8/6/2019 Micro Finance and Its Challenges and Opportunities in Pakistan
1/23
1
Executive Summary and Introduction
Microfmance collectively refers to the supply of loans, savings accounts, and other basic financial
services like insurance, to the poor. About one billion people globally live in households with per
capita incomes of one dollar per day (Morduch J. 1999). As the poor people cannot avail these
financial services from the formal commercial banks (because of the collateral requirements),
microfinance tends to provide to them exclusive of these conditions. The objective of micro-
lending is that the rural people in developing countries are engaged in financial activities but at a
very informal level like savings clubs, rotating savings and credit associations and mutual
insurance societies, that have a tendency to be erratic and insecure. Microfinance tends to provide
them these facilities at a much lower rate than what they get from these informal means and
provides a much lesser risk also. Microfmance loans are usually less than $200. Dr. Muhammad
Yunus became the first Bangladeshi to win a Nobel Peace Prize in 2006. He achieved this as a
result of his phenomenal work in the field of microfinance. Since its introduction in Bangladesh in
1976, microfinance has significantly gained lots of importance in the financial world. The practice
of matching small amounts of seed financing with the talents of entrepreneurs is gaining a serious
attention all over the world. The nature of this research is to study the concepts of microfinance
and then to study the policies that have been made by the State Bank of Pakistan and how they are
affecting the practices. State Bank of Pakistan (SBP) is the central bank in Pakistan and is
responsible for making guidelines for the financial sector. The central research question that has
been answered in this report is: at are the differences between the microfmance policy goals and
the realization in Pakistan and which factors influence such differences? SBP established a goal
for the year 2010 for the microfinance sector to achieve three million borrowers.
Microfinance has a positive impact far beyond the individual client. Studies show that vast
majority of the loans go to women as women are more likely to reinvest their earnings in the
business and in their families. When their families cross the poverty line and micro-businesses
expand, their communities benefit. Jobs are created, knowledge is shared, communitys
participation increases, and women are recognized as valuable members of their families and
communities.
8/6/2019 Micro Finance and Its Challenges and Opportunities in Pakistan
2/23
2
The microfinance sector in Pakistan consists of regulated and self regulated organizations,
depending on the type of organization they are (e.g. MFI, NGO or a Bank). According to theWorld Bank's Consultative Group to Assist the Poor (CGAP), Pakistan is a late starter but less far
behind the sector in other countries in South and South-East Asia. It has made considerable gains
after the inception of the MF Ordinance in 2001. The target set out by the Government of Pakistan
for MF sector for 2010 is three million borrowers. The sector is building up itself strongly yet
there are a few problems that might be a threat to the sustainability of the sector. This report
considers a few problems that might occur in practice of microfinance in Pakistan due to the
policies.
The Government of Pakistan and the Central Bank are trying their best for growth and progress of
the Microfinance Sector on a sound and sustainable basis. As of the issuance of the new Prudential
Regulations in October 2002, all licensed MFIs including Khushhali Bank are now under the same
regulatory framework and a level playing field is being ensured for all the players. Before that
Khushhali Bank had a separate regulatory framework, but now works under the same Prudential
Regulations 2002. The policy makers' vision for the sector is to develop a conducive policy
environment in which MFIs could establish, flourish, grow and provide a full range of financial
services to the poor. The State Bank of Pakistan tries to ensure to have risk management systems
fully in placed with efficient treasury management systems to ensure safety of depositors.
Overall the Government along with the Asian Development Bank has been busy making new
policies and different ways to enhance the sustainability of this sector. More focused efforts need
to be made. Microfinance in not widespread in Pakistan. The aggregate outreach from Banks and
other institutional sources is less than 5% of the potential market of nearly 6.3% households
(World Bank). The microfinance sector in Pakistan is characterized by a narrow institutional base,
limited retail capacity and little, if any, financial integration (CGAP).
It is, therefore, a matter of urgent priority for the country that a pro-poor financial system, with therecognition of its business prospects, is established as a critical element for combating the rising
incidence of poverty. This is being undertaken in a manner that is consistent with the overall
8/6/2019 Micro Finance and Its Challenges and Opportunities in Pakistan
3/23
3
reforms in the banking sector in terms of autonomy, good governance, privatization and
sustainability.
Concept of Microfinance
Microfinance collectively refers to the supply of loans, savings, and other basic financial services
like insurance, to the poor. As the poor people cannot avail these financial services from the
formal commercial banks (because of the collateral requirements), microfinance tends to provide to
them exclusive of these conditions. For these financial services, the poor people are willing to pay
for because of the added advantage they receive for not collateralizing anything. The term also
refers to the practice of sustainably delivering such services. More broadly, it is a movement thatenvisions a world in which as many poor and near poor households as possible have permanent
access to an appropriate range of high quality financial services, including not just credit but also
savings, insurance, and fund transfers (Christen, R. P., Rosenberg, R., and Jayadeva, V., 2004).
Prior to the introduction of microfinance, development projects in 1950s, usually introduced
subsidized credit programs targeting at specific communities. Such schemes often met with
failure. Poor repayment discipline and subsidized lending rates caused massive capital loss for the
rural development banks.
Ever since its introduction in Bangladesh in 1976, microfinance has significantly gained lots of
importance in the fmancial world. The practice of matching small amounts of seed financing with
the talents of entrepreneurs is gaining a serious attention all over the world. In microfmance,
entrepreneurs who are unable to provide appropriate security to the bank for a loan, form a group,
called as a Self Help Group,' with each other and get the fmancial services in the form of small
loans, usually amounting less than $200.2 All individuals of such a group forfeit the chance for
future loans, if one of them fails to repay his/her loan. This approach uniquely combines peer
pressure and mutual support, and has produced pay back rates at approximately 98 percent
(Trickle-up Economics, 1997), which is more than the recovery rate of the individual loans.
During 1980s and 1990s, microfinance programs throughout the world improved upon its original
8/6/2019 Micro Finance and Its Challenges and Opportunities in Pakistan
4/23
4
methodologies and disapproved conventional wisdom about financing the poor. First, it is well
known that poor people, in particular women, had excellent repayment rates among the betterprograms3, rates which were far better than the usual financial sectors of most developing
countries. Second, the poor were willing and easily able to pay interest rates that allowed
microfmance institutions (MFIs) to sustain them by covering their own costs and to attract more
clients in huge numbers. Another equally important aspect of microfinance is the recycling of
funds. As loans are repaid, usually within six months to a year, they are re-loaned. Such a
continuing reinvestment multiplies the impact of each dollar being loaned.
Such unique strategies make microfinance to be often considered as one of the most effective and
flexible strategies in fighting against global poverty. Sustainable microfinance can be
implemented on a massive scale, necessary to respond to the urgent needs of those people living
on less than $1 per day, i.e. the world poorest.
Microfinance has a positive impact far beyond the individual client. Studies show that vast
majority of the loans go to women as women are more likely to reinvest their earnings in the
business and in their families. When their families cross the poverty line and micro-businesses
expand, their communities benefit. Jobs are created, knowledge is shared, community
participation increases, and women are recognized as valuable members of their families and
communities.
Microfinance Institutions
A microfinance institution (MFI) is an organization that provides financial services to the poor.
This very broad definition includes a wide range of providers that vary in their legal structure,
mission, methodology, and sustainability. However, all share the common characteristic of
providing financial services to a clientele poorer and more vulnerable than traditional bank clients.
Quite simply, a micro finance institution is an organization that offers financial services to the
very poor. Most MFIs are non-governmental organizations committed to assisting some sector of the
low-income population. MFIs build resources by support of government or public institutes or
8/6/2019 Micro Finance and Its Challenges and Opportunities in Pakistan
5/23
5
formal/informal NGOs (Sapovadia, V. K., 2003-2004).
Historical context (as discussed previously) shows that experiments in the field of microfinance
starting from 1950s till 1980s resulted in the emergence of several non-governmental
organizations (NGOs) that provided financial services to the poor. In 1990s, many of these
institutions transformed themselves into formal financial institutions in order to access and on lend
client savings, thus enhancing their outreach.
Classification of MFIs
a.ProvidersMicrofmance institutions have been classified by the PSIA (Oxford Policy Management, 2006) as
follows:
(1)Formal providers are sometimes defined as those that are subject not only to general laws but
also to specific banking regulation and supervision (development banks, savings and postal banks,
commercial banks, and non-bank financial intermediaries).
(2)Semiformal providers are registered entities subject to general and commercial laws but are not
usually under bank regulation and supervision (fmancial NGOs, credit unions and cooperatives)
(3). In formal providers are nonregistered groups such as rotating savings and credit associations
(ROSCAs) and self-help groups. To these providers neither the banking laws nor general
commercial laws apply.
b.OwnershipOwnership structures of MFIs can be of almost any type imaginable. They can be government
owned, like the rural credit cooperatives in China; member-owned, like the credit unions in West
Africa; socially minded shareholders, like many transformed NGOs in Latin America; and profit
maximizing shareholders, like the microfmance banks in Eastern Europe.
8/6/2019 Micro Finance and Its Challenges and Opportunities in Pakistan
6/23
6
c.Focus
Focus of some providers is exclusively on financial services to the poor. Others are focused on
financial services in general, offering a wide range of financial services for different markets.
Organizations providing financial services to the poor may also provide non-fmancial services.
These services can include business-development services, like training and technical assistance,
or social services, like health and empowerment training.
d. Services
Services that poor people need and demand are the same types of financial services as everyone
else. The most well-known service is non-collateralized "micro-loans," delivered through a rangeof group-based and individual methods. The menu of services offered also includes other adapted
to the specific needs of the poor, such as savings accounts, insurance, and remittances. The types
of services offered are limited by what is allowed by the legal structure of the provider. Non
regulated institutions are not generally allowed to provide savings or insurance.
There is an almost infinite variety in the type and mix of microfinance service and conditions of
delivery: in some countries credit and savings providers are closely regulated and NGOs cannot
access deposits. In other countries rules are more relaxed. Some MFIs focus on loans, others have
large savings deposits and shares, some provide insurance and/or act as insurance or pension's
brokers.
In Pakistan, Microfinance networks are being established for group based training for the
employees of various MFIs, among which microfinance network is the biggest one. The Pakistan
microfinance Network (PMN) is a network of organizations engaged in microfinance and
dedicated to improving the outreach and sustainability of microfinance services in Pakistan.
Objective of Micro lending
Rural people in developing countries are engaged in fmancial activities but at a very informal
level like savings clubs, rotating savings and credit associations, mutual insurance societies that
8/6/2019 Micro Finance and Its Challenges and Opportunities in Pakistan
7/23
7
have a tendency to be erratic and insecure. They invest in livestock, jewelry, gold etc and near
cash things. They form informal savings groups where every member contributes a specificamount every day, week, and month and successively awarded the pot on a rotating basis. They
also keep money with their neighbors or local cash collectors for safe custody.
Although widely prevalent, such practices do have high limitations. They are less secure and more
unreliable. Poor people can lose their money in such informal arrangements mainly due to fraud or
mismanagement. Also, such savings are subject to fluctuation in market prices, fire, thieves,
illness etc. The informal rotating savings groups tend to be small and rotate small amounts of
money.
Formal financial services are rather difficult for the poor to access because of their various
compulsory requirements such as collaterals, credit history, etc. Formal banks don't lend out small
loans as they can make more money on a larger loan than on a small one and they also don't hold
small savings accounts as they are not usually profitable. Banks can make more money only if
they provide financial services to those who already have money. In these conventional fmancial
scenarios, the services provided by the MFIs are the only way to overcome this problem. Grameen
bank in Bangladesh is one of the most successful in making such efforts (Matthews, J., 1994). It
was formed out of a project of providing small loans to women in the village of Jobra.
Muhammad Yunus, the founder of Grameen Bank, mentions in his bookBanker to the Poor:
Poverty in not created by the poor. It is created by the structures of society and the policies
pursued by society. Change the structures as we are doing in Bangladesh, and you will see that
poor change their own lives. Grameens experience demonstrates that, given the support of
financial capital, however small, the poor are fully capable of improving their lives.
High Interest Rate
Interest rate charged in microfinance is relatively higher than the usual banking services. It is
because the services provided are for a small amount of money. Loans that are extended are small
in amount and thus the cost of these loans automatically rises. CGAP has defined three kinds of
8/6/2019 Micro Finance and Its Challenges and Opportunities in Pakistan
8/23
8
costs that an MFI has to cover when it makes microloans: the first two, the cost of the money that
it lends and the cost of loan defaults, are proportional to the amount lent. For instance, if the costpaid by the MFI for the money it lends is 10%, and it experiences defaults of 1% of the amount lent,
then these two costs will total $11 for a loan of $100 and $55 for a $500 loan. An interest rate of
11% of the loan amount thus covers both these costs for either loan.
The third type of cost, transaction cost, is not proportional to the amount lent. The transaction cost
of the $500 loan is not much different from the transaction cost of the $100 loan. Both loans require
roughly the same amount of staff time for meeting with the borrower to appraise the loan,
processing the loan disbursement and repayments, and follow up monitoring. Suppose thatthe
transaction cost is $25 per loan and that the loans are for one year. To break even on the$500
loan, the MFI would need to collect interest of$50+5+$25 = $80, which represents an annual
interest rate of 16%. To break even on the $100 loan, the MFI would need to collect interest of
$10+1+$25 =$36, which is an interest rate of 36%. Because the interest rates charged by
microfinance institutions very often range from 2.5% to a 4% a month (about 31% to 50% a year),
it has been subjected to controversial debates.
Muhammad Yunus, the founder of Grameen bank, recently commented that microfinance
institutions which charge more than 15% above their long-term operating costs should face
penalties. Nevertheless, these interest rates are low compared with those charged by local money
lenders (often over 10% a month)12
. In most cases, without access to microfinance, the poor
people would have no access to credit at all. Though, at the first glance, an interest rate this high
looks abusive to many people, especially when the clients are poor, but in fact, this interest rate
simply reflects the basic reality that when loan sizes get very small, transaction costs gets larger
because these costs cannot be cut below certain minimums.
Effects of Microfinance
The World Bank estimates that of approximately 1.2 billion people who subsisted on less thanUS$1 a day in 2003, 850 million lived in rural areas (World Bank, 2003). Microfmance is all about
8/6/2019 Micro Finance and Its Challenges and Opportunities in Pakistan
9/23
9
small numbers. With a small loan ranging from $50 to $100 and through a range of other
microfinance products it is most probable that a village dweller can build assets, have stableaccess to food and other necessities, and protect his self against risk. Many of the MFIs focus on
women. These efforts lead to the economic independence of women; they own assets including
land and lodging, empowering them to make decisions of their own in daily life, giving them more
confidence than ever before. Women can consequently improve the financial condition of their
households. The benefits of microfinance can be broadly categorized as follows:
Microfmance helps very poor households to meet their basic needs and protect against
risk.
By supporting women's economic participation, microfmance helps to empower women,
thus promoting gender-equity and improving household well- being.
The use of financial services by low-income households is associated with improvement
in household economic welfare and enterprise stability or growth.
For almost all significant impacts, the magnitude of impact is positively related to the
length of the time that clients have been in the program.
All these effects on the household level lead to the economic development of a country. It raises
the living standard of an average family circle. From a social perspective, raising interest rates
would cut into the net returns of borrowers and put credit out of reach for some. Evaluating the
consequences requires an explicit characterization of social weights. If a dollar earned by a poor
household is weighed sufficiently more than a dollar earned by a richer one, helping fewer but
poorer borrowers can deliver greater social benefits than helping a larger number of poorer
borrowers. Some poor borrowers, however, may be able to pay higher rates and still retain a
meaningful surplus (Morduch J. April 1999).
8/6/2019 Micro Finance and Its Challenges and Opportunities in Pakistan
10/23
10
Key Principles of Microfinance
According to the Wikipedia encyclopedia the following principles of microfinance can bedefined as follow:
1):
Deprived segment of the society need a diversity of financial services, not only loans.
2):
It is powerful instrument to fight against the poverty.
3):
It is a source to build financial systems may be useful to serve poor.
4):
It must pay for itself to accomplish large numbers of poor people.
5):
It is about building perpetual domestic financial institutions.
6):
Micro credit is not the suitable instrument for everyone or in every situation.
7):
Mark up ceilings making it difficult for poor people to get credit.
8):
The task of government is to enable financial services, not to provide them.
9):
8/6/2019 Micro Finance and Its Challenges and Opportunities in Pakistan
11/23
11
The funds of the donor should be supported to private capital not to compete with privatecapital.
10):
The shortage of organized institutions and managers are the main obstacles aremicrofinance.
11):
It is performed well while it is measured and opened
The common mistakes or misconception are found among the people is that the
microfinance is the modern shape of charity. But there is an apparent difference betweenmicrofinance and charity. Normally charity is given for fulfillment of needs while
microfinance facilities is given to the poor to start business and generate own source ofincome and became economically independent
Microfinance and micro credit is firstly used in 1970 and it is an innovation in the field of
finance. According to Robinson (2001):
Prior to then, from the 1950s through to the 1970s, the provision of financial services by
donors or governments was mainly in the form of subsidised ruralcredit programmes .(Journal of International Development. Special Issue. 1996. Vol. 8, No. 2. p. 154.)
These often resulted in high loan defaults, high loses and an inability to reach poorrural households The difference between microcredit and the subsidised rural credit
programmes of the 1950s and 1960s was that microcredit in sisted on repayment, oncharging interest rates thatcovered the cost ofcredit delivery and by focusing onclients
who were dependent on the informal sector forcredit
(Journal of International Development. Special Issue. 1996. Vol. 8, No. 2. p. 154.)
According to Robinson 1980 was the important year in the history of microfinance servicebecause in that year most of MFI (microfinance institute) and Grameen Bank came intoexistence and started their work in the field of microfinance and issuing small loans andsavings services at the large scale.
8/6/2019 Micro Finance and Its Challenges and Opportunities in Pakistan
12/23
12
Evolution of Microfinance in Pakistan (A Brief Sketch)
In case of Pakistan the recent microfinance moment is started in 1982. The firstmicrofinance institute in Pakistan is Orangi Pilot project in Karachi and then Aga khanrural support programme (AKRSP).
AKRSP spawned the rural support movement that accounts for approximately 70% of NGO outreach in microfinance and includes some of the largest providers in thecountry.(World Bank Report on Performance and Transparency: A survey of microfinance in South AsiaPage No. 67).
In the year of 1990 the microfinance facilities are widely spread across the country manyNGOs took momentum in this sector. 1996 Kashf foundation was established which has
started its work to provide microfinance facilities all over the country.
In Musharraf regime (1999 to 2008) the government firmly focused on poverty alleviation program. So in this era microfinance network increased very sharply because thegovernment has selected microfinance as a tool to fight against poverty. For this purposePakistan government has established Pakistan Poverty Alleviation Fund (PPAF) with thehelp of World Bank in the year of 2000. Another initiative of the government in whichmicrofinance has used as a tool of poverty alleviation by establishing Khushhali Bankwhich has provided and diversified the microfinance product like housing finance,
personal loans, leasing, insurance and remittance services all over the country specially inthe rural area of the country.
According to Khushhali Banks annual report published in the year of 2007, a goodnumber of the investors have shown their interest in microfinance because the rate ofreturn in microfinance is much higher than in conventional banking system. According tothe several reports and studies risk in microfinance sector is lower and it will be dominantin private sector by the year of 2015. (Khushhali Banks Annual report 2007 page no. 4)
The microfinance network is increasing very sharply in Pakistan. Support of governmentis also the key factor to accelerate this sector in case of Pakistan. According to Khushalli
bank report the number of client who availed microfinance facilities were 100,000 in 2001which have accelerated to 1,400,000 in 2007. (Khushhali Banks Annual report 2007 pageno. 5)
At Present following microfinance institutions are functioning in Pakistan:
8/6/2019 Micro Finance and Its Challenges and Opportunities in Pakistan
13/23
13
Micro Finance Institutions
Akhuwat Asasah Community Support Concern Development Action for Mobilization and Emancipation Kashf Foundation Orangi Pilot Project Sindh Agricultural and Forestry Workers Cooperative Organization
Micro Finance Banks
Kashf Microfinance Bank
Khushali Bank Network Microfinance Bank Limited (NMBL) Pak -Uman Microfinance Bank Limited (POMFB) Rozgar Microfinance Bank Limited Tameer Microfinance Bank Limited The First Microfinance Bank Limited (FMFB)
Following table would give as picture of microfinance sector progress in case of Pakistan.
Table 1:
Province Offices Microcredit Micro-Savings Micro-insurance
Potential
Micro-fin
Penetra-tion Rate
Market(%)
Fixed Mobile Active
Borrowers
Gross Loan
Portfolio (PKR)
Active
Savers
Value of
Savings
(PKR)
Policy
Holders
Sum Insured
(PKR)
Balochistan 22 - 15,832 109,542,837 47,685 17,454,507 15,973 137,813,054 1,656,762 0.96
NWFP 98 2 126,692 1,116,322,751 144,311 298,677,240 132,100 2,434,214,065 4,083,817 3.10
Punjab 1,030 - 1,209,221 13,333,905,675 1,152,446 1,513,536,943 1,504,486 22,943,178,333 15,233,924 7.94
Sind 310 4 349,606 3,982,203,225 521,794 3,238,723,742 418,387 4,464,288,678 6,357,795 5.50
AJK 31 - 23,241 148,801,278 121,309 49,189,956 33,412 691,724,691 -
FANA 15 - 20,603 489,989,681 41,959 470,655,612 20,603 489,989,681 -
FATA 5 - 2,512 17,897,959 - - 2,512 17,897,959 -
ICT 13 - 3,404 53,705,481 14,270 293,929,960 1,020 52,786,393 74,750 4.55
Grand 1 , 7 5 1 , 3 1 , 2 3 1 ,
S o u r c e : Microwatch - Is sue No. 11 Quarter (Jan-Mar 2009), Page No. 15 (Retyped by Author)
8/6/2019 Micro Finance and Its Challenges and Opportunities in Pakistan
14/23
14
As we have mentioned earlier that the network of microfinance is widely spread inPakistan. At this moment 1.75 million people take advantage from these facilities andaround Rs 19.252 billion loans have been given to poor segment of the society. On the
other hand 2.043 million savers or lender contribute Rs 5.882 billion as in the form ofsaving account. Potential of microfinance market exhibits that 27.407 million people are
engaged in this sector in Pakistan.
S o u r c e : Microwatch - Is sue No. 11 Quarter (Jan-Mar 2009), Page No. 6
Look at the above pie chart which indicates that most of the microfinance services areavailable in agriculture and livestock sectors almost 42 percent of total services. Thisindicated major activities of microfinance are in the rural areas. We have needed toincrease further share in these areas. It also indicates that only 7 percent microfinancefacilities are available in manufacturing sector; further realized the share of manufacturingsector should be increased because cottage industries may be the base of industrialdevelopment in the country.
According to Economic Survey of Pakistan the microfinance industry grows by 0.5million active borrowers to 1.7 million during the period of 2005-08 almost growth rate is240 percent which is remarkable. At this juncture the rural support program (RSP) has adominant share in microfinance service and it has approximately 41 percent, MFB 33
percent, MFI 25 percent and NGO 1 percent. It shown below figure 2.
8/6/2019 Micro Finance and Its Challenges and Opportunities in Pakistan
15/23
15
So urce : Spotlight No. 05, February 2009 Page No. 3
World Bank report June 2008, the ratio of women those took advantage frommicrofinance services increase by 45 percent to 49 percent but this ratio is still low in caseof Pakistan (as shown below figure) comparing this ratio to our neighboring countries likeBangladesh it consists of 99 percent while in India it reaches to 100 percent.
S o u r c e : Spotlight No. 05, February 2009 Page No. 5
8/6/2019 Micro Finance and Its Challenges and Opportunities in Pakistan
16/23
16
According to State bank of Pakistan 10 years strategy paper for banking sector reformshas been suggested in which microfinance sectors growth will be increase in comingdays. According to the said report it will be reached to 3 million clients in the year of2010 and 10 million clients in the period 2015. The estimated supply and demand will beat equilibrium to some extent in 2020 as shown in figure 4.
After the brief discourses about microfinance sketch in Pakistan we move to discussopportunity and challenges of microfinance in Pakistan.
Challenges
a): Political Interference
In Pakistan political interference is very common in all walks of life especially in rural
areas. The feudal are exploiting the poor people. A major portion of agriculture loans istaken by them. The microfinance sector is also hunted by this political interference in
Pakistan. So it needs a proper legislation to make the matter transparent.
8/6/2019 Micro Finance and Its Challenges and Opportunities in Pakistan
17/23
17
b): Increasing Competition
After the preface of formal microfinance banks and institutions the competition hasincreased among these microfinance banks and institutions which can provide betterservices to the clients but these competitions is not so grave in formal sector ofmicrofinance. Now client have more information about microfinance so they aredemanding more facilities which improve the services in this sector as well.
c): Limited Management Capacity in MFIs
If we compare the MFIs, initially it is developed in the form of NGOs and then theyconverted them into MFI. The functioning of NGO and MFI is relatively different but thegoal of both is same. Most of NGO which is converted into MFI lacking managerial
capacity to run microfinance institute so its a big challenge to microfinance sector
d): Innovative and Diversified Products
There are misconceptions about microfinance and people restricted it into micro creditonly. Microfinance has wide ranging products which can include working capital loans,insurance, money transfers, saving loans etc. but if we saw in Pakistan most of ourmicrofinance institutes not provided these facilities so far. So we said that their operationis very restricted. Especially low salaried person is totally ignored by this sector so far.
e): Stability of MFIs
If we analysis the microfinance sector it is just a by product of conventional banking
system so it can say that development of microfinance institute also depend on bankingsector development but at the moment the microfinance sector is sustained its own feet.
f): MFIs Profitability
In the initial stage of microfinance industry the MFIs generate large extent of profit but nowthe special condition on demand side of microfinance product. MFIs cannot be able togenerate more profit. So it can reduced there profitability and their revenue is not enoughto fulfill their cost of operation.
8/6/2019 Micro Finance and Its Challenges and Opportunities in Pakistan
18/23
18
g): Improper Regulations
Microfinance is an emerging sector in Pakistan. Since it came into existence no properlegislation was made towards the said sector. At the initial stage some rules and regulationwere made but these rules and regulation were not sufficient to cater the on goingchallenges At the moment regulatory norms are very complicated which can cause toincrease the cost of operation. Especially we are focusing on the insurance and savingdeposits and funds transfers.
h): High Transaction Cost
Microfinance sector faces transaction cost which is very significance and adversely
affecting it. High transaction cost is a main obstacle to repayment of loan. Due to hightransaction cost the probability of bankruptcy increase and the demand for microfinanceproduct fallen with the passage of time. Further its marginal cost is increase due to thedefault of loans. In these circumstances survival of MFIs is very difficult.
i): Inadequate Investment in Agriculture Development
In the agriculture sector and rural areas of Pakistan getting insufficient expenditure bygovernment is big hurdle in the progress of microfinance. Inadequate investment ininfrastructure such as roads, railways, communication is the main obstacle to the path ofmicrofinance sector. Due to shortage of physical infrastructure it can cause to increase thecost of production and finally adversely impact on private investment activity.
j): Low Level ofKnowledge
Shortage of human resource capital is also a hurdle to the path of economic developmentin all sectors of the economy. So that may cause inefficiency in MFIs. At the momenthuman resource capital efficacy is very low in Pakistan which is unable to run the wholemechanism smoothly.
Opportunities
In spite of the fact that microfinance has shown very good performance in the last few
years, though, the opportunities are further to grow to this sector. Following is a briefcount of some these opportunities:
8/6/2019 Micro Finance and Its Challenges and Opportunities in Pakistan
19/23
19
a): Poverty Alleviation
At present poverty is the most significant issue of the world as well as in Pakistan.Microfinance is the main instrument to reduce poverty. It is confirmed that poverty can bedeclined through microfinance. Microfinance is not only the main instrument to povertyreduction but it may be useful to diversifies income from rich segment of the society tothe poor segment of the society (Chen 1992).
b): Impact on Health, Social Capital and Economy
There are many positive impacts of microfinance on physical capital and social capitallike health and education which may defiantly impact on economic activity and theeconomic development. In accordance with an estimation of 1 percent credit to women
increased the probability of school enrolment increased by 1.9 percent for girls and 2.4 percent for boys (Grammen Bank). Microfinance helps to generate income andemployment to poor households which help to meet their consumption pattern.
c): Microfinance as Development Tool
Microfinance is also useful in unexpected crises such as business risks and adverse supplyshocks. Microfinance provides cushion against these shocks. It helps to give protectionfrom crises and put them on stability different study shown that national and internationalcrises have a little shock on it.
d): Opportunity for Commercial Banks
Microfinance seems new product which provides opportunity for commercial banks toboost it. According to a survey it is found that in microfinance product there are very highrecovery and profitability. So commercial bank may have an opportunity to invest therefunds in this sector.
e): Women Empowerment
Through the microfinance women can have an opportunity to their own business as we have
seen in the example of Bangladesh most of the microfinance institutes preferred to provide
loans to women because the recovery rate from the women is very high. So after themicrofinance innovation women empowerment increased in the male dominated society.
8/6/2019 Micro Finance and Its Challenges and Opportunities in Pakistan
20/23
20
Conclusion
As we discussed above that microfinance services have augmented in the last few years andit was used as an instrument to alleviate poverty. Most of MFIs schemes and products
preferred to provide loans and funds to women instead of men because in cases womenrate of recovery is very high. On the contrary it makes the women socially andeconomically empowered. It is crude thought that microfinance is a magic stick which cansuddenly change the economic and social scenario of the society. But no doubt it is veryimportant tool which can be used to bring about social and economic changes graduallyand durably
If we analysis microfinance as an innovation in financial services in Pakistan we can say itis still in a take off stage since 2000 .Most of the challenges of microfinance which are
being faced in Pakistan has been discussed above as result of discussion we suggested astrategic policy towards the microfinance sector should be developed and design to boostand cater the challenges of future in this sector. Pakistan has a lot of opportunities in thissector. Government needs to play its vital role to accelerate this sector and provideessential facilities to minimize challenges which were discussed in this paper. Significanceof this sector is to mobilize deposit in such a manner that it can play a vital role in economicdevelopment.
8/6/2019 Micro Finance and Its Challenges and Opportunities in Pakistan
21/23
21
References
1):
Adam D.W. and D.A. Fitchet, eds,. (2000) Informal Finance in low income countriesBoulder Co.
2):
Asian Development Bank, 2008, Key Indicators for Asia & the Pacific 39th Ed., ADB:Manila.
3):
Chen, M. (1992) Impact of Grameen Banks Credit Operations on its members. Past andFuture Research, Harvard University, Cambridge Mimeo.
4):
Geetha N. and Meyers R.L. (2006) rural Finance Today: Advances and Challenges
5):
Microfinance Performance in Pakistan (1999-2005) USAID WHAM Project
6):
Microwatch - Issue No. 11 Quarter (Jan-Mar 2009)
7):
Microfinance Spotlight No. 05, February 2009)
8):
Pakistan Interim Poverty Reduction Paper, Government of Pakistan, November 2001
Page-38.
9):
8/6/2019 Micro Finance and Its Challenges and Opportunities in Pakistan
22/23
22
PMN, 2007, Achieving Efficiency: Pakistan Microfinance Review, PakistanMicrofinance Network: Islamabad.
10):
State Bank of Pakistan 10 years Strategy Paper for the Banking Sector Reforms
11):
UNDP, Human Development Report (2003)
12):
World Bank Report on Performance and Transparency: A survey of micro finance in So uthAsia
8/6/2019 Micro Finance and Its Challenges and Opportunities in Pakistan
23/23
Top Related