Throughout the developing world, millions of people survive by operating microenterprises. These working poor are typically excluded from conventional financing due to selective lending policies. To meet their working capital needs, many turn to conventional financing sources. They have to pay exorbitant interest rates and unpleasant credit conditions that reinforce the cycle of poverty.
Microfinance was developed to address this problem. Microfinance is the practice of providing financial services, such as microcredit, microsavings, or microinsurance, to poor people. Through the work of microfinance institutions, these people are able to access credit, accumulate large sums of usable money, invest in their entrepreneurial vision, work towards financial stability, and build a better future for the entire community. This expands their options and reduces the risks they face. Microfinance is recognized around the world as a powerful enabler of economic development and an important tool in alleviating global poverty. However, microfinance is aimed only at those who cannot access the bank, who live above the poverty line and are not the poorest of the poor. Microfinance schemes that have served as a basis for the creation of self-employment by placing income-generating assets, such as dairy cows, power looms, small retail stores or street vending equipment, in the hands of the poor and providing them with access to credit and other forms of marketing assistance have worked effectively in the region. This is evident from the success of India’s Integrated Rural Development Program (IRDP), Indonesia’s Kupedes and Badan Kredit Kecamatan (BKK), and Bangladesh’s Grameen Bank.
Pakistan has a population of 160 million (2006), of whom 65 percent live in rural areas. It is a relative outlier in the region, ranking low in both the Gross Domestic Product (GDP) per person ($840) and the Human Development Index (HDI). Pakistan is ranked 134th out of 177 countries in the UNDP Human Development Report 2006. Real GDP has increased at an average rate of more than 7.5 percent per year for the last three years (2004 to 2006). With the population growing at an average rate of 2 percent per year, real income per person has grown at a satisfactory average rate of 5.6 percent (The World Bank Group, “Pakistan at a Glance,” 9/15/06) . The official unemployment rate, which stood at 8.3 per cent in 2002, has dropped to 6.2 per cent (Pakistan Economic Survey 2006/2007). Inflation remains the biggest threat to the economy. Over the past five years, the Pakistani government spent $22 billion on poverty-related and social sector programs that reduced the number of people living below the poverty line from 33 percent of the population to 24 percent. cent currently reported (Government of Pakistan Finance Division Director General (Debt Office)/EA, “Federal Budget and Economy Highlights 2006-7”). However, strong differences between rural and urban areas persist: 28% of the rural population lives below the poverty line, compared to 15% of the urban population below the poverty line.
Considering these economic situations, Pakistan requires the implementation of microfinance programs that create jobs and are sustainable. Microfinance services are provided by different institutions and schemes in Pakistan. These include microfinance banks; non-governmental organizations; rural support programs (such as the National Rural Support Program); commercial financial institutions (leasing companies); commercial banks and government-owned institutions (such as the National Bank of Pakistan, Pakistan Post Savings Bank, and ZTBL Agricultural Bank), cooperatives, and informal providers (informal lending mechanisms throughout Pakistan, such as relatives and friends, landlords, input suppliers, traders and lenders). The Pakistan Poverty Alleviation Fund (PPAF) is the leading provider of wholesale refinancing for microfinance providers. It was launched with the support of the World Bank. State Bank of Pakistan (the country’s central bank) is the supervisor of the formal banking sector, which includes the six microfinance banks. The Securities and Exchange Commission of Pakistan (SECP) regulates non-bank finance companies, insurance companies, non-governmental organizations (NGOs) and rural support programmes. At least 11 bilateral and multilateral donor agencies fund microfinance in Pakistan, along with a number of international NGOs and private funding agencies. The two largest funders are the Asian Development Bank and the World Bank. Micro-financing schemes for self-employment, by commercial banks and other institutions such as the Small Business Finance Corporation (SBFC) and the Pakistan Poverty Alleviation Fund (PPAF) are seen as critical in creating opportunities for educated youth , as job prospects have diminished significantly. got worse
Despite high expectations for these programs, experience with some schemes (for example, Prime Minister Nawaz Sharif’s scheme to provide yellow taxis to people at favorable rates to promote self-employment) has not been encouraging. The Pakistan Poverty Alleviation Fund (PPAF), which aimed to enable the “assetless” to gain access to resources for productive self-employment by lending to NGOs and microfinance banks and improving sustainability Finance is an example of this. After its launch, no funds had been disbursed by the end of 1999. The failure of such schemes in Pakistan can generally be attributed to their weak institutional structure, inefficient targeting, limited coverage, and high loan default rates. The excessive bureaucracy is also an obstacle in the way of the implementation of all these programs. Perhaps the largest operating microcredit scheme is the joint venture of the country’s large bank Habib Bank Limited and a large NGO, the National Rural Support Program i.e. NRSP (quoted from Social Policy and Development Centre, “Annual Review”) . probably only a few NGOs currently have the potential to reach scale. Loan amounts for these NGOs are all below PKR 50,000 and typically below PKR 25,000 for six to 20 month loans (ADB: “The Role of Central Banks in Micro-finance in Asia and Pacific: Pakistan”). There is a paucity of national data available on the microfinance industry in Pakistan, so there is no idea about its sustainability. A report on microfinance in Pakistan (SEBCON 1999, 9) has no numbers to report on sustainability or outreach, stating only that “NGOs in Pakistan have been entirely dependent on external funding sources.” Even large government-supported NGOs include data on their clients and some disbursements in their annual report, but do not include a balance sheet and standard indicators of financial performance.
While microfinance has brought the poor to a sustainable level, its target group in Pakistan is not the poorest of the poor, who need food and health security, but rather those who do not have access to commercial services. bank loans. Even the minimum collateral requirements potentially exclude the poorest in the country. The main reason for this is that the poorest people tend to be less visible and very shy, often living outside the mainstream economy. Likewise, the UNDP report (2000) affirms that “the most extreme poor, having few assets, are reluctant to assume the risks of credit, and when they do, it is generally for emergencies and consumption, not for production”. Microfinance schemes in Pakistan are limited in terms of efficiency of objectives, financial and economic sustainability, and growth potential of the economy.
Poverty is one of the main causes and effects of underdevelopment, as is evident in the case of Pakistan. Instead of focusing only on microcredit, it should be used in combination with effective agrarian reform policies and public employment programs for poverty alleviation, as the combination will be more effective than a single policy, as each of these will be focuses on different aspects of poverty. For sustained poverty reduction and to ensure that the country moves forward on the development path, what is needed is pro-poor economic growth and direct anti-poverty interventions. Microfinance programs in Pakistan can be successful if the banks see it as a great business opportunity and not just a social obligation, which will require more exposure, especially internationally. It will bring greater commitment that will help achieve the much-desired sustainability in these programs.