Sole objective of microfinance is not poverty alleviation but to create sustainable business entities.

SHABBIR H. KAZMI, Special Correspondent
May 21 - 27, 2007

Nearly one-third of total population of Pakistan lives below the poverty line. While one may give a number of reasons for the prevailing poverty, many analysts say it is because of non-availability of finances to those who need it the most. Some of the programs initiated in the past focused on distributing Zakat and Khairat to the poor without enabling the needy to develop their own income generating entities. The result is that despite distribution of billions of rupees, the number of people living below the poverty line is on the rise.

To be precise the models mostly followed in Pakistan were aimed at distributing stipend, rather than enabling the people to create sustainable business entities. Either the government was distributing charity or the money was routed through NGOs. While the NGOs may have succeeded in achieving their 'objectives' they also inculcated the habit of living on Zakat and Khairat. It had two adverse impacts - people losing their self-respect and failure in creating income generating opportunities.

To begin with one point has to be made very clear that the sole objective of microfinance is not the poverty alleviation but to create sustainable business entities. Therefore, any lending has to be reviewed in the backdrop of revenue generation and debt repayment ability of the borrower. The second objective is to improve income generation capacity of the borrower.

However, some issues arise because analysts and critics often link microfinance with the poverty alleviation program of the government. As such banks providing microfinance are just like any other commercial bank. They have to mobilize deposit, provide loans to the borrowers and in turn make money to take care of administrative and other expenses as well as a modest profit for the sponsors.

Some of the banks catering to small and medium enterprises as well as micro businesses get grants and aid from international donors, which they lend/distribute among the needy. However, most of the time, NGOs are used as intermediaries. Therefore, recovery remains negligible. One such example is that a specialized bank distributed loans under 'Shelter' scheme and more than 95% became delinquent. This happened only because repayment ability of the borrower was not kept in mind.

It is a common complaint that interest rate on microfinance is almost double the rate being charged from multinational and transnational companies. The rationale is that managing millions of accounts of highly fragmented borrowers is more cumbersome and costlier than doing business with large corporate entities. However, commercial banks could be asked to lend about 2% of their total advances to micro businesses.

If commercial banks start following this the borrowers would benefit more because of outreach of the commercial banks. However, some of the analysts are of the opinion that only microfinance banks should be allowed to undertake this business because it requires 'specific mindset'. Lending by commercial banks is mostly collateralized, whereas microfinance is collateral free. Therefore, the commercial banks should provide soft-term credit lines to the microfinance banks.

Another serious impediment is lack of separate and comprehensive set of Prudential Regulations for the microfinance institutions. The simplest reason being that financing of micro entities is collateral free. And hundreds and thousands of small borrowers are involved. However, the plus point is that small borrowers are prompt in payment.

In the case of micro enterprises, business plan and cash flow are very important. It also becomes the responsibility of the lender to help the borrower develop his/her business plan, ensure proper documentation and take steps whenever there are some deviations. Though, the amount involved may be small if couple of repayments are made in time, it may become almost impossible for the borrower to clear the outstanding amounts. Since no collateral is involved the whole amount could become uncollectible.

In Pakistan there are various types of microfinance institutions, based on their area of operation. Some of them operate nationwide whereas others have a predefined but limited territory. Both enjoy some advantages and disadvantages but outreach remains a serious issue. In order to form workable as well as dependable model microfinance institutions form networking with NGOs and philanthropist organizations, which often become viable and trustworthy intermediaries. However, one of the potential threats is that these organizations try to achieve their 'other objectives' once they realize limitations of the financial institutions.

At times involving NGOs in disbursement of the credit works as collateral but the inherent weakness of this model is that NGOs tend to distribute charity rather than creating sustainable business entities. This is because of the difference in the mindset of two entities. Historically, NGOs have been distributing the amounts received from international donors or the government. This creates another weakness that beneficiaries keep on living on donations and charity and also consider it their inherent right.

To conclude, it is also important to highlight that poverty alleviation programs sponsored by the government are not synonymous to microfinance. Poverty alleviation programs are aimed at supporting those who have no source of income, whereas microfinance is aimed at creating sustainable business entities. Since the objectives are different modus operandi is also different.