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    Page 1 MICROFINANCE  –   A POVERTY REDUCING AGENT IN PAKISTAN Muhammad Bilal Khan National University of Modern Languages, Islamabad mbkhan222@gmail.com - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -    Executive Summary: Pakistan is a large country with a population estimated at 180 millions. The economy has a low Per Capita Income of US$ 600 approximately, with an estimated purchasing power parity of $ 2500. Poverty has always remained a major development problem of Pakistan. Many methods have been used in the past to alleviate poverty including Direct Credit Approach, focus on job creation, heightened economic activities etc. Islamic modes of financing included Fitrana, Sadqat, Ijarah, Istisna, Bai Muajal, Salam, Musarakah, Mudarabah, Leasings and so many other things, but the results are not encouraging. The main focus of these approaches was on income redistribution. However, there is immense evidence suggesting that a successful anti-poverty strategy should include a policy regime that promotes inclusive economic growth; investments in human capital, infrastructure, and micro-credit. In fact microfinance encompasses all these important aspects and that is the reason to work on this particular area and analyze broadly its effect on the economy of Pakistan. Microfinance arose in the 1980s as a response to doubts and research findings about US state deliver y of subsidized credit to poor farmers. Grameen Bank’s of Dr. Yunus is still considered as the main pioneer in the provision of microfinance. In the 1970s US government agencies were the predominant methods of providing productive credit to those with no previous access to credit facilities. In Pakistan there are many formal, semi-formal and informal channels working for the provision of the micro-credit. In this paper, Pakistan Microfinance Network (PMN) and Aga Khan Rural Support Program (AKRSP) have been chosen for this purpose, and to discuss their maximum outreach including, the First Microfinance Bank, Kashf Foundation, Orangi Pilot Project, Punjab Rural Support Program and The Bank of Khyber. Microfinance has seemed to last a positive impacts on the Economy, culture and Psychology of the area where it was provided. Village organizations in the area of AKRSP seemed to have a positive impact (resulting in wealth creation, better productivity & income, better human resource management and conservation of natural resources). At the macro level provision of microfinance results in alleviation of poverty, female empowerment and development of overall financial system.    Page 2    Poverty  –   An Overview: Due to the large and dense population, poverty has always remained a major development problem of Pakistan but the situation has worsened especially after 1992-93. The growth rate nose-dived to 2.3% in 1992-93 due to natural disasters coinciding with a series of structural adjustment measures and external shocks to the economy. The growth rate has averaged 3.5%. Since then, merely keeping the high population growth rate of 3% while the calorie-based poverty has started rising again. About 70% of these poor in Pakistan live in the rural areas. They include land less labor, tenant farmers, small farmers cultivating marginal land and those engaged in numerous informal livelihood activities.    Trend in Poverty Indicators: The poverty head count was updated for the year 2007-08 in an economic survey. The comparison is reproduced below: Year Urban Rural Pakistan 2002-03 22.7 39.3 31.0 2003-04 21.4 37.0 29.2 2004-05 20.5 35.5 28.0 2005-06 19.7 33.5 26.6 2006-07 16.2 28.8 22.5 2007-08 13.1 27.6 20.3 Poverty is not merely income deprivation. It is a multidimensional concept, which encompasses economic, political, and social needs that are sine qua non for a meaningful existence. The poor in Pakistan are not only deprived of financial resources, but they also lack access to basic needs such as education, health, clean drinking water, and proper sanitation. Limited access to education, health, and nutrition, undermines their capabilities, limits their ability to secure gainful employment, and results in income poverty and social exclusion; while also making them vulnerable to exogenous shocks. This cycle is further exacerbated when institutions of governance tend to exclude the most vulnerable from the decision-making process and thus feeds into poverty and human deprivation, i.e. 30% of the total population (60 millions) are living below the poverty line in the country. Incidence of poverty increased from less than 15% in the late 1980s to more than 30% in the early 2000s.    Old Methods for subsiding Poverty: In the history of alleviating poverty, there was more of a focus on a “direct - credit” approach to eliminate poverty. Poverty was mainly viewed as a consequence of the poor not earning enough money and therefore not being able to acquire enough food or assets to reach an acceptable standard of living. Alleviation strategies focused on creating jobs, developing skills, and included Islamic mode of alleviating poverty such as zakat, sadqat   and  fitrana , which all focus on redistributing income from the wealthy to the poor. As part of this view, the role of finance was    Page 3 mainly limited to providing loans. It was assumed that borrowing households would be able to increase their production levels. As a result, the poor would benefit from increased consumption, while society benefited from the increased production generated by the loans. Apart from these tools more informal lending was also in practice in Pakistan, which included personal loans from families, friends or others. The informal lending also included the popular “committee” schemes practiced by women to increase their savings and thereby improving the families’ domestic income. There is sufficient evidence which suggests that a successful anti-poverty strategy should include a policy regime that promotes economic growth; investments in human capital, infrastructure, and microfinance; improved governance and civil society participation in decision making; effective social safety nets; and targeted redistribution policies. These methods are still in practice and even more emphasis has been laid on them in the recent budget. However, still the latest and more professional approach to poverty alleviation is microfinance.    Microfinance - A possible way out: Microfinance refers to small-scale financial services  –  primarily credit and savings  –  provided to people with low levels of income and savings. The microfinance instrument is the ray of hope for the poor people of the world. Microfinance includes the provision of financial services (including credit, deposits, and insurance) to low-income clients. Microfinance and micro-credit are often treated as synonyms, though the latter focuses exclusively on the provision of credit. This service is now the main tool through which governments and institutions channel funds with the hopes of eradicating poverty. Microfinance institutions (MFIs) have sprung up in all areas of the globe, to substitute for usurious interest rates charged by informal moneylenders. By exploiting new institutional forms and contractual structures, these institutions have reduced the risk and costs associated with granting uncollateralized loans. The promise of microfinance prompted world leaders in 1997 to pledge that 100 million of the world’s poorest families would be provided credit for self  -employment or other financial services by 2005. It was estimated that over US$ 21.6 billion would be needed over a decade to fulfill this goal, $8 billion slated to come from loans at market rates from private markets. Regrettably, the private sector has been less than keen to invest a significant amount into supporting the proliferation of MFIs. Microfinance is now recognized as an effective and financially sustainable instrument for poverty reduction, particularly in developing countries but also for the poor in the developed world. The Micro Credit Summit Campaign announced that 30.6 million poor households around the world now have access to micro credit, and that the number covered increased by 40% over the past few years. It means that there is now an opportunity to bring about a substantial reduction of poverty around the world. Microfinance is not a cure for the elimination of world poverty, as not all poor households can make good use of it. Those without an able-bodied member to engage in income-generating activities cannot be helped out of poverty by a loan. Many other poor households do not have either the entrepreneurial ability and/or the self-discipline required to make good use of micro credit. But experience from all around the world now shows that substantial numbers of poor women provided with access to microfinance services are using the opportunity to reduce their poverty and that of their families. The micro-credit programs have become very popular as a tool to    Page 4 reduce poverty in many countries of the world following the success of Grameen Bank of Bangladesh. Providing the poor access to financial services is one of the main ways to help increase their incomes and productivity. In many countries however, traditional financial institutions have failed to provide this service. Micro credit programs have been designed to fill this gap. Their purpose is to help the poor become self-employed. Many of these programs provide credit using social mechanism such as group based lending. With increasing assistance from the World Bank and other donors, micro finance is emerging as a device for reducing poverty and improving the Poor’s access to financial services in low income countries.    History of Microfinance: Microfinance arose in the 1980s as a response to doubts and research findings about the US state delivery of subsidized credit to poor farmers. In 1970s, the US government agencies were the predominant methods of providing productive credit to those with no previous access to credit facilities-people who had been forced to pay usurious interest rates or were subject to rent seeking behavior. Governments and international donors assumed that the poor required cheap credit and saw this as a way of promoting agricultural production by small landholders. In addition to providing subsidized agricultural credit, donors set up credit unions inspired by the Raiffeisen Model developed in Germany in 1864. The focus of these cooperative financial institutions was mostly on savings mobilization in rural areas in an attempt to "teach poor farmers how to save." Beginning in the mid-1980s, the subsidized, targeted credit model supported by many donors was the object of steady criticism, because most programs accumulated large loan losses and required frequent recapitalization to continue operating. It became more and more evident that market-based solutions were required. This led to a new approach that considered microfinance as an integral part of the overall financial system. Emphasis shifted from the rapid disbursement of subsidized loans to target populations toward the building up of local, sustainable institutions to serve the poor. At the same time, local NGOs began to look for a more long-term approach than the unsustainable income generation approaches to community development. In Asia Dr. Mohammed Yunus of Bangladesh led the way with a pilot group lending scheme for landless people. This later became the Grameen Bank, which now serves more than 2.4 million clients (94 percent of them were women) and is a model for many developing countries. In Latin America, ACCION International supported the development of solidarity group lending to urban vendors, and Fundacion Carvajal developed a successful credit and training system for individual micro entrepreneurs. Changes were also occurring in the formal financial sector. Bank Rakyat Indonesia, a state-owned, rural bank, moved away from providing subsidized credit and took an institutional approach that operated on market principles. In particular, Bank Rakyat Indonesia developed a transparent set of incentives for its borrowers (small farmers) and staff, rewarding on-time loan repayment and relying on voluntary savings mobilization as a source of funds. Since the 1980s the field of microfinance has grown substantially. Donors actively support and encourage microfinance activities, focusing on MFIs that are committed to achieving substantial    Page 5 outreach and financial sustainability. Today the focus is on providing financial services only, whereas the 1970s and much of the 1980s were characterized by an integrated package of credit and training-which required subsidies. Most recently, microfinance NGOs (including PRODEM/BancoSol in Bolivia, K-REP in Kenya, and ADEMI/BancoADEMI in the Dominican Republic) have begun transforming into formal financial institutions that recognize the need to provide savings services to their clients and to access market funding sources, rather than rely on donor funds. This recognition of the need to achieve financial sustain ability has led to the current "financial systems" approach to microfinance. This approach is characterized by the following beliefs:    Subsidized credit undermines development.    Poor people can pay interest rates high enough to cover transaction costs and the consequences of the imperfect information markets in which lenders operate.    The goal of sustainability (cost recovery and eventually profit) is the key not only to institutional permanence in lending, but also to making the lending institution more focused and efficient.    Because loan sizes to poor people are small, MFIs must achieve sufficient scale if they are to become sustainable. One of the main assumptions in the above view is that many poor people actively want productive credit and that they can absorb and use it. But as the field of microfinance has evolved, research has increasingly found that in many situations, the poor people want secure savings facilities and consumption loans. In the upcoming paragraphs, a comprehensive overview of the poverty position in Pakistan, methods used in the past to alleviate poverty and how microfinance can help in alleviating or eliminating poverty in Pakistan have been discussed. It further uncovers the specific microfinance institutions and networks and how can they really help in improving the overall economic situation in Pakistan.    The Microfinance Approach: Microfinance gained popularity in Pakistan after the success story of Grameen in Bangladesh. Microfinance has evolved as an economic development approach intended to benefit low income women and men. The term refers to the provision of financial services to low-income clients, including the self-employed. Microfinance services are provided by informal, semi-formal and formal sources and Institutions. “Informal sources of finance”  account for approximately 83% of the credit supply and are provided by moneylenders, shopkeepers, traders, middlemen, family and friends for consumption and production purposes. Every village has at least one informal committee that collects regular savings and offers loans to members in a similar management arrangement to ROSCAS (Rotating Savings and Credit Associations). Compared to the other sources of micro financing, interest rates from informal sources are much higher, ranging from 50% to 120% per annum. Land-based credit is the informal instrument used by tenants and subsistence farmers. It is widely used in Sindh, Balochistan and Southern Punjab. The credit is extended by the landlords for purchase of inputs and consumption. No collateral is required, but conventionally the credit
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