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Multidimensional role of micro-finance institutions An immediate need for poverty eradication.

It totally depends upon the forthcoming situation, which nobody knows exactly.

Former President, Fist Women Bank Ltd.
Oct 08 - 14, 2001

The criterion for determining extent of poverty in a country looks beyond per capita income and assess same against factors like rate of literacy, average life expectancy, status regarding gender equality, rate of growth of economy in relation to growth rate of population and overall well-being in the country under study. Human Development Report released by UNDP in year 2000 ranks the countries on the basis of aforementioned parameters hence Pakistan among the list of 176 countries is placed at 135th position, depicting a formidable position regarding human poverty despite having per capita income above poverty benchmark but the same accompanied by following adverse status:

GDP per capita US$511//-(1998)

Adult literacy rate. Female 28.9%
Male 58%

Female professionals and Technical workers as Percentage of total


Female administrators & Managers As percentage of total


Overall growth rate of Economy from 1975 to 1998

4.3 %
Average rate of inflation 11.1%
Allocation for Education as percentage of GDP 2.7%
Population growth rate 2.8%
Life expectancy at birth 64%

The World Summit on Social development held at Copenhagen in March 1995 had reached the conclusion that economic growth having distinction of being labour intensive and equitable (with efforts to minimise gender disparity and gap between rich and poor), combined with making large allocations for social expenditures especially directed towards poor are a winning combination to fight against poverty. Accordingly Micro-credit identified as an effective tool for promoting economic growth with greater equity is receiving global attention and considered a vehicle to make possible access of poorest of the poor to all factors of production including credit, but it is unfortunate that Commercial banks, globally remained shy to finance micro-enterprises because of lack of collaterals and high transaction cost involved. However success of micro-financing programme in some of the developing countries and fastly increasing poverty in the country has concern with full intensity within Pakistan for freeing people from poverty with the realisation that neglected capacity of disadvantaged segment of population including women to participate in economic process would be harnessed effectively through micro business financing programme launched through Micro Finance Institutions and commercial Banks of the country both in public and private sector.

It has also been appropriately felt that apart from disbursing micro loans to poor segment of population the credit disbursing agencies must look into their training needs in the areas of management, business behavioural skills and also marketing skills as a package of free/charged facilities offered to the clients. This would ensure success of their business/project and safe return of loans besides creating more job opportunities, adding to Gross Domestic Product and above all giving economic empowerment to women which in turn would eliminate all sort of exploitations against her.

In order to ensure success of micro financing programme Micro Financial Institutions (MFIs) must embark on the venture with following strategy:

  • Women being 65% of the population living below poverty line must be assigned equal share in the funds to be disbursed for setting up micro enterprises.

  • Size of the loan should be small not exceeding Rs.50,000/, keeping in view present rate of inflation

  • Repayment period should be short. For development loans repayment period should not exceed 18 months in any case

  • Repayment instalments worked out should be on weekly/fortnightly basis except for line of businesses like cultivation of certain crops and livestock farming etc where generation of funds starts after completion of crop cycle and animal growth.

  • Credit should be allowed mainly for agriculture activity, trading, handicrafts, distribution, processing and agro-based businesses

  • Administrative structure of MFI should be simple and its entire working should be of participating nature.

  • The MFIs need to expand their outreach to cover an increasing number of the poor borrowers and the credit disbursement programme should be launched on communal/group basis facilitating mutual guarantee of the group or community to each member borrower and also ensuring peer pressure for proper utilisation of borrowed funds and thereafter regular repayment by each borrower.

  • In order to ensure sustainability of the programme MFI must have emphasis on following:

a)In the present circumstances when Donor agencies have squeezed their allocations for Human development, MFIs should follow the policy of self reliance or reliance on indigenous resources. Focus should be on carrying financing programme from MFIs' own resources comprised of its Equity, savings of members/clients mobilised and funds raised at commercial rates from conventional Banks and financial institutions.

  • Service charges or Mark up charged on loans should cover the real cost of funds and administrative expenses giving due allowances to inflationary rate. The overall culture in which an institution operates that influences its profitability. The lending rates, borrowing rates, loans turnover and administrative cost are the principal factors determining institutional profitability as in order to ensure viability and sustainability of the programme following should be the approach:

  • Since micro finance is generally available for manufacturing /trading/distribution of consumer items businesses involving fast cash conversion cycle and high profit margins, rate of mark up charged should be high enough to cover cost of lending, provision for bad debts and reasonable profit level.

  • The rate should be flexible enough to effectively allocate scarce funds to competing borrowers.

  • The rate of mark up/service charges should be staggered in the sense that its incidence on large loans is more than smaller loans.

The lack of access to institutional credit is not the only factor impeding poor, specially women to get involved in micro business effectively. Given the virtual exclusion of women micro entrepreneurs from all but the lowest level of education in many less developed countries, they often lack the basic management skills necessary to set up and run the business. As a result they require undergoing entrepreneurial skill development programme and also arrangements should be in place for updating their skills in various lines of business and marketing techniques as integral part of micro enterprise financing programme.

The preliminary skill development courses should be designed in vernacular languages to be imparted through experts in various lines of business. To cover these auxiliary service expenses there should be built in provision in rate of mark up/service charge applicable to the loans. However for advanced training programmes in these areas for entrepreneurs of established businesses, course fee can be charged directly from each participant.

Further, in order to facilitate creating enabling environment for the community to get involved in economic process with total peace of mind, MFIs can play a role of pressure group to the authorities for providing health care, education facilities, desired sanitary conditions and all necessary logistics and utilities etc.

In rural and less developed areas where rate of literacy is very low, the community tapped should be urged upon to set up atlas one room school on self help basis by inducting teachers from same village/community to promote education upped primary level at least as a condition for eligibility for subsequent loan to those who have set up their businesses and now want to expand it.

No doubt Pakistan Poverty Alleviation Fund, apart from setting up Khushali Bank(Micro Credit Bank) has the programme in hand for maintaining and development of required education and health infrastructure in rural areas and also for expanding rural based public works programme to make rural areas accessible to market through pucca roads. However keeping in view the magnitude of demand for these services desired results will not be achieved unless and until MFIs and Commercial Banks participating in financing disadvantaged groups of population undertake to look into overall community development needs.

The success of most talked about Grameen with Bank of Bangladesh's programme is the outcome of their infusing the spirit of self help among the communities tapped for their total development by making it a compulsion for each member/client to participate in the community development programme. As a result each village community encompassed in their credit disbursed programme is equipped with village school(usually comprised of one room) and small dispensary run by village based teachers and doctors. As a result mortality rate has dropped considerably and they boast of literacy rate of 80% and primary education for each child among the communities coming within the purview of Grameen Banks' programme. One of the recent World Bank report says that half of all 10 years borrowers of Grameen Bank are leaving poverty.

In Pakistan also First Women Bank (FWB) has successfully experimented with multi-dimensional role with great success in developing entrepreneurship among women and to make them economically empowered. The bank being a commercial bank, apart from facing compulsions of meeting commercial objectives on top priority, ventured into financing micro enterprises of poor women both in rural and urban sector by offering a package of training in entrepreneurial skills including management, behavioural and marketing skills and also imparting technical skills in various lines of businesses involving latest technology enabling women to produce value added and exportable goods.

Further, in order to improve the living conditions of disadvantaged women from rural areas FWB had launched Housing Improvement scheme in 1993 which greatly helped in improving the housing environment of the communities as a whole. A study conducted by JICA in collaboration with Ministry of Women Development in 1997 to find out socio-economic impact of micro credit programme of FWB revealed that 39% of the women covered under the study who are running small businesses have started sending their children to schools and 17% were found to have access to medical facilities due their contribution to total family income.

In some of the communities Bank could provide counselling to women on family planning through its client doctors who voluntarily came forward for rendering this service.

Khushali Bank launched in recent past has also embarked on micro credit disbursement programme with arrangement for pre-disbursement training to borrowers where needed and it is hoped that in course of time Khushali Bank as well as other MFIs coming up in future would have focus on development of communities as a whole through their own clients on self help basis in order to eradicate human poverty in the true sense.