Financing for all

Microfinance is perhaps one of the most effective and flexible strategies in the fight against global poverty

By Madiha Mujahid
Today the world faces the major challenge of poverty alleviation. At present, 1.2 billion people around the globe still live on less than $1 a day and nearly 850 million people go hungry every night. Therefore, poverty reduction should be at the heart of all development efforts. The General Assembly of the United Nations has recognised the highly positive impact of microfinance on poverty reduction.
The World Bank defines microfinance as "small loans that help poor people who wish to start or expand their small businesses, but are unable to get mainstream banks to lend to them." Microfinance is often considered as one of the most effective and flexible strategies in the fight against global poverty, because it empowers people by making it possible for them to earn sustainable livelihoods, through the undertaking of income-generating schemes and the promotion of self-employment. It can also be implemented at a massive scale necessary to respond to the urgent needs of those living on less than $1 a day, the world’s poorest people. Therefore, many governments in the developing world encourage the setting up of microfinance institutions (MFIs).
In Pakistan, the official poverty line in 1998-99 was defined at Rs7,800 ($129.60) per capita. According to this definition, about 48 million Pakistanis (33 percent of the country’s total population) live below the poverty line. Microfinance assists in reducing poverty by endowing the poor with opportunities for self-employment and providing them with a credit facility to start a small business. The self-employment of those people is especially stressed who have the requisite skills but no capital to set up a business.
However, microfinance is more than just a means to make small loans available to deserving people – it is also a process through which to liberate these people politically, economically, culturally and socially. Microfinance not only improves the economic condition of the poor, by helping them make their ends meet, but also has positive impacts on their social life, by enabling them to have a better standard of living with greater access to education and health facilities. It also has significant effects on capacity building, increased awareness about issues and women empowerment.
By supporting women’s economic participation, microfinance grants these women valuable financial independence. It empowers women both socially and economically, thereby promoting gender-equity and improving household welfare. This is imperative because gender equality and women’s empowerment are human rights that lie at the heart of development and the achievement of the UN’s Millennium Development Goals (MDGs).
In Pakistan, the vast majority of the population is employed in the informal sector of the economy. Consequently, these people do not have access to formal sources of financing, such as mainstream banks and financial institutions. Thus, the poverty-stricken people typically acquire loans from informal sources. According to the NHDR/PIDE Survey 2001, the four traditional sources of microfinance in Pakistan are friends, relatives, shopkeepers and landowners.
Microfinance in Pakistan is a relatively new concept as compared with other countries in South Asia. NGOs and Rural Support Programmes (RSPs) have been the major players in the sector since the early 1980s. Recognising microfinance as an important poverty alleviation tool, the federal government has also adopted a microfinance policy that mainstreams the concept of sustainable microfinance, recognises the private sector’s role in poverty reduction and encourages its entry into banking with the poor.
Pakistan has one of the largest prospective markets for financial services within the microfinance sector, with a clientele base of almost 6.6 million; a number that will rise in the future due to the country’s high rate of population growth. This can be used as a yardstick to gauge the importance of aiding the rural and urban underprivileged people to have unproblematic access to a range of easy and affordable financial products, such as saving schemes, micro-credit, micro-insurance, remittances, etc. However, in Pakistan, at present microfinance mostly remains a single commodity market restricted to micro-credit. These small loans usually range from Rs10,000 to Rs25,000, and are mostly taken for use in agricultural and trade activities.
Currently a variety of institutions ranging from NGOs to private- and government-sponsored RSPs are delivering microfinance services to the poor. Commercial banks –such as the First Women’s Bank, Bank Islami, Bank of Khyber, etc – are also providing lines of credit for the microfinance sector. A number of new MFIs have sprung up in Pakistan in recent years. Khushhali Bank Limited was established in August 2000 as the country’s first licensed MFI, with initial funding from Asian Development Bank (ADB) and the paid-up capital subscribed by 16 commercial banks.
Khushhali Bank came into conception as part of the Government of Pakistan’s Poverty Reduction Strategy and its Microfinance Sector Development Programme (MSDP), which was developed with the facilitation of ADB. It functions under the guardianship of the State Bank of Pakistan (SBP) are to retail microfinance services on a widespread level and to act as a catalyst for stabilising the country’s newly-formed microfinance sector.
Talking to The News on Sunday, Khushhali Bank President Ghalib Nishtar stated: "Within the overall mandate of financial inclusion, Khushhali Bank is expanding service access to low-income households across Pakistan, with special focus on excluded areas and segments of the market. Gender and microfinance are unequivocally important and our experience as well as evidence elsewhere demonstrates greater dividends for institutions that pursue this as a strategy in terms of impact and sustainability. Our endeavour is to facilitate financial service access to women micro-entrepreneurs."
This has been demonstrated by the success stories that have transpired as a result of the efforts undertaken by these MFIs. Raffia Ismail, a 27-year-old woman with three children and a husband, lives a content life in Baldia Town, Karachi. Though her life may be good today, the same could not have been said about Raffia until a few years ago, when circumstances demanded of her to come to the forefront and become the main breadwinner of the family.
Before hearing about Khushhali Bank and availing the opportunity of obtaining a loan, Raffia used to stitch clothes day and night in order to make both ends meet. Unfortunately, she was still unable to generate sufficient income to even afford the basic amenities of life. She knew that she was capable of doing much more and that she had the potential to significantly increase her earnings.
The only obstacle in Raffia’s way was that she had no earnings / savings to invest in another sewing machine and materials that would have enabled her to start her own embroidery shop and centre, where she could teach the art of embroidery to other women for a small fee. This was made possible after she got the money required as the initial funding. Today her vision has translated into reality and she now runs a centre where she teaches about 25 women how to stitch and do embroidery. The progress Raffia has made is commendable; she is a perfect example of an empowered woman, who has made something of herself and who has, contrary to common belief, proved that women can do anything and everything.
Another important addition is the First Microfinance Bank, a banking and loan institution of the Aga Khan Agency for Microfinance. It is the embodiment of the concept of micro loans as a means to spur development in the Third World. These loans are quite diminutive, but provide access to capital that was previously not possible due to economic, cultural or historical reasons.
These are just a few examples of the major MFIs operating in the country. Additionally, there is an extensive network of both public and private sector organisations, mostly NGOs, that exist principally to facilitate the disadvantaged and deprived by making it possible for them to obtain small loans to set themselves up in business; hence become self-supporting and economically-productive members of the society. The easy and widespread availability of microfinance is also one of the most beneficial and important factors in the study of small-scale industries in Pakistan; because most entrepreneurs require financing to start up a new business or keep a present business going.
It is not a smooth sailing though, because there are those too who are too poor to even avail themselves of institutional microfinance services. These are the people who lack even the most basic steady sources of income and are, thus, in no position to make the mandatory repayments. Additionally, a large proportion of the people who need such small loans reside in the rural or other far-flung and inaccessible areas. Hence, it is the non-governmental sector that primarily steps in to help these underprivileged people who are passed over by the formal MFIs.