Growth Prospects Of Microfinance In Pakistan Economics Essay
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Keywords: Microfinance outreach, empowerment of poor, poverty eradication, growth.
Microfinance seems to provide a permanent source of income for the clients making them independent of any further financial aid. Usually formal banking sector excludes low income households, because of non availability of any collateral to cover their borrowings, increasing the risk for the banker. Microfinance institutions provided the enduring solution for the poor.
According to World Bank's Global poverty report (2000), internationally, the percentage of poor people reduced from 29 percent in the year 1987 to 26 percent in 1998 but the number of poor people remained almost same at around 1.2 billion witnessing an increase in population effected the results achieved through various efforts to reduce poverty. Some of the countries in East Asian region made notable progress to combat poverty like China and endorsed reduction in global poverty. South Asia, Latin America and Africa could not demonstrate any achievements to reduce poverty during this time period. In these regions there was either little or no decline in poverty levels. Some regions like Latin America even reported an increase in poverty level, the figure for poverty in this region increased by 12 million taking it up to 78 million. These figures will further amplify if a poverty line of $2 per day (world Bank 2000) is used, which is said to be more suitable for these regions. The most noteworthy conclusion of the said report was, "approximately 75 percent of the world's poor people live in the Asian and Pacific region" out of total 2.8 billion poor people of the world. Amongst these 75 percent poor people the largest proportion of poor live in South Asia. According to an estimate 522 million people are living in poverty in South Asian Region. The occurrence of poverty also rose to 5 percent from 3 percent in countries of Eastern Europe and Central Asia. These regions are expected to host the largest amount of poor people surviving under "poverty line".
1.1 Incidence of Poverty in Pakistan
Pakistan ranks 141st on the 182 countries "UNDP Human Development Index" (HDI) based on 2007 data. It is a comprehensive indicator of well being of people. Various poverty bands of Pakistan's poverty profile show different poverty levels for different provinces. A study conducted by Social Policy Development Center in 1996-97, suggests that the highest incidence of both rural and urban poverty was recorded in Balochistan, 54 percent and 35 percent respectively, followed by Punjab, 29 percent and 33 percent, Sindh, 53 percent and 20 percent, and NWFP, 24 percent and 18 percent.
When poverty is not addressed promptly, it may cause serious impression on Socio-economic structure of the society. Increase in the degree of poverty together with illiteracy, propensity of crime also increases resulting in Socio-economic unrest in the country.
1.2 Microfinance as an Anti-Poverty Strategy
Anti-poverty strategies floated by poor countries achieved less success due to many reasons. However, the breakthrough came when the new Bottom-Up (BP) approach was introduced a few years back. It was felt that empowering people and allowing them to create their own jobs and revenues were recognized as ways through which poverty could be alleviated permanently. The new BP approach gave new life to anti-poverty strategies and a special role to credit in the overall poverty eradication process.
1.3 Microfinance in Pakistan
The microfinance program is not new in Pakistan. It has been operative since October 1972 in one form or the other. It was first launched by the then government to curb poverty. The latest economic survey of Pakistan indicates that as in June 1999, the government had disbursed over rupee 4.2 billion to alleviate the poverty level in Pakistan. The current growth of MFPs is observed in late 1990s.
1.3.1 Microfinance Providers in Pakistan
Microfinance operators working in Pakistan as reported by Pakistan Microfinance Network (PMN) is reclassified into four categories. These categories necessitate some explanation as under:
184.108.40.206 Microfinance Banks (MFBs)
To solely serve the microfinance market these banks are licensed by State Bank of Pakistan (SBP). Their operations also follow the prudential regulations formulated by SBP. MFBs include following; Pak-Oman Microfinance Bank Ltd. (POMFB), Khushhali Bank (KB), Tameer Microfinance Bank Ltd. (TMFB), Network Microfinance Bank Ltd. (NMFB). Rozgar Microfinance Bank Ltd. (RMFB), The First Microfinance Bank Ltd. (FMFB) etc.
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220.127.116.11 Microfinance Institutions (MFIs)
These are microfinance institutions deal in provision of specific microfinance products. They include; Akhuwat, Orangi Pilot Project (OPP), Asasah, Kashf Foundation, Development Action for Mobilization and Emancipation (DAMEN), Sindh Agricultural and Forestry Workers Cooperative Organization (SAFWCO), Community Support Concern (CSC).
18.104.22.168 Rural Support Programs (RSPs)
These programs are running microfinance operations as a division of their multi-dimensional rural development program. These include the following; Sarhad
Rural Support Program (SRSP), Lachi Poverty Reduction Project (LPRP), Thar-deep Rural Development Program (TRDP), National Rural Support Program (NRSP), Punjab Rural Support Program (PRSP).
All institutions that do not fall within above three categories. These are financial institutions in the conventional financial sector, providing microfinance services as a separate function within the broader organizational context. These mostly include CFIs and NGOs. For example; ORIX Leasing Pakistan Ltd. (OLP), Save the Poor (STP), Jinnah Welfare Society (JWS), Sindh Rural Support Program (SRSP), Narowal Rural Development Programme (NRDP), Organization for Participatory Development (OPD), Rural Community Development Society (RCDS), Sungi Development Foundation (SDF), Swabi Women's Welfare Society (SWWS), Taraqee Foundation (TF).
2. Literature Review
Otero (1999) defined microfinance as "the provision of financial services to low-income poor and the core poor self-employed community". According to Otero the objective of microfinance is much more than provision of financial capital to the individual poor. Microfinance has its impact at a broader level. It urges to establish such institutions which contribute to well being of the poor as well as bring a change at global level. Otero further demonstrate the microfinance mechanism to combat poverty.
Ledgerwood (2000) stresses on provision of expanded financial services like insurance and payment services. He emphasized on making microfinance more than it generally include such as savings and credit.
Dichter (1999) refer to the 1990s as "the microfinance decade". He recognized 1990s as the era of accelerated growth in the number of microfinance service providers. This time period is recognized for microfinance turning into an industry.
UNCDF (2004) found that the outreach of microfinance service providers is alarmingly low. Approximately 10,000 MFIs could reach about 30 million people of the world which makes to achieve an outreach of four percent of potential clients. Through its research studies UNCDF identified three very important functions performed by microfinance in development of any country. First, it promotes gender equity by empowering women and making them economically practical component of economy. Second, it is very helpful in promoting economic welfare of the households. Thirdly, it also helps attain the very basic needs of the poor and guard against risks in life.
PPAF (2002) states that the conventional micro credit programs generally exclude extreme poor (the poorest). PPAF identifies two reasons for the exclusion of very poor clients from the network of conventional micro-credit programs. One reason is, poorest keep themselves away from such activities, not considering themselves "credit worthy" either, or may be lack of awareness about micro credit programs lead to their exclusion. Another important reason is that some of the flourishing micro-credit institutions remain cautious to exclude out potentially risky customers from their programs. Most MFIs reported the poorest as most risky to work with.
Khan (2001) commented that Pakistan is clearly on the right course, though significant gains in the fight against poverty are not so far visible. Ultimately, Pakistan's growth and development will depend on the governments' ability to remain persistent with strong fiscal and monetary policies and to continue the momentum of advancing broad-based structural reforms to promote private sector development. Intensifying implementation capacity will be crucial to improving public service delivery to the poor as well as sufficient resources being provided to key social sectors.
Musharaf (2002) says that Pakistan is well aware of the challenges poverty poses to humanity. Inequalities between the richest and the poorest communities are widening. Women are worst hit by poverty, and with them the family unit gets entangled in a vicious cycle of poverty, ignorance, diseases and even more poverty. Action is required on a number of fronts, as only a multi-pronged strategy can deal with the dilemma of poverty.
In this research, methodology includes primary as well as secondary data analysis. For collection of primary data research tool used is questionnaire and it covers the data collection period of 2006 to 2008. Equal importance is given to qualitative and quantitative data both. A variety of sources were helpful for gathering secondary data including various international reports issued by United Nations, Economic Surveys of Pakistan and various periodic publication of Pakistan Microfinance Network. Secondary data analysis was helpful in connecting what has been done earlier and findings of the current research. The selected sampling procedure is quota Sampling. The sample is collected from all four types of MFPs operating in Pakistan as classified by PMN, so that participation of all categories of MFPs could be ensured to make the scope of the research comprehensive. We know that Microfinance Banks (MFBs), Microfinance Institutes (MFIs), Rural Support Programmes (RSPs) and others all have different scope, different clientele, and different objectives. In this view it was important to have representation of all of these four categories in the sample extracted from them.
4. Facts and Analysis
4.1 Growth in Microfinance Providers
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