Microfinance Industry Pakistan is often demarcated as financial services for poor and low-income customers offered by different types of service providers. Microfinance typically refers to a wide range of financial services including credit, savings, insurance, money transfers, and other financial products provided by different service providers, targeted at poor and low-income people
In practice, the term is often used more by a whisker to refer to loans and other services from providers that identify themselves as “microfinance institutions” (MFIs)
The microfinance revolution began when Bangladeshi economist professor Muhammad Yunus first handed over a few dollars to an impoverished basket weaver in 1974. The granting of very small loans to the poorest people in the world to enable them to run small businesses that will lift them out of poverty. Has won fervent supporters across the globe. Last year, Yunus and the microfinance institution the founded, Grameen Bank, shared the Nobel Peace Prize. It is well recognized fact that microfinance is the most suitable way to empower the poor and to increase their income generating capacity. In Pakistan as well as at international level, the importance of microfinance as a tool to eliminate poverty is well putative. The basic idea of micro-finance services is to provide the financial assistance to the poor at the time he or she needs it at the doorstep and at a very expedient condition. Recently microfinance has got distinct attention not only in the academic debates but also in the area of policy making.
Despite progress made over the past few years, outreach of the sector is just 40% of the target outreach of 3 million poor. Growth of the sector is largely led by a few unsustainable institutions that lack operational and financial sustainability. The financial self-sufficiency of the sector is as low as 76 percent and the average return on assets (AROA) of the sector remain negative. Instead of laying emphasis on intensive growth strategy of utilizing the existing capacity to improve productivity and efficiency and reliance on mobile offices, the sector focused on extensive expansion in terms of fixed branches and offices which led to high operating and financial costs of majority of the institutions. As a result the sector remains dependent on external support, subsidized credit and tax exemptions etc. Besides paid up capital financially majority of the institutions rely on donor funds and subsidized debt as the major source of funding. This implies future growth of the sector is conditional upon the availability of donor funds or subsidized credit, otherwise growth of the sector may slow down. Moreover, besides the issues of outreach and sustainability, the recent slow growth of GDP and high inflation may also impact the progress of the sector.
Currently there are four types of microfinance institutions working in Pakistan and these are as follows.
1. Microfinance Institutions (MFI or Specialized NGO)
2. Rural Support Programs (RSP) RSPare established to alleviate poverty in rural areas. RSPs are running microfinance operation as part of multi-dimensional rural development program.
3. Non Government Organizations (NGOs)
4. Commercial Financial Institution (CFI) CFI are commercial institutions providing microfinance services to the small and medium sized entities. Organizations providing Micro
finance in Pakistan.
At present following microfinanceinstitutions are operating in Pakistan:
Micro Finance Banks
- Finca Microfinance Bank
- Apna Bank
- Khushhali Bank
- Network Microfinance Bank Limited (NMBL)
- Tameer Microfinance Bank Limited
- The First Micro Finance Bank Limited (FMFBL)
Micro Finance Institutions
- Community Support Concern
- Development Action for Mobilization and Emancipation
- Orangi Pilot Project
- Sindh Agricultural and Forestry Workers Cooperative Organization
Rural Support Programmes
- Lachi Poverty Reduction Project
- National Rural Support Programme
- Punjab Rural support Programme
- Sarhad Rural Support Programme
- Thardeep Rural Development Programme
Notwithstanding the fact that microfinance has shown significant growth in the last twenty years or so, however, the opportunities are still there for this sector to grow further.
Poverty Alleviation Poverty is one of the major problems of the world at this juncture. Obviously, Pakistan is not an exception to it. It is proven that poverty can be reduced from microfinance. It is also admitted that role of microfinance is not just restricted to poverty alleviation but it also diversifies income carrying sources, builds assets and improves the status of women. It has a positive impact on income and assets levels.
Social Capital and Economy Microfinance has a significant impact on health and social capital and ultimately on economy. According to an estimate an increase of 1% on Grameen Bank (Bangladesh) credit to women increased the probability of school enrolment by 1.9% for girls and 2.4% for boys. Microfinance generates income, and employment follows other than from agriculture, with the result of that it helps to smooth consumption and labour supply.
The availability of microfinance or such type of services acts as a buffer against any unexpected emergencies, business risks and temporary slumps. It helps the poor to uplift them from just subsistence level and bring into the position of stability. In this way it becomes an important tool for economic development of the country.
Microfinance as a new field provides a good opportunity for commercial banks. Very high rate of recovery and probability of higher profit gives a good opportunity to commercial banks for investment of their funds.
Improper Regulations In the last decade this sector was not regulated, and still a lot of work has to be done. The existing regulations in many cases are not appropriate and these are undercutting the growth of this sector. It is the need of the time to liberalize the regulations and restrictions. Some rules which were made at the initial stage now have required serious reconsiderations because they become a big hurdle when the sector is in a position of take off. Moreover, it is quite necessary to reform regulatory norms which are quite complicated and have become the reasons of increasing cost, especially regulations about funds transfers, insurance and saving deposits etc. require serious attention.
Increasing Competition With the introduction of formal microfinance banks and institutions, competition among them is quite tough. Another important fact is that with the increase in awareness, clients are now demanding more services, which ultimately warrant a cost increase. It is a confront situations for MFIs. Interesting fact is that this competition is not so serious in formal segment of the sector.
MFIs Profitability In microfinance sector due to the special circumstance on demand side, MFIs cannot charge high rate of interest. It is the reason that MFIs do not consider their credit operations as a significant means to generate revenue and to cover their cost of operations. This fact minimizes their margin of profit to a large extent. So it is necessary that some concessions must be provided by the government for the healthy operation of MFIs. Innovative and Diversified Products Microfinance is just not restricted to micro credit only. A wide range of products are included in it e.g. savings loans, insurance money transfer, services and working capital loans. Unfortunately in most of the cases MFIs have restricted themselves to just micro-credit. Expansion of the sector depends upon the fact that range of services should be increased and upto maximum number of clients. Low salaried persons are that segment of the market which is yet to be explored, with different types of financial services.
MFIs depends upon continuous development of banking sector. Microfinance in a particular context is a by-product of banking sector. Hence its stability depends upon the banking sector. But the time has come that this sector should stand on its own feet. Definitely it is a big challenge for it.
Many MFIs are converted from NGOs to this position. The role of NGO and MFI is quite different. No doubt, both of these are working to achieve the same target but the main difference is in methodology. Most of MFIs, which are converted from NGOs, do not have sufficient managerial capacity to run this different type of institution. It is a big challenge for them to overcome this deficiency.
Political Interference In the rural areas of Pakistan role of landlords is very obvious. They openly exploit the poor people. A big proportion of loans of agriculture sector is taken by them. Microfinance sector is also negatively hunted by their negative activists. Proper legislation is required to protect this sector from their exploitation.
High Transaction Cost is another big challenge ahead this sector is high transaction cost. The volume of transactions is very small, whereas the fixed cost of those transactions is very high. It cannot vary with the size of the loan. The higher a producer’s fixed costs in the proportion of his total cost, the element of risk increases in the same proportion. Moreover, if the demand for the product falls or the marginal costs increases, it becomes very difficult to adjust the cost by cutting output. This cut will reduce revenue out of which he has to pay principal amount as well as interest on the loan. This needs to be rationalized.
Inadequate investment by government in agriculture sector and for the rural development is a big constraint in the way of microfinance promotion. Insufficient investment in physical infrastructure is a big problem in the development of microfinance sector because non-availability of infrastructure automatically increases the cost of doing business and ultimately discourages private investment.
The working and efficiency of banking sector as well as MFIs largely depends upon the quality of human resources, operating system procedure and practice and the level of knowledge of the person who are responsible to run that system. Unfortunately, existing human resource has a very low knowledge level which is quite insufficient to run this mechanism smoothly. It is another big challenge for the MFIs in Pakistan.
Microfinance services for the poor are now widely promoted as a key strategy for poverty reduction. Many microfinance programs have increasingly targeted women in response to experience of excellent repayment rates. However micro-finance is no magic bullet. Badly designed micro-finance programs (even if financially sustainable and female-targeted) may have very limited impact on poverty. Credit programs may not enable people to increase incomes but may accelerate a downward spiral of indebtedness. Female targeting may not benefit women but merely shift the burden of household debt and/or household thrift onto women. Microfinance is comparatively a new branch of finance and in Pakistan it is almost at the stage of takeoff. Since 2000, this has observed rapid growth and performed tremendously as a market player. However, challenges are still there in the way ahead, which need to be faced with strategies policies. Besides, there are opportunities too which can be availed if government is keen to provide level playing field to the private sector market players in this area.
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