SHAMSUL GHANI (shams_ghani@hotmail.com)
Apr 28 - May 11, 2008

The free market economy presupposes the "entrepreneur" to be a one-dimension human entity having its focus on a single objective ˝ profit maximization. The Nobel peace prize winner for 2006, Muhammad Yunus of Grameen Bank, Bangladesh, in his lecture at the award ceremony stunned many by making a simple proposition:

"Let us suppose an entrepreneur, having a single source of motivation (such as maximization of profit), has now two sources of motivation, which are mutually exclusive, but equally compelling - a) maximization of profit and b) doing good to people and the world."

It is the idea of "doing good to people and the world" that can transform any business taking place in any type of market, into a pursuit of sustained pleasure and a value-added activity par excellence. The value addition done for the sake of human betterment at large turns out to be the supreme of all value additions. Microfinance, in essence, is investing in the poor and not doing business with them. The nascent microfinance industry of Pakistan needs to define the objective first. Does it want to do something good to the countryÝs poor or simply engage in the pursuit of profit maximization? We already have a good number of commercial banks strictly adhering to this earthly objective. Then why to add a few more, in the garb of microfinance banks?

Let us think over what Muhammad Yunus said at the prestigious world forum:

"I found it difficult to teach elegant theories of economics in the university classroom, in the backdrop of a terrible famine in Bangladesh. Suddenly, I felt the emptiness of those theories in the face of crushing hunger and poverty. I wanted to do something for people around me, even if it was just one human being, to get through another day with little more ease. That brought me face to face with poor people's struggle to find the tiniest amounts of money to support their effort to eke out a living."

These historic lines explode the myth of "credit worthiness", a paradoxical expression used by the banks to deny the needy a well-deserved monetary assistance. The loaning system of commercial banks that are in the market to earn profits is invariably based on this deceptive expression. On the contrary, the objectives of microfinance should essentially be based on the assumption that one cannot be poor and credit worthy at the same time. The field work force of microfinance banks should not waste its efforts in identifying "credit worthy poor", in the ranks and files of struggling human beings, rather it should start with the conviction that every single needy person, when helped with a tiny amount of credit, is capable of reforming into a changed person, ready to return the amount in some form that may not be tangible. Many economists believe that cash disbursements to the poor, in place of food subsidies, can contain food inflation. Micro finance should set its objectives on this theory. While identifying its potential customers, it should look for "reform worthiness" instead of credit worthiness. The poor have the greatest urge and ability to change themselves. Invest in them for that change to take place.


The following epoch-making lines from Muhammad Yunus should be a beaconing influence for those willing to understand the meaning of microfinance:

I decided to make a list of the victims of this money-lending "business" in the village next door to our campus. When my list was done, it had the names of 42 victims who borrowed a total amount of US $ 27. I offered US $ 27 from my own pocket to get these victims out of the clutches of those money-lenders. The excitement that was created among the people by this small action got me further involved in it. If I could make so many people so happy with such a tiny amount of money, why not do more of it?

That is what I have been trying to do ever since. The first thing I did was to try to persuade the bank located in the campus to lend money to the poor. But that did not work. The bank said that the poor were not credit worthy. After all my efforts over several months failed, I offered to become a guarantor for the loans to the poor. I was stunned by the results. The poor paid back their loans, on time, every time! But still I kept confronting difficulties in expanding the program through the existing banks. That was when I decided to create a separate bank for the poor, and in 1983, I finally succeeded in doing that. I named it Grameen Bank or Village bank."

To-day, after 25 years of operations, the Grameen Bank has assets worth Takas 68,953 millions with a paid-up capital as small as Takas 318 million, but reserves as hefty as Takas 5,551 million. Till March 2008, it had made total loan disbursements of Takas 371,550 million with recoveries of Takas 333,159 million ˝ an astounding recovery rate of 90% with a total infected portfolio of around 2%. The loans have been used to build 653,266 new homes and install 296,438 village phones.


The microfinance segment is the latest addition to the countryÝs banking sector. Under a presidential ordinance promulgated in 2000, the countryÝs leading microfinance bank Khushhali Bank was established. Besides some microfinance institutions (MFIs), the following microfinance banks are also operating:

* The First Microfinance Bank Limited
* Karakroom Bank
* Network Microfinance Bank
* Pak Oman Microfinance Bank
* Rozgar Microfinance Bank, Karachi
* Tameer Microfinance Bank Limited

By virtue of its size and operational network, Khushhali Bank is the barometer of microfinance business in Pakistan. It has reached by 2006 more than 535,000 households in 85 different districts located in all four provinces and Azad Jammu & Kashmir. By that time, it had 73 branches and 12 district service centers. The women representation on the customer list is 23% as against 97% in the case of Grameen Bank. As of December 31, 2005, it had total assets of Rs.6,183 million. The paid-up capital was Rs.1,705 million with reserves standing at Rs.44 million. Advances stood at Rs.1,848 million and investment at Rs.1,373 million. The figures present the picture of a typical Pakistani commercial bank. Five major commercial banks and eleven others share the total paid capital of Rs.1,705 million. Khushhali Bank's policies are bound to be influenced by the "bad boys" of our financial sector, the commercial banks. State Bank's prudential regulations for microfinance banks are almost the same as for commercial banks. On pricing, the regulations maintain, "The MFB / MFI shall implement appropriate pricing policies." The historical evidence suggests that the commercial banks have not been able "to implement appropriate pricing policies" and have gobbled through draconian pricing policies around Rs.700 billion that should have been passed on to their small depositors.

In the case of Grameen Bank, the average balance per borrower ranges between Takas 5,000 - 6,000. Per borrower limit at Khushhali Bank is around Rs.32,000. Grameen Bank's success story suggests that the lesser the amount of finance, the higher the chances are that it will not only be properly utilized but will also be repaid on time. Khushhali Bank will do well to mull over this simple theory.

Our microfinance sector is in its early stage of development. We have still time to review and reshape our policy design. Let not this sector end up as a loss making business forced to allow write-offs to the squandering borrowers. Our commercial banks are there to take care of such borrowers. After all, they have recently allowed write offs to the tune of Rs.54 billion to the affluent. Let the microfinance banks be the "banks of the poor." Give them a chance and then decide who would be the better borrowers-the poor or the affluent.