Microfinance

Microfinance is referred to “providing finances to poor, low-income groups/peoples”.

Broadly speaking microfinance is a kind of movement by socialist peoples that would
guarantee access of poor peoples to not only credit but also other financial services as
saving, insurance, fund transfer etc. The very basic objective of microfinance is to reduce
or eliminate POVERTY.

Reason for Microfinance Banks have traditionally not offered loans to low-income
group peoples. Major reason for not providing loan to poor peoples is their
inability to payback their outstanding loans. Most of these poor peoples have
almost negligible substantial assets which cannot be kept as collateral with bank.
Therefore banks often refrain from lending to poor peoples. As well banks
transaction cost, administration cost of accounts, revenue etc is being effected by
such low-income peoples.

Good financial system is necessary for healthy development of national economy. As

income of nation rises, its saving also increases ultimately which is being invested
creating an effect on national economy. Although banks have provided a good system of
financial services its role in building income of poor peoples is almost negligible. Banks
often provide loan to richer peoples whose proportion is lower in low-income countries.
Microfinance in this course provides a catalyst role in building incomes of poor peoples
thus bringing them into national income stream.

Boundaries and Principles

These are certain principles endorsed by CGAP (Consultative Group to Assist the Poor).
1. Poor peoples need not just loans but also saving, insurance and fund transfer.
2. Microfinance must be useful to poor household: helping them raise income, build
up assets and/or cushion against external shocks.
3. “Microfinance can pay for itself”. Subsidies from government and other donors
are scarce and uncertain, and so to reach a large number of poor peoples
microfinance must pay for itself.
4. Microfinance means building permanent local institution.
5. Microfinance also means integrating the financial needs of poor peoples into
country’s mainstream financial system.
6. The job of government is to enable financial services, not provide them
7. Donor funds should complement private capital, not compete with them
8. The key bottleneck is the shortage of strong institutions and managers. Donors
should focus on capital building.
9. Interest rate ceiling hurt poor peoples by preventing microfinancing institutions to
cover their cost, which chokes off the supply of credit.
10. Microfinance should measure and disclose their performance – both financially
and socially.

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Scope of Microfinance Microfinance scope can be seen in terms of outreach it have.
By outreach we mean that how much a microfinance institution is reaching poor peoples
in remote and distant areas? Another term which could possibly determine the scope of
microfinance is ‘substantiality’. Substantiality means a microfinance institution covering
its cost from revenues it realizes. Together outreach and substantiality determine scope of
microfinance institution. Although practitioners of microfinance advocate a balance
between these two objectives there is wide different institutions built up in market. Some
of them are minimalist in using minimum profit orientation while others are pure social
no-for-profit organizations. Microfinance experts agree that women should be primary
focus of service delivery. Evidence shows that loan defaults for men are than women.
Men are considered riskier than females. This conclusion is sometimes questioned. A
recent study of Sri Lankan micro-entrepreneurs shows that return on capital employed for
men is about 11% while females was 0% or slightly negative.

MFI’s scope has not been properly spelled out. Wide differences occur among various
academics about MFI’s scope. However poor in this world are more than richer. There
are poor peoples in both developed world and developing world.

Financial Needs of Poor Peoples Needs of poor peoples are classified into certain
categories. Which are:

Lifecycle Needs: such as weddings, funerals, childbirth, education, homebuilding,

widowhood, oldage.

Personal Emergencies: such as sickness, injury, unemployment, theft, harassment or

death.

Disasters: such as fires, floods, cyclones and man-made events like wars, bulldozing etc.

Investment Opportunities: such as expanding business, buying land or equipment,

improving housing, securing job (which often requires paying large bribes) etc.

Financial Product of Microfinance

• Insurance Plans This is basically risk coverage product. It works the way
traditional insurance works.
• Pension Plans This includes retirement plans. Contributions are made by plan
holder and MFI for benefit of plan-holder.
• Trade Microcredit Provides working capital for poor entrepreneurs to keep their
business.
• Group Micro Credit Provides loan to poor peoples in group for which group act
as collateral.
• Emergency Micro Credit Provides instant cash flow to tackle with emergencies.
• Micro Mortgage Micro sector customers ranging from seasonal crop financing,
purchasing shop inventory to buying of machinery and tools for business use have
this kind of product available.

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 • Micro Leasing A product offered to lease out assets to clients.
• Micro Saving Time deposits ranging from 3 months to 1 year is offered on which
return upto 13.25% is given. However this is not fixed rate
• Term Deposit MFI’s also offer term deposits ranging from 3 months to 12
months with upfront profit or back load profits.

Credit Lending Models

There are various microfinance models that explain working knowledge of microfinance.

• Associations: An organized body of peoples who have interest in common in

certain areas. This is where target community forms an association through which
they initiate various microfinance activities. Such associations may include
savings. These associations may be formed by youth, women, men etc. They can
be formed on cultural/religious/political issues. They may support micro-
enterprise and work-based issues. In various countries there are legislations,
which give legal protection to associations.
• Bank Guarantees: This is used to obtain loan from commercial bank. Bank
guarantee is a form of capital guarantee scheme. These funds can be used for
various purposes. UN and several other international organizations are creating
guarantees that NGOs can subscribe to, in order to initiate various microcredit
programs.
• Community banking: It essential treats whole community as one unit and
establishes formal and semi-formal institutes through which they disburse
microcredit services and products. These banks also offer saving facility while
income generating products as well. Community members are trained to
undertake various community banking activities
• Cooperative: A cooperative is autonomous associations of persons united
voluntarily to meet their common social, economic and cultural need through
jointly owned and democratically controlled enterprise.
• Credit Union: A credit union is a unique member driven, self-help financial
institution. It is organized by a particular group who agree to save money and
contribute in union which thereby lend money to other members at fair interest
rates. It can also be said to a cooperative, the difference in it being a credit lending
organization while cooperative undertakes various other facilities too.
• Grameen Model: In such a model a group of 5 is formed in which 2 are lend
loans. These two are monitored for a specific time. If they conform to rules of
bank other member of group become also eligible to obtain loans. Due to
substantial group pressure, individual try to keep their records clear.
• NGO: NGOs has emerged as a key player in field of microfinance. They act
basically as intermediary between donors and beneficiars. Although they have
been working on development of various sectors. In microfinance they have put
substantial effort in creating awareness about various microfinance activities.
• Rotating Saving and Credit Association: ROSCAs are essentially group of
individuals who unite together to make regular cyclical contribution to fund

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 created by them which is then given in lumpsum to one person and another in
next cycle and so on.
• Village Banking: Village banking is community based credit-lending and saving
banks. Their intial setup may come from an external source but they essentially
comprise of members of a village. These members run the bank themselves. All
functions from operations to policies to officers are selected by these members.
Their loans are backed by moral collateral, the promise that group stands behind
each individual.

Microfinance Banks in Pakistan

Microfinance banks in Pakistan are:

1. Khushali Bank
2. Tameer Microfinance Bank Ltd.
3. Network Microfinance Bank Ltd.
4. Pak-Oman Microfinance Bank Ltd
5. Rozgar Microfinance Bank Ltd
6. The First Microfinance Bank Ltd
Various institutions specializing in various products are also available in Pakistan.
These are:

1. Akhuwat
a. Microfinance
i. Group Lending
ii. Individual Lending
iii. Rural Credit Program
b. Education
c. Health
d. Legal Aid
2. Asaasah
3. Kashf Foundation
4. Orangi Pilot Project
5. Sind Agricultural and Forest Worker Cooperative Body (SAFWCB)
6. Community Support Concern
7. Development Action for Mobilization and Emancipation

Rural Support Program includes:

1. Lachi Poverty Reduction Program

2. National Rural Support Program
3. Sarhad Rural Support Program
4. Punjab Rural Support Program
5. Thardeep Rural Support Program

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There are other institutions like: Orix Leasing Company, Center for Women Cooperative
Development, Jinnah Welfare Society, Narowal Rural Development Program etc.

Policy
There are various policy guidline in Pakistan, which are:
• Mobile Banking
• NGO Transformation Guidelines
• Commercial Banks to Undertake Microfinance Business
All the policy guidelines are available on www.microfinanceconnect.info
Regulations
There are various regulations passed by legislature regarding microfinance business,
which are:
• Microfinance Ordinance 2001
• Prudential Regulations
• Branchless Banking
Various MF Groups in Pakistan
State Bank of Pakistan

Which provide legal framework and regulatory body of MF in Pakistan

Consultative Group to Assist the Poor

It is a consortium of 28 private and public sector development agencies working

together to expand access to financial services to the poor referred to as MFI. It works as
a donor agency. CGAP control its operations from office in World Banks, Washington
DC. (www.cgap.org)

The Small Enterprise Education and Promotion Network

It is association of around 50 North American Organization that support MFI

around the globe. (www.seepnetwork.org)

The Microfinance Gateway

It is the most comprehensive resource on microfinance available online.
(www.microfinancegateway.org)

Mix Market

Global information exchange body for microfinance industry. It strives to

facilitate information exchange, investment flows, reporting standards.
(www.mixmarket.org)

Microfinance Connect

Online resource material about microfinance industry, academic articles, training

etc in Pakistan. (www.microfinanceconnect.info)

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Evidence on Poverty Reduction

The BBC Business Weekly program reported that much of the supposed benefits
associated with microfinance, are perhaps not as compelling as once thought. In a radio
interview with Professor Dean Karlan of Yale University, a point was raised concerning a
comparison between two groups: one African, financed through microcredit and one
control group in the Philippines. The results of this study suggest that many of the
benefits from microcredit are in fact loaned to people with existing business, and not to
those seeking to establish new businesses. Many of those receiving microcredit also used
the loans to supplement the family income. The income that went up in business was true
only for men, and not for women. This is striking because one of the supposed major
beneficiaries of microfinance is supposed to be targeted at women. Professor Karlan's
conclusion was that whilst microcredit is not necessarily bad and can generate some
positive benefits, despite some lenders charging interest rates between 40-60%, it isn't the
panacea that is purported to be. He advocates rather than focusing strictly on microcredit,
also giving citizens in poor countries access to rudimentary and cheap savings accounts

There isn’t any substantial research that suggests that microfinance did actually act as
catalyst. However it has been quiet helpful in certain cases like Grameen Bank of
Bangladesh.

Sociologist Jon Westover found that much of the evidence on the effectiveness of
microfinance for alleviating poverty is based in anecdotal reports or case studies. He
initially found over 100 articles on the subject, but included only the 6 which used
enough quantitative data to be representative, and none of which employed rigorous
methods such as randomized control trials similar to those reported by Innovations for
Poverty Action and the M.I.T. Jameel Poverty Action Lab. One of these studies found
that microfinance reduced poverty. Two others were unable to conclude that
microfinance reduced poverty, although they attributed some positive effects to the
program. Other studies concluded similarly, with surveys finding that a majority of
participants feel better about finances with some feeling worse.

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