Mar 5 - 11, 20

Pakistan is one of the few countries having an enabling environment for microfinance services. However, currently, microcredit is reaching to only two million borrowers whereas the size of the target market is estimated to be 25 to 30 million. There exists a strong demand for microfinance services among the poor.

The State Bank has developed a pro-poor Microfinance Strategic Framework 2011-15 to boost microfinance sector for the sustainable development. Pakistan has a separate legal and regulatory framework for microfinance banks (MFBs). Prudential regulations for the MFBs are upgraded from time-to-time in line with the market dynamics. The government has played a direct role in promotion of microfinance in Pakistan. Two major programs, in this regard, are the Pakistan Poverty Alleviation Fund and the Khushhali Bank.

Microcredit unleashes the entrepreneurial spirit. The intent of microfinance is to make credit directly available to the very poor and thereby promoting their self-sufficiency. Therefore, the success of microfinance programs can be a milestone towards poverty alleviation. When given an opportunity to succeed, the poverty-stricken people take it with a determination to break the vicious cycle of inherited misery. Millions of poor people have used microcredit to fund a new tool, a machine, or a shop in the marketplace. Micro credit may play a better role for poverty reduction by focusing on following areas:

1- MFBs have to ensure the outreach of credit to the poorest of the poor. The very poor individuals are often described as high risk as they cannot offer collateral and have no stable source of income. Pioneers such as Muhammad Yunus of the Grameen Bank (Bangladesh) showed the world that poor, rural women without collateral were bankable.

We also need to recognize that microfinance institutions working with the poor, but lacking conventional capital adequacy, are also bankable. Providing credit to women can not only yield social benefits but also have a long-term impact on economic development. It has been observed that women plan more for the family's future and spend more of their earnings on their family than their male counterparts. Most poor women, supplied with capital on reasonable terms, invest it profitably and repay the loans, plus interest, faithfully in full on time. Internationally, 90 per cent of micro loans go to women and in case of Grameen Bank 95 per cent.

2- Loan products being offered by MFIs today facilitate only income generation activities and working capital management of micro businesses of the borrowers. For meeting the needs of the rural poor, MFBs should launch special loan products for financing crop production, storage of agriculture products and most importantly for marketing and trading of the crops produced. These loan products should be low in cost and extended against group / communal guarantee.

Seed capital products are to be introduced and established for clients having expertise to run the business but no capital to start with. Although it involves a high risk, certain percentage of total credit disbursement budget may be allocated under this head to enable upcoming graduates from professional colleges not only to start their micro businesses for getting self-employed but also for creating employment opportunities for others.

3- Microfinance institutions must have an inherent ability to absorb losses by keeping an adequate proportion of funds for financing deficits due to non- performing debts. Micro credits are not collateralized; microfinance banks soundness heavily depends on the efficiency of the collection system and the capital base of these banks is lower compared to that of commercial banks. They need to start deposit mobilization to enhance their power to sustain losses. Some microfinance institutions criticize that harsh regulations and liquidity crunch are not letting them extend financial services.

4- High interest rates are considered necessary for generation of profitability and for reduced reliance of microfinance institutions (MFIs) on external funding. But, these become unaffordable for down trodden borrowers. To eliminate this issue, Pakistan Poverty Alleviation Fund provides loans for microcredit to different organizations like the Rural Support Program networks and other NGOs at six per cent interest rate. The clientele of microfinance banks comprises of poor who have multiple reasons for delaying payments. The provisioning criterion is based on international practice and regulations are tougher because micro credit dimensions differ from commercial banks loans. The financing to the poor must be made available on a long-term basis with a longer grace period so that repayments can be made from profits after break-even.

5- Microfinance banks need a better infrastructure for improved outreach to their target clients. But, they do not have enough branches, facilities and saving products to attract individual businesses. They have yet to establish their own resource base for the long-term sustainability of their business.

6- If Pakistan wants to widen the base of micro financing, it needs to prompt large commercial banks to take a plunge and capitalize this untapped area more seriously. These banks can use their vast branch network, stable funding sources and big profits to set up microfinance subsidiaries and branches on the principle of social business enterprise.

7- In Pakistan, the distribution of micro loans in agriculture and livestock have been exceeding other sectors in the past. To some extent, it is good because the impact of micro loans on agriculture and livestock is more direct in terms of poverty reduction than in other sectors. However, MFBs must take steps to diversify their portfolio into different sectors. Now, some of the new banks are largely focusing on loans to micro enterprises with little or no interest in agriculture and livestock.

Summing up microfinance programs continue to have strong support from political spectrum. But, the success of microfinance has been marred by severe criticism of high interest rates, unchanging levels of poverty and a failure to cater effectively the target groups. Despite problems, the sector is making progress and the addition of the new MFBs over the last few years has brought significant changes in pattern of loan disbursement. The millennium target of halving the poverty is still a distant dream. The current world recession, surging food scarcity, war on terrorism and, political uncertainty have also increased level of poverty. More vigorous efforts are needed to expand outreach of microfinance program and to make it an effective vehicle through which country's poor be lifted up from an evidently sedated socio- economic status.