MICROFINANCE A TWO-PRONGED REMEDY DURING ECONOMIC DOWNTURN

RIZWANA BASHIR
Mar 9 - 15, 2009

Major decline in GDP growth rate from 8.96% in the year 2004-05 to 5.78% in 2007-08 and to probable 2-2.5 percent in 2008-09, can be described as one of the most compelling challenges faced by Pakistan economy as it is feared that it will aggravate the problem of poverty.

In the quest for solutions to the country's development challenge and poverty alleviation, microfinance is becoming one of the most admired options as credit has been identified as a hurdle facing the poor. Pakistan's poverty reduction strategy has yielded handsome result in the shape of sharp reduction in headcount poverty from 2000-01 to 2005-06.

Although, poverty has declined but the fact remains that 22.32% people of Pakistan are still living below the poverty line. During the time of global economic downturn, along with increasing inflation rate which has already reached around 25% and 2009 being identified the year of unemployment by many, tool like microfinance can at least save the problem of poverty from getting worst.

Macroeconomic stability is, of course, a prerequisite for the persistent economic growth that brings the poverty reduction and rising living standards. However, macroeconomic stability is the foundation on which to build a flourishing economy. Successfully targeted social programs, like microfinance are also the key to permanent and sustained reduction in poverty.

Operating on this foundation, microfinance institutions can make a big difference in alleviating poverty in Pakistan. Pakistan Economic Survey (2006-07), enumerate that strong economic growth, large inflow of remittances and Rs.2217 billion spending on social sector and poverty-related program (including microfinance) during 2001-02 and 2006-07 have succeeded in reducing poverty in Pakistan.

We should also remember that this was the era of growth for Pakistan. At the national level, headcount poverty reduced from 34.46 percent in 2000-01 to 23.9 percent in 2004-05, showing a substantial reduction of 10.5 percentage points over this period.

In absolute figures, the count of poor people has fallen from 49.23 million in 2001 to 36.45 million in 2004-05 while rural poverty declined even more sharply by 11.13 percentage points, urban poverty also declined by 7.75 percentage points. In general, it is argued that though poverty has declined in Pakistan, the gap between rich and poor has widened. The result suggests that however consumption inequality in Pakistan has increased marginally during 2001-05, consumption/ income equality in Pakistan is far less compared with many high, middle, and low-income countries.

However, the micro-enterprises can promote economic growth, which as proven in many studies, reduce poverty. Richard Adams, a poverty specialist with the World Bank's Poverty Reduction Network, researched in 50 developing countries to examine the impact of economic growth on poverty and inequality.

His research finding suggests that growth represents an important means for dropping poverty in the developing world. When economic growth is measured by consumption, there is strong, statistical link between economic growth and poverty reduction.

We can also witness many success stories of microfinance even in Pakistan. An impact study of KASHF foundation, Pakistan revealed that 94 percent of its borrowers have experienced positive economic and social changes in their households and 75 percent of them feel that without this loan it would have not been possible for them to undertake business activities and to generate employment and income.

Another impact study conducted on Bunyad Literacy Community Council (BLCC), by the State Bank of Pakistan, found that its clients have increased their income by 63 percent. Beneficiaries of micro-credit are not only able to increase their earnings, but more importantly, also are able to spend more on the education of their children.

In this scenario, we can say that microfinance can be of dual advantage to alleviate poverty and to promote economic growth in the country. Therefore, there is a need to emphasis the implementation of such an effective remedy.

(Author is the lecturer, Defence Authority College of Business, PhD fellow, Department of Economics, University of Karachi)