Across the developing world, millions of people survive by operating micro-enterprises. These working poor are typically locked out of mainstream financing by selective lending policies. For meeting their working capital needs, many turn conventional financing sources. They have to pay back at exorbitant interest rates and unsavory credit terms which reinforces the cycle of poverty.
Micro-finance was developed to address this problem. Micro-finance is the practice of providing financial services, such as micro-credit, micro-savings or micro-insurance to poor people. Through the work of micro-finance institutions, such individuals are able to access credit, accumulate usably large sums of money, invest in their entrepreneurial vision, work towards financial stability, and build a better future for the entire community. This expands their choices and reduces the risks they face. Micro-finance is recognized worldwide as a powerful economic development enabler and an important tool in alleviating global poverty. However, micro-finance targets only the un-bankable, who live above the poverty line and are not the poorest of the poor. Micro-finance schemes that have served as a basis of creation of self-employment by placing income-generating assets, such as milk cows, power looms, small retail stores, or street-hawking equipment, in the hands of the poor and by 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 the Grameen Bank of Bangladesh.
Pakistan has a population of 160 million (2006), of which 65 percent live in rural areas. It is a relative outlier in the region, ranking low on both Gross Domestic Product (GDP) per person (US$ 840) and the Human Development Index (HDI). Pakistan is ranked 134 out of 177 countries in UNDP’s 2006 Human Development Report. Real GDP has increased to an average rate of over 7.5 percent per year during the last three years (2004 to 2006). With the population growing at an average rate of 2 percent per year, the real per person income 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 percent in 2002, declined to 6.2 percent (Pakistan Economic Survey 2006/2007). Inflation remains the biggest threat to the economy. Over the last five years, the Pakistani government spent US$ 22 billion on poverty-related and social sector programs which reduced the number of people living under the poverty line from 33 percent of the population to the currently reported 24 percent (Government of Pakistan Finance Division Director General (Debt Office)/ E.A, “Highlights of the Economy and Federal Budget 2006-7”). However, strong differences persist between rural and urban areas: 28 percent of the rural population lives below the poverty line, compared with 15 percent of the urban population below the poverty line.
Considering these situations of the economy, Pakistan requires implementation of such employment creating micro-finance programs that are sustainable. Micro-finance services are provided by different institutions and schemes in Pakistan. These include micro-finance banks; nongovernmental organizations; rural support programs (like National Rural Support Program); commercial financial institutions (leasing companies); commercial banks and government-owned Institutions (such as National Bank of Pakistan, Pakistan Post Saving Bank, and the agricultural bank ZTBL), cooperatives and informal providers (informal lending mechanisms throughout Pakistan like family and friends, landlords, input providers, traders, and moneylenders). Pakistan Poverty Alleviation Fund (PPAF) is the main provider of wholesale refinancing to micro finance providers. It was launched with World Bank support. State Bank of Pakistan (the central bank of the country) is the supervisor of the formal banking sector, which includes the six micro-finance banks. The Securities and Exchange Commission of Pakistan (SECP) regulates Non-Banking Finance Companies, insurance companies, nongovernmental organizations (NGOs) and rural support programs. At least 11 bilateral and multilateral donor agencies fund micro-finance in Pakistan, along with several international NGOs and private funding agencies. The two largest fund providers are Asian Development Bank and the World Bank. Micro-finance 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 considered pivotal for creation of opportunities for educated youth since employment prospects have significantly worsened.
Despite high expectations from these programs, experience with some schemes (e.g. the Prime Minister Nawaz Sharif’s scheme of provision of Yellow Cabs to people at concessional rates to promote self-employment) has not been encouraging. The Pakistan Poverty Alleviation Fund (PPAF) which aimed to enable the “asset-less” to gain access to resources for productive self-employment by lending to micro-finance NGOs and banks and enhancing financial sustainability is one such example. After its launch, it had not disbursed any funds as of late 1999. The failure of such schemes in Pakistan can be generally attributed to their weak institutional structure, inefficient targeting, limited coverage and high default rates in the repayment of loans. The excessive bureaucracy is also a hurdle in the way of implementation of all these programs. Perhaps the largest operational micro-credit scheme is the joint venture of the large bank of the country Habib Bank Limited and a large NGO, the National Rural Support Programme i.e. NRSP (quoted from Social Policy and Development Centre, “Annual Review). There are probably currently only few NGOs that have potential for reaching scale. Loan sizes for these NGOs are all below Pakistani Rupees 50,000 and typically below Pakistani Rupees 25,000 for loans of six to 20 months (ADB: “The Role of Central Banks in Micro-finance in Asia and the Pacific: Pakistan”). There is a shortage of national data available about the micro-finance industry in Pakistan, due to which there is no idea about their sustainability. A report on micro-finance in Pakistan (SEBCON 1999, 9) had no numbers to report on either sustainability or outreach, stating only that “NGOs in Pakistan have been completely reliant on external funding sources”. Even the large government-supported NGOs in its annual report include data on its clients and some disbursements but do not include a balance sheet and standard indicators of financial performance.
Although, micro-finance has been successful to bring the poor to a level to sustainability, its target group in Pakistan is not constituted by the poorest of the poor, who need food and health security, but the ones who do not have access to commercial banks’ loans. Even the minimal collateral requirements potentially exclude the poorest of the country. The main reason for this is that the poorest people tend to be less visible and very shy, and often live outside the mainstream economy. Also, The UNDP report (2000) claims that “the hard-core poor, having few assets, are reluctant to take on the risks of credit, and when they do, it is usually for emergencies and consumption, not for production.” Micro-finance schemes in Pakistan are limited with regard to targeting efficiency, financial and economic sustainability, and potential for growth in the economy.
Poverty is a major cause and effect of underdevelopment as is evident in case of Pakistan. Instead of focusing only on micro credit, it should be used in combination with effective policies of land reforms and public employment programs for poverty alleviation, as the combination will be more effective than a single policy as each of these focus on different aspects of poverty. For sustained poverty decline to ensure that the country moves towards the path of development, what is needed is a pro-poor economic growth and direct poverty interventions. The micro-finance programs in Pakistan can be a success if the banks realize it as a major business opportunity and not merely a social obligation, which will require more exposure especially internationally. It will bring in more commitment which will help bring the much desired sustainability in these programs.