MICROFINANCE & ECONOMY
Mar 5 - 11, 2012
Access to financial services is a major issue for people living in both rural and urban areas of Pakistan. Most of the lower middle class and poor lack access to basic financial services that would help them manage their own assets and generate income. This is particularly true for over 100 million poor people living in rural areas of Pakistan. Good management of even the smallest assets such as livestock can be crucial for poor people living in uncertain conditions, threatened by lack of income, shelter, and food. They need to borrow, save, and invest so as to protect their families against adversity and contribute in the national economy. With little income or insufficient collateral, poor people are seldom able to obtain loans from commercial banks and other financial institutions.
Microfinance is one way of generating income for the poor in the rural areas. It puts credit, savings, insurance, and other basic financial services within the reach of poor people.
The UN Year of Microcredit in 2005 appeared as a turning point for microfinance as the private sector in Pakistan began to take more serious interest in what has been considered the domain of NGOs. Through microfinance institutions, poor people can start their own business by obtaining small loans, receive money from relatives working abroad, and safeguard their savings.
It has been approximately 30 years since the birth of microfinance with the founding of Grameen Bank in Bangladesh by Mohammad Yunus. The field has since then spread with the adaptation and evolution to various countries and in different contexts. The microfinance revolution started with the recognition that poor people specially women in rural areas needed access to loans and they can use available funds productively. Moreover, it is also changing the perception that poor people are not credit worthy.
Microfinance in Pakistan was started when the Aga Khan Rural Support Program (AKRSP) launched its credit operations in the Northern areas of Pakistan in mid eighties. Microfinance sector in Pakistan consists of regulated and self-regulated organizations depending on the type of organization they are e.g. NGO or a microfinance bank.
Government of Pakistan recognizes that access to rural finance and microfinance could be one of the major tools of generating economic activity in the country. Microfinance is not widespread in Pakistan. The aggregate outreach from banks and other institutional sources is less than eight per cent of the potential market of nearly 10 million households. The government and the State Bank are trying their best for growth and progress of the sector on a sound and sustainable basis yet more focused efforts need to be made.
As a business rule, one has to apply for a loan in order to start a business, which proved to be an obstacle for the people having poor or no credit history. This obstacle has resolved with the emergence of microfinance institutions.
Microfinance institutions now offer basic financial services like savings, insurance, and loans to unprivileged people. Pakistan's microfinance sector loan data shows that they are a good risk, with higher repayment rates than conventional borrowers from the commercial banks.
The informal sources are the only window available for the poor. It has become a strategy for generating economic activity by providing small loans and savings to facilitate the people who are excluded from the commercial financial services. Commercial banks do not view the unprivileged as viable clients due to their earning history, unstable and inconsistent credit record and lack of financial security. However, microfinance institutions often dismiss such requirements by providing small loans at rates, which are often higher than the interest rates of commercial banks. As a matter of fact, access to credit is a way to provide poor women and men with opportunities to take an active role in the society through entrepreneurship and building income, bargaining power, and social empowerment.
Access to credit and participation in the income generating activities strengthens the poor's bargaining position in the society, thereby allowing them to influence a greater number of decisions taken in their villages and rural areas.
The war against terrorism being fought in Pakistan has damaged the financial and human capital of the country; it is substantially important to promote microfinance sector so as to cover the highly criminalized war and its huge impact on the economy.
Poor people lack insufficient funds to meet their business startup cost despite the fact that they can also have profitable business plans. Microfinance institutions can provide startup capital to such individuals and thereafter people can continue to generate revenues from their own businesses indefinitely.
Expanding informal business sector during and post conflict can be a significant source of employment and household income; otherwise, unemployment will remain high and also impede the restoration of the damaged economy.
Microcredit empowers women since they are the major beneficiaries as almost all the microfinance institutions operating in Pakistan focus on women as their preferred client. This helps the women to make their own decisions and provide confidence and sense of security. Having their own business not only gives women confidence but also contributes in the national economy. In the past, women were not able to participate in the economic activities despite the fact that they are instrumental in the agriculture sector of the country.
In Pakistan, microfinance faces several challenges. The general climate of insecurity with lower sustainability levels are causing microfinance institutions to restrain their expansion in the rural areas, preferring relatively safer urban settings. They need to develop services, which not only give access to services but also increase income of the clients and decrease vulnerability; targeting females so as to empower women; deepening poverty reach to the poorest and most disadvantaged groups; and resolving potential tensions between development aims and certain policies for achieving financial sustainability. There is an urgent need for microfinance institutions to improve their ability to reach the poorest families and satisfy their growing demand for a wide range of financial services. This includes the safe and flexible savings services that poor people need and value. Although the amounts involved may be small, the loans, savings, and insurance options that microfinance offers gives millions of rural men and women an opportunity to find their own solutions.