It is imperative for the government to make microfinance an integral part of poverty alleviation efforts.

May 21 - 27, 2007

By now microfinance is being recognised as the tried and tested poverty reduction strategy internationally. Pakistan with a population of over 160 million and average population growth of 1.9 per cent during three years ended June 30, 2006, a low per capita income of $ 850, widespread un-employment, a 'young' population of around 100 million or over 60 per cent people under the age of 25, and widespread incidence of poverty as per independent analysts offers an ideal condition for the growth of microfinance. And yet microfinance still much remains an extremely small sector in Pakistan. Though Pakistan's economy has shown signs of revival with an average annual GDP growth of seven per cent per annum in last few years, independent analysts claim that poverty has increased due to inequitable distribution of wealth. One of the other major reasons for the increase in the incidence of poverty is the rising cost of living, particularly the substantial rise in the prices of food items. The situation has been worsened by an adequate increase in income and the lack of access to affordable financial services. It is, therefore, imperative that the government should make microfinance an integral part of poverty alleviation efforts.

Abdullah Yusuf, Chairman Central Board of Revenue (CBR), the premier tax collecting agency of the country, recently hinted at offering incentives for the development of microfinance in budget 2007-08 to be announced next month. He said that the State Bank of Pakistan and other government and private sector organisations have submitted suggestions and proposals to promote micro-financing in the country as a tool to reduce poverty.

However, the fact is that microfinance services still remain unaccessible to the majority of the poor in the country because of its negligible reach. Microfinance makes a great topic for academic debate but has made little on-the-ground progress with an outreach that remains restricted to negligible portion of the poor thereby not allowing them to play any role in the economy. According to the former president of First Women's Bank Akram Khatoon: "Presently, a large chunk of women business comes under the purview of micro business, financed through personal savings or the presence of five or six micro-finance banks and MFIs (micro finance institutions), caters to hardly 5% of women business, financed through personal savings or borrowings from sources other than financial institutions. The presence of five or six micro finance banks and few creditable NGO-based MFIs (micro finance institutions) caters to hardly 5% of women businesses, hence 3/4th of self-employed women are operating in the informal sector."

Just as rich are rich irrespective of the gender the poor are poor irrespective of the gender. Genderizing poverty only weakens the cause and the inhuman plight of the poor because poverty dehumaizes a man as much as a woman, particularly in a society like ours where man is still supposed to be the breadwinner of the family. Instead of spending immense amount of energy on trying to give poverty a masculine of feminine face attempts should be made to make the policy makers increase the outreach beyond less than 5 percent of poor households and making affordable microfinance services to the majority of the poor.

A presentation made by Mr. Mir Muhammad Ali, Investment Officer, Pakistan Resident Mission Asian Development Bank exactly four years ago this month in 2003 about the bank's perspective on microfinance sector in Pakistan still appears to be timely, particularly the section that dealt with the financial constraints and issues that needed to be addressed then, which still remains applicable today, for the realization of the microfinance potential in Pakistan.

The following, in brief, were the social and financial constraints and issues that he wanted to be addressed:

1. Inadequate access to productive resources and social services has resulted in low indicators of well-being and lack of employment opportunities, specially in rural areas. Low skill level and absence of support for human resource development for the poor prevents them from diversifying their household income. Much of the investment required is for public services where private sector investments are unlikely. Without these services, MF will have less than the intended impact.

2. Social intermediation costs to enhance women's access to MF are significantly higher in Pakistan as constraints on mobility, social interaction, and skills development must be addressed on a sustained basis. The gender orientation of organizations, products, and delivery mechanisms is insufficient to enhance outreach to women. Inadequate social preparation adversely affects group's cohesion, the quality of loan portfolio, and ultimately the sustainability of MF operations.

3. Absence of risk mitigation measures as a result of which poor households are vulnerable to economic and physical downturns. They forego potential technologies, production choices, and income opportunities due to risk aversion. Mechanisms to mitigate such risks are not available. In addition, the poor have no means to secure the safety of their savings, unless deposited with CBs, to which the poor have little access.

4. Lack of conducive policy environment in the early stages of MF sector development discourages innovation and setting up of diverse institutions to provide a range of services in a supervised and regulated environment.

5. Operating procedures of CBs are incompatible with the requirements of banking with the poor, and thus their services and delivery mechanisms have excluded the poor. Women have been virtually excluded from institutional credit. In addition, large network CBs with significant outreach to the rural areas are going through restructuring and reorganization and MF does not appear on their radars.

Slow transformation of Development Financial Institutions (DFIs) into efficient financial intermediaries due to their overt political considerations in business decisions and persistent poor governance, particularly of ZTBL, underlines constraints to change and undermines the development of the rural financial system. For these reasons, MF has been perceived as high risk and unprofitable in Pakistan. Consequently, potential suppliers have avoided entry into MF.

NGOs have small credit operations with no MF specialization. NGOs do not have the trained staff, financial systems, and, until recently, have not seen the necessity of following successful practices and procedures. Good governance is a growing concern. Even among the members of the MF Group, many have yet to achieve financial viability. Inadequate investment in social intermediation has also affected portfolio quality.

6. Delivery of financial services to the poor, particularly in rural areas is constrained by low population density in some provinces, inadequate communication services, small loans, and low household savings that increase transaction costs. Seasonality of the agriculture business cycle, the main occupation for poor households, the high probability of risks adds to the problems of providing MF services to the rural poor. In addition, secure savings facilities are not accessible, which is a prime concern for rural households.

The important role that microfinance could play in the poverty alleviation in a country like Pakistan which reels from high incidence of poverty that has many faces including 'working poor' could hardly be over-stated. The minimum monthly wage though has been increased to Rs 4,000, or around $ 65, is extremely low because the cost of living has been on a constant drastic rise with incessant increase in all essential food items and more so because the household earning of a manual labour with a non-working wife and one child comes to $ 1 a day, the international benchmark of absolute poverty.

The Poverty Reduction Strategy launched by the government in 2001 comprised a five-pronged strategy, namely accelerating economic growth and maintaining macroeconomic stability, investing in human capital, augmenting targeted interventions; expanding social safety nets and improving governance. The government claims to be closely monitoring the progress about reduction in poverty and improvement in social indicators and living conditions of society through large- scale household surveys to gauge progress in meeting the targets set by Pakistan for achieving the seven UN Millennium Development Goals by 2015, the most important being halving the population living below the poverty line from 26% in 1990 to 13% by 2015. The question is would it be able to successfully achieve the target with acute level of poverty with such restricted microfinance access to the majority of poor?