Microfinance plays a critical role in improving the lives of the poor.

May 21 - 27, 2007

All governments in their respective times have been strategizing range of programmes and policies with an objective to achieve certain redistributive, risk-pooling and social cohesion goals, and act as an enabling mechanism that allows the poor and vulnerable to participate more productively in the economy. The incidence, manifestation and causes of poverty and vulnerability vary across Pakistan, with the highest rates of poverty and vulnerability being observed in the rural areas.

The present government too has a number of programmes in Pakistan that have been formulated to tackle poverty and vulnerability directly or indirectly, which need to be integrated into a holistic framework in order to maximize impact. Currently, Zakat and Pakistan Bait-ul-Mal (PBM) are the main institutions for addressing social protection needs of the poor and vulnerable. The National Social Protection Strategy aims to fill this gap by developing an integrated and comprehensive social protection system, covering all segments of population, especially the poorest and the most vulnerable.

Microfinance plays a critical role in improving the lives of the poor. The poor use financial services not only for business investment in their micro-enterprises but also to invest in health and education, to manage household emergencies and to meet the wide variety of other liquidity needs that they encounter occasionally. Evidence from the millions of microfinance clients around the world demonstrate that access to financial services enables poor people to increase their household income, build assets and reduce their vulnerability to the crises that are so much a part of their daily lives. In the context of Pakistan, the use of micro-credit holds importance for both the agricultural and non agricultural sector. The need for credit is particularly important for poor farmers. Their requirement for agricultural inputs, seeds, fertilizer, pesticide etc. tends to be cyclical as does their income. However, the two cycles do not always coincide. Rural loans for non-agricultural purposes include such things as micro enterprises in unorganized sectors of rural economy. Realizing the importance of microfinance as a tool of poverty reduction and social mobilization, the government has accelerated its efforts to establish strong foundations of microfinance in formal sector along with extending support to the informal sector (NGOs) as well. Khushhali Bank (KB) was established as the first specialized microfinance institution in 2000 and the Microfinance Institutions (MFI) Ordinance was promulgated in 2001 to provide a separate regulatory framework for microfinance institutions. As a result, during the last five years, four specialized microfinance banks (excluding KB) have started operation, which includes the First Microfinance Bank Limited (FMFBL) and Tameer Microfinance Bank working at the national level; the Rozgar Microfinance Bank Limited (RMFBL) and Network Microfinance Banks Limited (NMFBL), which are operating at the district level. In addition, the Pakistan Poverty Alleviation Fund (PPAF) has been working since 1999 as a distributor/ wholesaler of credit to the NGOs. The government has accelerated its efforts to establish strong foundations of MF in formal sector and extended considerable support to the informal sector (NGOs) as well. Currently, microfinance services in Pakistan are being provided by microfinance banks (MFBs); commercial banks; rural support programmes (RSPs) and non-governmental organizations (NGOs) with the Pakistan Poverty Alleviation Fund (PPAF) being wholesale provider of credit to NGOs. It is estimated that around 40 microfinance institutions (MFIs) are operating in all of the above mentioned categories, offering over 400 outlets countrywide. Cumulatively, the outstanding loans of these institutions amounted to Rs. 6.6 billion in 2005-06.

The microfinance institutional framework currently supports one million active borrowers, which are planned to be increased to 3 million by 2010. Future challenges include adapting polices to provide the conditions for expansion of the microfinance sector and to maximize its social and poverty impact. The broad conditions required for this expansion, at the highest level are macroeconomic stability and continued development of the banking sector. The key role of MF policies at this stage of the development of the sector is to provide an enabling environment in which the sector can grow.

Firstly, there is a need to move away from subsidization of microfinance services to commercialization of such financial services, which invariably involves looking beyond the government or donor subsidized credit delivery systems to self sufficient institutions providing commercial finance.

Secondly, the microfinance industry has to move from single to multiple products in order to ensure its financial and social sustainability. The microfinance providers would be encouraged to mobilize savings through deposits and provide insurance.

Thirdly, financial sustainability of microfinance is contingent on recognizing that the credit has to be priced effectively. The administrative cost of delivery, disbursing and collecting a micro or tiny loan portfolio is much higher in comparison with conventional loan portfolios. The key to reducing costs is to introduce market competition, innovation and efficiency.

Fourthly, options to enhance the access to credit for the lower income group can be augmented by the combination of credit bureaus and statistical risk-scoring techniques.

Fifthly, the MF Banks/MFIs need to know their customers, know their market and design products to fit the financial requirements of the people they serve. The design of products has to be based on the financial requirements of the household and the economic activities the household supports.