Apr 28 - May 11, 2008

Expanded net work of Micro financing is universally considered to be the most effective tool for poverty elimination. Unfortunately, however, in Pakistan despite included in the world poorest countries of the world, the system of micro financing has not been developed as yet.

It is primarily being handled by non-government organization (NGO's) and philanthropist organization operating in limited areas. It has not been expanded the way it should have been to meet the needs and requirement of over 35 per cent of the population scattered all over the country mainly in rural areas. Efforts made in this field by Khushhali Bank and Rozgar Scheme launched through National Bank of Pakistan have not proved effective enough so far. Rozgar Scheme was launched by the president last year through national Bank of Pakistan according to some press reports. Rozgar Scheme started with a big fanfare has proved to be a burden on the jobless youth rather than some help. Last week daily Dawn Islamabad carried a lengthy report under the caption "Rozgar Scheme more a burden than a boon" saying that the scheme launched under the slogan of providing jobs to the poor in September 2006, the President's Rozgar Scheme has emerged as burden on the people in the Rawalpindi region, as CNG rickshaws financed under the programme have turned out to be fraught with manufacturing faults.

The national bank of Pakistan has delivered 47 rickshaws in the Rawalpindi region so for. However, its offices have sought an immediate halt to the scheme until the manufactures remove the faults. Market and client feedback received by the bank had found that instead of benefiting the poor clients, the scheme had inflicted losses on them. Majority of the vehicles distributed under the scheme are now off the road within just a year of their distribution.

Despite high growth rate during the last few years there has been almost no reduction in the poverty level in the country. The government claimed 10% reduction in poverty during 2005-06 but they were disputed by the World Bank which proved with facts and figure that claim was highly exaggerated. According to their estimate the reduction ranged between 4 to 5 percent. During the subsequently 2 years, there has been more than 5 percent increase in the poverty level bringing us back to the previous level. To be precise the models mostly followed in Pakistan for micro financing were aimed at distributing stipends rather then enabling to people to create sustainable business entities. Either the government was distributing charity or the money was routed through NGO's. It lacked a clear objective of improving the income generating capacity of the borrower or the person so helped.

Commercial banks have restricted their activities in this field to only consumer financing mostly for purchase of motorcycles, cars and other comfort goods. Poor people cannot borrow from commercial bank as they have nothing to offer as collateral security. Consumer financing too declined in recent months for increasing number of defaults.

A group of economists is of the opinion that the continuous high growth of GDP brings reduction in the poverty level the "trickle down" theory. This theory, however, could not gain universal acceptance because of the practical experience in various countries. For continuous high GDP growth to bring a dent in the poverty level, it is imperative that equitable system for distribution of national wealth, including rationalized taxation structure, is also present which is not the case in Pakistan. Therefore, in existing circumstances, the benefit of high economic growth befalls on the top echelons of the populace. The high growth can prove partially meaningful to the poor sections of society only when it could create massive employment opportunities through establishment of labour-intensive industries. However, in the era of modernization, the industrial undertakings are being refurbished by sophisticated machinery requiring lesser labour. Our industrialists do not seem much interested in the labour-intensive sectors like ready-made garments etc. and we are much behind India and Bangladesh.

The strategy of our planners in the matter of inviting foreign direct investment (FDI) is also misplaced. For instance, in the telecommunication sector, we are spending over $ one billion on the import of cellular phones instead of setting up phone manufacturing industry in the country with FDI / imported technology. Planners have to initiate measures to provide self-employment opportunities to the people by providing credit on easy terms.

Another option to get the poor people engaged in the self-employment, particularly in the rural areas where there is higher concentration of poverty, is the "micro-finance". Micro finance has helped enormously in reducing poverty and income gap between various sections of the society in different countries. However, the rural population is largely illiterate and its poverty does not permit it to furnish security / collateral to the lending banks for availing of credit. It is due to this reason that the commercial banks did not come forward in the past to provide small loans to the poor people waiving the stringent security / collateral requirements.

The need for creation of the specialized institutions to cater to this section of the populace was felt by the government. Pakistan, however, entered this field too late. Pakistan Poverty Alleviation Fund (PPAF) was created in 1999. The purpose of the PPAF is to improve access of the communities to the financial services. The first Micro Finance Bank, Khushhali Bank was established in the year 2000 in the government sector through "Khushhali Bank ordinance" to carry out micro finance activities in the country. Later on, Micro Finance Institutions Ordinance was promulgated in the year 2001 in order to provide legal framework for establishment / operation of the micro finance banks. Necessary amendments in the micro finance ordinance were introduced through finance bill in 2006.

Later on, 4 MFBs were established in the private sector by the end of 2005 i.e. First Micro Finance Bank Limited [established by the Aga Khan Foundation], Tameer Micro Finance Bank Limited., Rozgar Micro Finance bank Limited and Network Micro Finance Bank. The Khushhali Bank Limited, First Micro Finance Bank Ltd. and Tameer Micro Finance Bank Ltd. are operating at national level while Rozgar Micro Finance Ltd. and Network Micro Finance Bank Ltd. are working at district levels. The sixth micro finance bank i.e. Oman Micro Finance Bank became functional by the end of June 2006; permissions were given for the establishment of two more micro finance banks. It has not made any impact so far.

The Khushhali Bank Ltd. is operating mostly on the Asian Development Bank line of credit arranged for the purpose by the government. Other MFBs are also depending on the borrowed funds for their operations as their deposit base is smaller. The quantum of "advance / investment 2005" [out of assets valuing Rs 8.5 billion] worked out on the basis of above percentages comes to Rs 2.27 billion and Rs 1.573 billion respectively. This is indicative of the fact that the lending portfolio of the MFBs is at much lower level and it seems that these banks are diverting their efforts more on the "Investment" than concentrating exclusively on reaching out the poor people for granting small loans which are the basic aim/objective for which they were established.

The need, therefore, is of redoubling the efforts to reach the poor and expand the lending net instead of diverting the efforts towards "investment" which is not the real function of the MFB's. A large potential exists in Pakistan for extending micro finance to the poor particularly in the rural areas as over 46 million Pakistanis [29 per cent of the population as per the World Bank assessment] are living in the abject poverty. According SBP estimates, the potential micro finance clientele in Pakistan is 25 to 30 million poor people; however, the coverage so far is slightly above one per cent. There is also a need to focus on bringing the female borrowers as their clientele to date is too small.

According to official sources, Pakistan has come a long way in introducing and familiarizing the microfinance concept. However, strategic steps are being taken and multiple approaches already adopted for substantive up-scaling of microfinance facilities to benefit the people belonging to the resource deficit areas. They further said the government was focusing on improving the standard and quality of life of common man, and adding lack of capital can be a major impediment in their efforts to live a better life. "Micro credit facility is an effective tool to generate economic activates, reduce poverty and improve living standards. It will provide them opportunities to augment their income and move up the social ladders."

Analysts, however, emphasized the need to promote public-private partnership and said civil society organizations and enterprising philanthropists need to come forward and involve themselves in organizing microfinance credit to the marginalized sections of the society. They said Pakistan has in place a sound legislative framework which should facilitate achieving the target to bring three million households in microfinance network in three years.

They appreciated the hard work done by the State Bank of Pakistan for preparing the microfinance strategy and asked the Governor SBP to prepare a timeframe for its implementation. Commercialization of microfinance is critical for financial and social sustainability of the sector, they added. Moreover, the government has asked the private sector to come forward and make investment for setting up microfinance banks at district, provincial and national levels. This is very viable preposition which will help promote cottage industry in the country.