commercial banks which generally extend advances to the moneyed people, political, industrial and business lords who were responsible for the biggest financial scam to the banking sector in Pakistan. Lack of income and resources force the poor to take loans to met basic necessities of life and the hurdle of collateral leave them at the mercy of the informal lenders.
According to a survey, friends and relatives are the major sources of loan followed by shopkeepers and landlords. Thus, there remains a great need and potential for growth of micro finance sector in Pakistan.
Some initiatives have already been taken by the non-profit organizations to provide small loans to the poor to enable them to start small business.
The Pakistan Poverty Alleviation Fund (PPAF) was also established to provide credit and loan to partner organizations of NGOs for further lending to the poor individually or in groups.
Rural Support Program (RSP) launched by the government aimed at modifying the entire economic system in a way that the poverty alleviation becomes the focus of all development activities. RSP create, promote and support effective and disciplined community organizations to manage rural development and work toward self-reliance and poverty alleviation. RSP in South Asia opted for the strategy of social mobilization and thus they not only provide financial support to the poor but also guide them towards the effective use of resources by including them in the decision making process.
The participating groups in Pakistan like Aga Khan Rural Support Program (AKRSP) was established for small farmers of northern areas in Pakistan living at subsistence level and having marginal access to financial and technical support. During 1980s, such farmers required an average Rs250 as a crop loan. But banks were unable to afford millions of such small loans and later recover them. However, AKRSP took an initiative by forming local institutions such as Village and Women's Organizations to facilitate provision of financial services to poor farmers. This policy has been quite effective and there are now a thousand village organizations with around 90,000 members in the northern region of the country. The pay back rate on the loans has been impressive at approximately 98 percent.
SARHAD RURAL SUPPORT PROGRAM
This program was founded in 1989 with the assistance received from the provincial government of NWFP, AKRSP and USAID. It follows the successful strategy of Aga Khan Rural Support Program by focusing on improving the quality of life of the most vulnerable social groups by providing them financial assistance in the form of micro finance. Currently it operates in the rural regions of Peshawar, Abbottabad, Mansehra, and Kohat and covers 12 districts reaching 6,000 community organizations.
Financial services provided by Micro Finance Institutions (MFIs) generally include savings and credit. According to an estimate, currently 67.6 million people around the world have access to micro financing. This number is expected to grow steadily in the future since the target is to reach 100 million poor people with credit by the end of the year 2005.
The United Nations is currently observing the decade (1997-2006) for the eradication of poverty while the UN General Assembly has proclaimed 2005 as the international year of micro finance or micro-credit to recognize its contribution to poverty reduction.
In order to commemorate 2005 as micro credit year, a resolution targets to reach 100 million of the world poorest families, especially women of those families, with credit for self-employment and other financial and business services.
The resolution also stressed on the fact that people living in poverty in rural and urban areas need access to micro credit and micro finance to enhance their ability to increase income, built assets and mitigates vulnerability in times of hardship. The resolution invited the member states, relevant organizations of the UN system, NGOs, the private sector and civil society to collaborate in the reparation and observance of the year and to raise public awareness and knowledge about micro finance.
The year of micro finance provides an opportunity to the international community to raise awareness about the importance of micro-credit in eradicating poverty by enabling people below the poverty line to undertake micro enterprises so as to generate self-employment and contribute to achieving empowerment, especially for women folk.
PAKISTAN MICRO FINANCE NETWORK
The Pakistan Micro Finance Network is a network of organizations engaged in micro financing and committed to improving the outreach and sustainability of micro finance in Pakistan. This network was established to resolve the issues and problems related to the sector, which prevent micro financing from achieving its true potential.
The mission of Pakistan Micro Finance Network is to support the sector provide financial services to the poor with particular focus on retail micro finance institutions. This network pursues its mission through three broader objectives:
(a) Enhancing the capacity of retail Micro Finance Institutions (MFIs) through specialized training and strategic planning.
(b) Establishing a use of performance measures and promotes financial transparency. For this purpose, PMN members self report their performance indicators that is published biannually as a performance indictor report.
(c) Helping to create a policy environment that is conducive for retail micro finance institutions. To achieve these objectives, PMN is actively involved in arranging policy seminars and conferences, which provides an opportunity for a range of stakeholders to present their views at a common platform. Moreover, PMN has representation on the State Bank of Pakistan's consultative group in order to participate in the development of a regulatory framework for micro finance.
PMN activities were initially financed through grants from the Asia Foundation and Aga Khan Foundation, but now it supports its operations not only through grants but also revenues earned through training courses and thus increasing its sustainability.
POVERTY ALLEVIATION FUND
The Pakistan Poverty Alleviation Fund (PPAF) was established in 2000 to alleviate poverty and empower the rural and urban poor by providing them with access to resources and services.
There are five project components which include Micro-credit, Community infrastructure, Capacity building of partner organizations, Capacity building of the PPAF and Endowment from the government.
The credit and enterprise development unit of PPAF has been focusing on the identification of credible partner organizations to expand its facility of loan disbursement and guidance of the deprived group for utilization of their resources over the time period of almost four years. It has maintained a diversified portfolio giving special consideration to gender. Under its mandate it can finance any legally established entity in government or private sector and its criterion for selection is based on the strength of the organization by analyzing its past trends and the proposal submitted by the organization. Partner organizations are disbursing credit on quarterly basis subject to satisfactory performance that is evaluated through periodic on-site visits. It may be recalled that by the end of financial year 2003, PPAF funding had been disbursed in 72 district of the country, to 37 partner organization, of which ten are catering exclusively to women. Almost 300,000 individuals had availed of PPAF financing by end of financial year 2004 with an average loan size of Rs8,816 with 44 percent of the loan going to women. PPAF has recently extended lines of credit to three year instead of the previous one-year facility.
NGOS INVOLVED IN MICRO FINANCE
Amongst the active organizations involved in micro finance, KASHF seems to be the most efficient as its client base is the largest along with the lowest operational efficiency ratio. It is working with a network of 30 branches and more than 50,000 clients. Its major lending products are general loan and emergency loan, along with flexible, open access savings products and accidental and life insurance products.
KASHF is followed by DAMEN but its portfolio risk is greater. Orangi Pilot Project (OPP) borrows from commercial banks without any concession and lends it to asset-less families on trust basis rather than collateral. At the beginning, bad debts were high but in third year the recovery rates began to rise. About 11-20 percent operations of Sungi are related to empowerment people through micro-credit though it was not basically aimed at micro-credit to the poor.
According to SBP report, presently two Micro finance Institutions i.e. First Microfinance Bank Ltd (FMFBL) and Khushhali Bank (KB) is operating in the country. As awareness about the MFIs framework grows, micro finance banks are likely to be established in the foreseeable future. In this regard licenses have already been issued to "Network Microfinance Bank Ltd" and "Rozgar Bank" by State Bank of Pakistan. Though these license holders are expected to start their operations in the near future, yet the requirement of paid-up capital from the intended companies is said to be too high to encourage a culture of such institutions in Pakistan. Financial experts are of the view that the minimum paid up capital needed to be revised downward to promote micro finance culture on humanitarian grounds.
However, there are encouraging operational reports from MFIs which have reportedly enhanced their outreach by increasing the number of branches in different geographical areas in addition to a considerable increase in their active client base.
Khushhali Bank has a major share of 95 percent in loaning activity. This institution has expanded its outreach vertically as well as horizontally throughout the provinces of the country including Azad Kashmir. The network of Khushhali Bank consists of 40 branches and 70 service centers across 41 districts where as FMFBL network consists of 20 branches in 12 districts. The advances by MFI increased by Rs389 million during the first half of 2004. A break up of advances shows that the loan portfolio of MFIs is relatively diversified. The major share of the advances belongs to the livestock sector followed by micro enterprises and agricultural inputs.
Poverty alleviation is the most crucial human issue which calls for concrete and result-oriented measures in the interest of the national economy as well building up social, economic and political values in the society. "The dearer the bread, the cheaper the flesh and blood", it is the poverty which is a root cause for crime and disease, said a psychiatrist.