Microfinance helps to ease poverty by smoothing the poor’s income consumption, enabling them to accumulate assets, and by promoting economic growth (Asian development bank, 2002).It has also been demonstrated to empower poor women by giving them more control over financial resources. Typically Microfinance has become an increasingly common method for alleviating poverty over the past 20 years. It is estimated that about 95% of an estimated 180 million impoverished households in the greater Asia region lack access to financial services (Asian development bank, 2002).
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Shortage of domestic food production, constricted exports, high growth rate of imports, few years back great stoppage for foreign direct investment (FDI), defective banking system with increasing interest of loans for poor, continuous loss in the public enterprises and industries, poor infrastructure of everything, unproductive taxation, high inflation rate, political instability, serious corrosion of law and order situation giving signal for high need towards establishment of MFIs (Asian Development Bank, 2002).These days in most of the part of the world many people are doing crimes because of lack of jobs, unemployment making them to do crimes and informal activities so also in Pakistan its going on, that’s why this situation showing the necessity of microfinance to get bit closer to improved quality life. Microfinance has become a much-favored intervention for poverty alleviation in the developing countries and least development countries. There is scarcely a poor country and development oriented donor agency (multilateral, bilateral and private) not involved in the promotion (in one form or other) of a microfinance programme (Asian Development Bank, 2002).
Basically Microfinance should be subsidized in Pakistan or not has got very much consideration to emphasis on. In Pakistan 6.5 million households require financial assistance and microfinance is serving only three percent of these households. Micro credit is largely provided through nongovernmental organizations, some specializing in micro credit, others offering micro credit as one component in a larger development project. Microfinance institutions give them (borrowers) loans which has become powerful instrument for poverty reduction. The extreme poverty carried on and very poor are likely to use their loans to direct consumption. This is against the philosophy of microfinance. The subsidized loans and grants from domestic and international donors though giving a great help for poor but it severely affects the microfinance operations of MFIs. Microfinance services are provided by three types of sources (Asian development bank, 2000).
• Formal institutions, such as rural banks and cooperatives.
• Semiformal institutions, such as non government organization.
• Informal sources such as moneylenders and shopkeepers.
Microfinance institutions are the only one light to brighten the living and chance to live in a better way with a variety of survival activities and working conditions of the poor, through loans and other financial services those helped to create jobs and made a very good strategy for job creation (Asian development bank, 2000).Microfinance has done its job using anti-poverty strategies with fast, gigantic special effects targeted with exactness at the poor and very poor.
Total number of borrowers and loan takers do not indicate that they will be active savers; they won’t utilize money (loan) in useful manner. Microfinance helps its customers to establish household enterprises and these household enterprises are as great source to create financial resources spent by the household enterprise for consumption, savings, investment and make income, manage risk to protect against income fluctuations for human capital, with side to side education and health care, but just one limitation or exception is the usage of this loan in a constructive manner. Employment, building empowerment and income generation are achievable objectives for micro financing institution. Microfinance helps in income generation and manages risks by risk-managing financial services like as savings, emergency loans and different insurance products to make stable income levels and consumption but borrowers specially those who are in Pakistan are not considering as good active savers which is very bad sign for all Pakistanis. Microfinance institutions should get faster growth in their client base borrower as well as in the client base savers.
The institutions that provide micro finance and credit services include non-governmental organizations (NGOs) credit unions, non bank financial intermediaries, and commercial banks (Sebcom, 1999). Right to use financial services allow individuals and house holds to get good hold over risks and worries to save in secure ways, to invest in a business or home, insure against astonishing shocks, these financial institutions catering so many peoples, still one billion wanting access to basic financial services, especially very poor and the penniless. Most of the microfinance efforts are for modest poor and helpless non-poor (Sebcom, 1999).
As employment come to the achievement of the Millennium Development Goals without fruitful employment, which highly reduced the poverty that estimated will be halved by 2015 (UN, 2001). There is scarcely a poor country and development oriented donor agency (multilateral, bilateral and private) not involved in the promotion of a microfinance programme. However domestic financial improvement participating in poverty alleviation has a say to economic growth.
The best factor of microfinance is, it’s amazing delicacy with poor, they know what will be the better way to cater them (needy), by seeing independent individuals who want their lives changed (Sebcom, 1999). Employment does not mean full time, stable and salaried jobs, but also largely unpaid family jobs in an informal economy; it is indefinable like as unsalaried. Microfinance being against child labor created household-enterprises but they should thought this is seasonal paid job seized with a person from outside the family to a learner or beginner or children presence in school compare to children working at home or even away from home (Sebcom, 1999). Empowerment, group lending, savings etc, facilitate people particularly women to improve public wealth and empowerment. Micro-finance impacts over self employment and unpaid family labor(less on wage employment).MFIs changed the demand of quality work for labors, except loans can agree parents to make enough income, letting their children to go school, away from work and improved work quality of whole household-enterprise. World’s around 3 billion population which is half of the total population are very poor cant able to avail basic necessities and take care of their children or to give them long life. International development, the United Nations (UN) set some Millennium Development Goals that are required to achieve, finish this poverty from the world by 2015 for this millennium development (UN, 2001). International institutions, developed nations, and the developing countries are approaching these development goals through giving diligent attention to long-term donors and foreign supports, therefore these countries and institutions highly emphasizing on international trade by means of development, international capital surge, efficient capital markets, corporate governance. Domestic financial improvement participating in poverty alleviation has a say to economic growth but financial improvement and poverty alleviation is not an easy task (Zaman, 2003).
The goals of development strategy is apprehension with economic growth to reduce poverty, increase interest in the contribution that financial development can make to poverty reduction in developing countries, it has an excellent example of Bangladesh. Bangladesh helped out thirteen million poor via ascertaining two hundred microfinance institutions (MFIs) but the industry is dominated by four large MFIs (BRAC, Grameen, ASA and Proshika) that serve around 11.4 million or ninety percent of all clients. That is truly admirable. All of the microfinance institutions covered $800 million in outstanding loans and around $380 million in savings (Zaman, 2003). And in this development there is an important role of Grameen bank. Micro credit came in real scene in 1980s, Grameen Bank is an important institution provided greatly micro credits in Bangladesh, their most valuable borrowers are twenty-seven million people, more than half are women and total outstanding loans are amount to $1 billion having repayment rates of ninety-five percent and this development policy strengthening links between financial development, economic growth, and poverty alleviation specially for serving the poor (Morduch,1999).
Many microfinance institutions (MFIs) have developed large-scale operations by offering a few highly standardized products. In providing “one size suits all” loan terms and conditions, designing administration with a form that will present very little resistance to a flow of loan, simpler or easier decision making for field staff, less desirable state of the information required from clients, and operating costs must be grasp down (Meyer,2001). By limiting the range of interest rates, repayment schedules and the way interest is charged, also simplified the calculation of repayment obligations and the explanation of those obligations to uneducated borrowers (Microfinance Council, 2006).Focus groups and marketing studies are being used to better understand client preferences. MFIs are experimenting with more flexible products designed to retain existing clients and attract new customers, especially in markets where competition among MFIs is becoming more intense.
In Pakistan about 6.5 million households need microfinance services, while the sector serving just 0.5 million households. Financial services are existing already in developing countries repeatedly got some difficult boundaries in terms of cost, risk, and convenience (Sebcom, 1999).
There is a strong demand of MFIs in Pakistan considering increased need of loan for borrowers.
The combined average number of active savers for the changed group was approximately 75,000 in 2006 up from approximately 15,000 in 2002. This increase suggests an expansion of the borrower’s base targeting, both new and existing borrower looking for saving products. This shows there is a strong positive relationship between no of MFIs and active savers (Frank, 2008).
Importance of offering savings products is a key motivation for MFI transformations and savings provide a protective cushion and security for clients in times of sudden liquidity needs such as health emergencies and natural disasters (Microfinance Council, 2006).
MFI targets poor households that have not much income-generating activities and debt capacity to borrow through a group methodology, so they introduced micro enterprises for individual business loans to increase their income with consumption as well as savings where as women came across with high saving quality (World Bank, 1996).
For this research study Secondary data gathered for 5 years from 2003-2007, and this data collected from the source “Pakistan Microfinance Network”. The statistical tools applied to test the hypothesis are Bivariate correlation and Bivariate regression model as there are two independent variables (no of borrowers and gross loan portfolio) and one dependent variable (active savers) and these model indicated insignificant result for the subsidization of microfinance in Pakistan.
This research aims to examine subsidization of Pakistan, after the success of microfinance subsidization in many other countries, this research based on Whether Microfinance should be subsidized in Pakistan or not conducted and tested through bivariate correlation and bivariate regression but the result came insignificant. And these insignificant results showed that microfinance should not be subsidized in Pakistan because total number of borrowers and loan takers do not indicate that they will be active savers, they won’t be able to save some money for the betterment of their life and in fact are less responsible on the way to save. Microfinance focuses on poverty alleviation rather than those who just focus on financial results, financial results undoubtedly are more effective at reaching the very poor (Rasheed, 2005).Governments of developing countries obtained a great start, initiating variety of programmes with subsidized micro credit, repeatedly schemes continue till such subsidized funds are available. Due to these subsidized financing large commercial banks, MFIs find it difficult to survive (Groen, 1998). From a microfinance point of view it might increase the likelihood that financial development more broadly can contribute to poverty alleviation but this is not going to work here in Pakistan (Rasheed, 2005).In this situation microfinance subsidization in Pakistan will not be possible if it can’t improve the life of civilians.
Initially when microfinance established in Pakistan to alleviate poverty, it seemed to work well but now it’s indicating that there is high need to check out the savings of active savers and borrowers as well, are the borrowers active savers and what they doing after captivating loans?. Most of the borrowers are not able to get back loans because of unfair utilization of capital.
This study got some limitations too in collecting the information related to Pakistan’s financial development situation. To have the data of microfinance institution was very much difficult and there was not much written information.
Outline Of Study
Chapter 1
Current chapter has discussed Microfinance introduction.
Chapter2
This session has been on literature review in which variables related research have given.
Chapter 3
Theoretical Framework for hypothesis has been done in this chapter.
Chapter 4
It has been about research methods and hypothesis summary.
Chapter 5
This chapter has been explaining results and finding of the research.
Chapter 6
This chapter has been for conclusion and discussion of the research.
Chapter 7
Final chapter has been covering references.
Chapter 2: Literature Review
World is availing excellent Microfinance facility for the financial development by means of financial services, to alleviate poverty and help poor. Also Building demand improvements in the financial market largely and overcoming the poverty troubles but most of the Asian countries got failed in establishment of microfinance institutions (MFIs), it’s not ignorable that nongovernmental organization (NGO) or bank really doing their work perfectly, have become completely economically sustainable and competent of attainment important micro entrepreneurs, checking out and forecasting series of models, products, up coming industry and a great future of the microfinance in Pakistan (Rutherford, 1993).MFIs are vita to the banking system that increase credit loans to borrowers for them who think banks are costly and risky to reach (Zaman,2003).
Microfinance is not just about micro credit or lending small loans to the poor, in bigger perspective it’s the source of insurance, transactional services and savings. But at what rule or condition microfinance have to work, researches showed healthy microfinance needs higher interest rates but it would be little difficult to reach to the poor having high interest rates. How ever financial services are existed already in developing countries repeatedly got some difficult boundaries in terms of cost, risk, and convenience sometimes when poor need urgent credit they suffered from moneylender’s high rate problems, collateral that make poor helpless (Zaman, 2003). Microfinance helps demand for market improvement like credit information and bureaus benefit financial deepening. If microfinance institutions grow, competition will get up and borrower can choose among lenders for higher default rates, so that conditions between borrower and lender will sound weaken. Credit history will distinguish as reputation, collateral for micro credit borrowers usually lack much physical collateral. Banks do not demand clearing houses because only banks get access to the credit data; private returns to banks are lower than the social returns to information sharing under a number of reasonable states of affairs. Microfinance programmes are associated now to remittances of abroad which have turned out to be an important source bringing capital for microfinance institutions making MFIs self relied used for a development strategy as a gross domestic product in developing countries (Zaman, 2003). There is a problem of high repayment rates, which come from the high transaction costs in lending small amounts to many poor borrowers. Indonesian microfinancing institutions failed other financial services giving institutions short-term loans stretched repayment programme to cover up need of borrowers in the future.
In socio economic development microfinance did not show any sudden change, they thought of social mobilization against existing injustices, would suffice and financial services were unnecessary. With respect to microfinance, Bangladesh is an excellent example initially microfinance acquired help of Bangladesh Bank and commercial banks to provide support to the ‘Grameen Project’ and made groups consisted over five individuals for the repayments, all these groups by keeping view of males and females in one group, come together weekly to informed their approach for the repayments to other groups. ‘Occupational groups’ were composed also for the good deed of village-based groups. MFIs developed some new plans like as
(i) Introducing more flexible repayment schedules such as ASA’s Flexible Loan Programme.
(ii) Lowering first loan floors to make them feel easy and set loans as small as 500 taka ($9).
(iii) Grameen’s programme based on zero interest loans to beggars.
(iv)The Resource Integration Center’s programme offering loans susceptible group of extremely poor. (Rutherford, 1993).
Grameen made its grants from many sources and the main contributors have shifted over time. Initially donors offered the volume of capital at very cheap rates. 1990s, Grameen availed most of its funding from the Bangladesh Bank, the central bank with some marginal funding coming from money markets and bond sales 5%. Benchmark cost of capital of the deposit rate plus 3% yields, that the Bangladesh Bank had been offering Grameen about a 40% discount on interest (Zaman, 2003).
It is really a remarkable achievement of NGO (non governmental organization) and MFI (microfinance institution) to got almost rid from unemployment through small household loans and been a key factor behind the success of the microfinance industry (Zaman, 2003). Leadership skills played a very important role in this success and in the process of building up trust of poor on them.
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Because of productive and beneficial donor client relationship MFIs can stand proudly in this position, both of them played their role positively in strengthening microfinance industry, the reasons is, every one performed their responsibilities sincerely and used large part of donor investments in capitalization of MFIs loan fund, development of institutional capacity with respect to management information system and human resource development. Donors also invested in organizational systems and MFI staff training, in order to strengthen the capacity to administer these growing programmes. Second, large NGOs in particular have been reasonably successful in “managing donors”; have invested capital in expanding MFIs with a strategic sustainability plan. This splendid Success of microfinance somewhere is because of best donor role who fund greatly to poor households (Zaman, 2003).
Microfinance institutions casing up the problems like poverty alleviation, growing domestic credit demand which couldn’t solve out due to bad governance, many of the risk alleviation techniques developed by microfinance institutions techniques were peer lending, creditor protection (enforcement on collateral). Microfinance did not rely on government support, strong legal institutions allowed poor to borrow against their assets or creditors to collect, as bad governance could obstruct micro finance’s growth. Microfinance institutions functioning as a strong pillar in state affairs development, as well as progressing ability of the poor to build assets, increase price competition and forcing down interest rates, where other sectors of a country are self-conscious (Barr, 2005).
The goals of development strategy are apprehension with economic growth. Development is a source to economic growth and economic growth is the source to poverty alleviation, for economic development banks worked as a key, the reason is they direct economy’s savings to entrepreneurs who creates (Barr,2005).Microfinance being against child labor created household-enterprises, but they should thought that this is seasonal paid job seized with a person from outside the family, to a learner or beginner or children presence in school compare to children working at home or even away from home. These household enterprises are great source to create financial resources spent by the household enterprise for consumption, savings, and investment and make income, manage risk to protect against income fluctuations for human capital with side-to-side education and health care (Barr, 2005). Challenges to establish impact of microfinance on employment were:
1. Employment was not the one man decision, required so many people’s filtered decisions made with the MFI clients; mostly entrepreneur took decisions of investment, budget allocation decisions.
2. Micro-finance impacted over self-employment and unpaid family labor (less on wage employment).
3. How microfinance helped to differentiate household enterprise from paid and unpaid employment like unpaid family worker and non family worker, caught a special eye of MFI for repeat loans or continuous flow of credit which usually on very low wages. The reason was, workers always take on to be paid at market rates, this become view through rose-tinted glass of a rising MFI client brought employment for poor.
4. MFIs changed the demand of quality work for labors, except these loans agreed parents to make enough income let their children to go school, away from work and improved work quality of whole household-enterprise (Balkenhol, 2006).
MFIs Increased their income, improved quality of life; gave ability to afford food, shelter, education and healthcare and made the local community stronger.
Well aware ILO surveyed and got to know that 46 MFIs operating in 24 different countries and has 74% self employed clients, 17% were mainly self employed in their clientele and 9% had only a minority of self employed amongst their clients. Agricultural loans were for self-employment, where consumer loans were dealings with wage employed (Balkenhol, 2006). There were also important differences between sectors specially erection of jobs in agriculture and manufacturing.
Central bank paid $ 791 million credits to commercial banks by way of refinancing. Zambuko Trust in Zimbabwe participated in programme has an influence on the number of person-hours worked, that on the whole paid employment more established amongst clients than in the control group, but there was no impact on paid employment.
If it was happening in other countries then why Pakistanis were not taking this advantage from microfinance (Balkenhol, 2006).MFIs usually have the sound knowledge and position of superiority or inferiority for different sorts of employment outcomes. MFIs encircled all structures of paid, somewhat paid and unpaid labor, from the family and outside then they go for clients typify the household enterprise and considered only wage employment from outside family as actual hard employment, 5 to 10% of micro entrepreneurs generally chosen those were self-motivated, accumulated capital and raised productivity and could enlarge small and formal enterprises with forming continuously real jobs, stable and well-paid (Balkenhol, 2006).
Microfinancing in Pakistan
Microfinance was a relatively new and emerging sector of the development industry in Pakistan. However, in the past few years, both the Pakistan government and the nonprofit community have taken a more active role in promoting its growth and development.
Consequently, the sector is enjoying the benefits of this attention, through an increase in funding, exposure in the media, and improved workforce recruiting. After the government sector Khushhali Bank appeared with 173 offices in 75 districts and 345,000 clients, first microfinance bank approached with 30000 clients in just two years in private sector (Rasheed, 2005). In Pakistan about 6.5 million households need microfinance services, while the sector serving only 0.5 millions. Over 90% potential clients were then left out. MFI, the KASHF Foundation has currently about 70000 clients and functioning well. Presently following organization working in microfinance sector and many more are willing to participate (Rasheed, 2005).
Microfinance Providers
Kashf Foundation
Khushhali Bank
Orix Leasing Pakistan
Sarhad Rural Support Programme (SRSP)
Sindh agricultural & Forestry Workers Coordination Organization (SAFWCO)
The Bank of Khyber
The First Microfinance Bank Ltd
Urban Poverty Alleviation programme (part of NRSP)
Donors and Investors
• Asian Development Bank (Pakistan programme)
• Pakistan Poverty Alleviation Fund (PPAF)
• Swiss Agency for Development and Cooperation (SDC)
Supporting Organizations
• Pakistan Microfinance network (PMN)
• The State Bank of Pakistan
International Efforts
Figure 2.1
(Source: Montgomery & Weiss, 2005)
All over the world, microfinance institutions including international formal and informal institutes are coming into consideration to alleviate poverty and better standard of living (Montgomery & Weiss, 2005). Asian Development Bank (ADB) did very hard to attain set goals, of giving development collision including reduction in the incidence of poverty, as well as they making aware people of micro finance advantages (Montgomery & Weiss, 2005).
In NWFP Khushhali and First Microfinance Bank, the banks of Khyber performing good, micro-financing institutions required help of commercial banks for improved services, suitable microfinance environment. Millennium Development Goals (MDGs) of UN covered wide array of extreme poverty to uncertain the spread of GIV/AIDS, universal primary education by 2015 structured a plan agreed to by all the world’s 44 countries and the entire world’s leading development institutions (UN, 2001).
Good financial services for the poor those do this job in the safest, most convenient, most flexible and most affordable way. For the temporary poor who were helpless in fluctuations of income that brought them close to or below the poverty line, microfinance provided the possibility of credit at times of need, and in some schemes the opportunity of regular savings by a household itself (Zaman, 2003).
The avoidance of sharp declines in family expenditures drawn on such credit or savings allowed smooth consumption (Zaman, 2003). In practice this distinction between the needs of the chronic (continual) and transitory poor to credit for ‘promotional’ (that is income creating) and ‘protectional’ (consumption smoothing) purposes, respectively is over-simplified since the chronic poor also have short term needs that have to be met, whether they were due to income shortfalls or unexpected expenditures like medical bills or social events for example weddings or funerals (Hulme & Mosley, 1996).
One of the most interesting generalizations emerged from the microfinance and poverty literature was that the poorest of the chronic poor (the core poor) borrowed essentially for protectional purposes given both the low and irregular nature of their income. It suggested, is to risk averse to borrow for promotional measures (that was for investment in the future) and therefore only a very limited beneficiary of microfinance schemes (Hulme & Mosley 1996). It is defined poverty as an income (or more broadly welfare) level below a socially acceptable minimum, and microfinance as one of a range of innovative financial arrangements designed to attract the poor as either borrowers or savers.
The condition of poverty has been interpreted conventionally as one lack of access by poor households to the assets, necessary for a higher standard of income or welfare, whether assets are thought of as human (access to education), natural (access to land), physical (access to infrastructure), social (access to networks of obligations) or financial (access to credit) (World Bank, 1996). Most MFIs offer savings products. MFIs do rely mostly on savings mobilized for their lending activities and tend to have more savers than borrowers. NGO-type institutions (RIM, Vision Finance, Urwego and Inzira) did not originally mobilize deposits, and used to rely on external donor funds for their lending activities. However, with the new microfinance regulations, such MFIs may be allowed to mobilize deposits when granted a license by NBR.Poor people can save and want to save; when they do not save it is due to lack of opportunity rather than lack of capacity. During their lives there are many occasions when they need sums of cash, the only reliable way of getting hold of such sums is by finding some way to build a bit from their savings. They need these lump sums to meet life cycle needs, to manage with emergencies and to take hold of opportunities to acquire assets or develop businesses (Rutherford, 1999). The job of financial services for the poor is to provide them with mechanisms to turn savings into lump sums for a wide variety of uses (not just to run micro enterprises). Each individual region saw a decrease in active borrowers and an increase in gross loan portfolio. In most cases, this was supported by a corresponding increase in loan balances related to income levels.Though, there was evidence that MFIs are moving down market as loan balances relative to income levels decreased (Rutherford, 1999).
The poor turn their savings into a single payment made at a especialy intense time by identifying consistently good in quality deposit takers, by attempting to find advances in anticipation of future savings (loans), or by positioning up plan similar to ROSCAs and savings clubs. A study of these traditional methods reveals the importance of the frequency and regularity of deposits, of the timescale over which the deposit is made. Some but not all, of these lessons have been learned by the two new sets of players that have emerged recently to form the new ‘microfinance industry (Rutherford, 1999).
There are ‘promoters’ organizations that seek to help the poor, set up financial services devices owned by themselves or their communities and ‘providers’ new financial intermediaries, sell financial products to the poor. Providers, it is found are better able to reach large numbers of poor people with innovative products, build on the experience of the informal sector. To develop good financial services for the borrowers, there is need for products that suit the poor’s’ capacity to save, their needs for lump sums and product delivery systems that are convenient for the poor. It is aimed at microfinance practitioners that intended to
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