May 11 - 17, 2009

While micro financing has been realized and proved most effective approach to alleviate poverty throughout the world, it is under deficient utilization in Pakistan with only 6.25 percent micro-credit penetration ratio until April 2009. As per recent statistics issued by Pakistan Microfinance Network (PMN), active borrowers of microfinance have reached 1.73 million in a potential market of 27.74 million. Although, number of microfinance providers has increased catering such a small market is not adequate.

Microfinance institutions vary widely in terms of their range, outreach, and sources of financing. Some MFIs fund their lending from members' deposits and capital donations. Other MFIs specialize in micro-credit, directing grants, and loans, from various donors (including governments, development agencies, charitable organizations, and other national and international institutions). These forms have developed overtime with some successful cases growing from the grant-dependent, credit-only model, into self-sustaining, full-fledged deposit accepting institutions. A low rate of outreach shows that microfinance is growing at a very slow rate in Pakistan with highest outreach in Punjab 7.66 percent (5.26 percent in Islamabad capital territory), followed by 5.55 percent in Sindh, 3.52 percent in NWFP, and the lowest 1.21 percent in Balochistan.

Although in December 2008, Pakistan Microfinance sector heard the good news of First Microfinance Bank (FMFB) ranked 7th in the 2008 MIX Global 100 Composite Rankings, going up from its 16th place in the 2007. This ranking is based on the status of profitability, outreach, efficiency, and transparency. The only other institution from Pakistan in the top 100 ranking is KASHF Foundation showing that majority of MFIs working in Pakistan are unable to achieve the standards of outreach and sustainability.

Microfinance sector analysis remains incomplete if another major issue is not examined, that is reaching the poor or the core poor. As highlighted at various forums that one of the key responsibility microfinance has to perform is to provide financial services to the poor, who are neglected by the formal banking sector. This is their social duty. It is also observed that most of MFIs tend to be found in urban areas while the majority of the poor in Pakistan live in rural areas, where financial services are not provided. Therefore, if MFIs are to fill this huge gap they must reach the rural poor. Microfinance penetration can be increased by opening some mobile branches in hard to reach areas. As per recent statistics of PMN, only six mobile branches are operating in contrast to 1546 established branch offices. Four of them are in Sindh and remaining two in NWFP. Surprisingly Punjab, the most populous province and Balochistan, having major part as hard to reach area does not have any mobile MFI office. It supports the argument that microfinance is only reaching a small fraction of the anticipated demand of the poor for financial services.

Though 24 percent of active borrowers until April 2009 (reported by PMN) are associated with agriculture and 14 percent with livestock, which we can assume that are living in rural areas. Then why MFIs are not reaching to rural poor? It is because MFIs do not have the power of outreach that is needed to meet the anticipated demands of the rural poor. Serving the rural poor in a developing country like Pakistan demands a major financial obligation, as it is expensive to run rural microfinance venture as compared to an urban venture. However, if MFIs are to comply with their social duty of serving the poor then they need to reach the rural poor with financial services.

We have examples from the international experiences that poor can be reached in a cost effective manner. Whether it is financial or operational sustainability, it can be achieved with appropriate management and planning. Reaching poor is also conditional to provision of financial services in a feasible manner. It is also said that microfinance can not practically achieve both the objectives together of reaching the poor and staying financially sustainable. There has to be a compromise between two. If outreach is to be increased it will be costly. However, if sustainability has to be achieved, penetration ratio can be enlarged gradually not rapidly. MFIs even if not focus on commercial objective of being profitable they have to earn for their survival. When they become sustainable, they can expand their outreach. In order to achieve long-run sustainability, while at the same time reaching the poor, microfinance plans need to be managed in a precise and professional manner.

Whether it is micro-credit, micro-insurance or any other service offered by MFIs, appropriate loan sizes for clients matching with their needs, rational interest rates, savings as a must, regular repayment periods and achieving economies of scale can ensure long run sustainability. If such measures to achieve sustainability are established, while focusing on the needs of the poor, then balance between both objectives discussed above can be achieved. Therefore during global economic downturn an increased focus on MFIs penetration can not only improve livelihood of people along with overall poverty reduction but expanding such profitable venture can promote economic growth in the country.

(Writer of this article is the Lecturer, Defence Authority College of Business, PhD fellow, Department of Economics, University of Karachi)