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When poverty is not addressed seriously and promptly, it may cause serious impression on Socio-economic structure of the society. When poor is denied of access to his basic rights, such as, justice, education, employment, health, shelter, etc., he could turn into a burning flame. To meet his emergencies, he commits crime. When the degree of poverty rises, together with illiteracy rate, propensity of crime also increases resulting in Socio-economic unrest in the country.
1.2.4 Poverty and the Economy
Demand side of the economy: Infect, poverty arises for not having adequate money to buy basic necessities of life, such as enough food, shelter, clothing, etc. Low spending by poor households, due to low purchasing power, holds aggregate demand of goods and services, in a narrow band. As demand remains weak, so does supply, causing low level of investment and widespread unemployment in the country.
Supply side of the economy: Supply, owing to low productivity, remains below the standard level. This stems from having mostly uneducated, both psychologically and physically sick, labor force (mostly coming from the poor families).
1.2.5 Microfinance and Anti-Poverty Strategies
Anti-poverty strategies floated by poor countries achieved less success due to many reasons. However, the breakthrough came when the new Bottom-Up (BP) approach was introduced a few years back. It was felt that empowering people and allowing them to create their own jobs and revenues were recognized as ways through which poverty could be alleviated more effectively. The new BP approach gave new life to anti-poverty strategies and a special role to credit in the overall poverty eradication process. The BP approach to reducing poverty holds that governments and donor agencies should seek to develop income-generating activities since these are the activities that are likely to increase the income of the poor. Credits, in this case, can only a means to develop such activities not an end itself. Precisely, not everyone can raise his/her income. To rationalized the logic, we divide the poor in two groups; one who can raise their income themselves, when opportunity knocks on their door, the other group cannot and will need to be financially supported by the government. Given the purpose of the study, I however, shall spotlight on the former group who has the capability to raise its income if opportunity is given.
1.2.6 What is Microfinance?
Microfinance as term implies, refers to providing small loans to the low-income clients living in both urban and rural areas to initiate a business in the informal sector. It is a confined process and based on local institutions that collect local resources and recollect them locally. Providers of microfinance may include formal-sector institutions (such as, commercial banks); semiformal bodies such as non-government organizations, cooperatives; and other informal savings and credit institutions. Over the last ten years, successful experiences in providing finance to small entrepreneur and producers demonstrate that poor people, when given access to increase responsive and timely financial services at market rates, repay their loans and use the proceeds to increase their income.
1.2.7 Microfinance in Pakistan
The microfinance program is not new in Pakistan. It has been operative since October 1972 in one form or the other. It was first launched by the then government to curb poverty. The latest economic survey of Pakistan indicates that as in June 1999, the government had disbursed over rupee 4.2 billion to alleviate the poverty level in Pakistan. The current growth of MFPs is observed in late 19990s.
220.127.116.11 Microfinance Providers in Pakistan
Microfinance operators working in Pakistan as reported by Pakistan Microfinance Network (PMN) is reclassified into four categories recently. This included MFBs, MFIs, RSPs and others. These categories necessitate some explanation as under: 18.104.22.168.1 MFBs
Microfinance Bank licensed and prudentially regulated by the State Bank of Pakistan to exclusively service microfinance market. MFBs include following; Khushhali Bank (KB), Network MicroFinance Bank Ltd. (NMFB) , Pak-Oman Microfinance Bank Ltd. (POMFB), Rozgar Microfinance Bank Ltd. (RMFB), Tameer Microfinance Bank Ltd. (TMFB), The First MicroFinanceBank Ltd. (FMFB).
Microfinance institution providing specialized microfinance services include; Akhuwat, Asasah, Kashf Foundation, Orangi Pilot Project (OPP), Sindh Agricultural and Forestry Workers Cooperative Organization (SAFWCO), Community Support Concern (CSC), Development Action for Mobilization and Emancipation (DAMEN).
These programs are running microfinance operations as a division of their multi-dimensional rural development program. These include the following; Lachi Poverty Reduction Project (LPRP), National Rural Support Programme (NRSP), Punjab Rural Support Programme (PRSP), Sarhad Rural Support Programme (SRSP), Thardeep Rural Development Programme (TRDP).
All institutions that do not fall within above three categories. These are financial institutions in the conventional financial sector, providing microfinance services as a separate function within the broader organizational context. These mostly include CFIs and NGOs. For example;
ORIX Leasing Pakistan Ltd. (OLP), Jinnah Welfare Society (JWS), Narowal Rural Development Programme (NRDP), Organization for Participatory Development (OPD), Rural Community Development Society (RCDS), Save the Poor (STP), Sindh Rural Support Program (SRSP), Sungi Development Foundation (SDF), Swabi Women's Welfare Society (SWWS), Taraqee Foundation (TF).
1.2.8 Microfinance Institutions Mechanism
In case of low-income households, the formal bank sector fails to reduce the asymmetry information between them and the borrowers. The four basic activities, screening, monitoring, auditing and enforcement of payment, are too expensive or not feasible. The microfinance institutions resolve this problem lending to groups of people with joint liability, dynamic incentives, regular repayment schedules and guarantee substitutes. Among the microfinance institutions there is a wide degree of combination of these mechanisms. For example, the Bank Rakyat in Indonesia does not use group-lending contracts, but uses dynamic incentive.
1.2.9 Microfinance Role in Poverty alleviation
Today, the world faces the major challenge of reducing poverty. Out of the world's 6 billion people, 2.8 billion survive on less than 2 dollar a day and a sum of 1.2 billion live on less than 1 dollar a day. Of these 1.2 billion extreme poor, 500 million poor people live in South Asia. General Assembly of the United Nations has acknowledged the positive impact of microfinance in poverty reduction. Microfinance impact studies have verified that microfinance helps poor households meet basic needs and protects them against risks. The utilization of these financial services by low-income households brings in improvements in household economic welfare and enterprise strength and development. By supporting women's economic participation, microfinance empowers women, thereby promoting gender-equity and improving domestic well being. The intensity of impact relates to the duration of time clients have had access to financial services. Microfinance helps in reducing poverty by providing the poor with credit facility to establish a small business. It not only supports the economic condition of the poor people but also has positive impacts on their social life through better standard of living with better access to education and health facilities and empowerment to contribute in decisions of the society.
1.3 Microfinance: a Tool of Development
Although microfinance is not a new concept, the current popularity of microfinance has its origins in 1976 when economist Muhammad Yunus began lending small amounts of cash ("micro credit") to rural women in Bangladesh to start or enlarge their businesses. The recipients of these small loans repaid them on time and ran successful enterprises; this in turn encouraged Yunus to make official his lending program into what has turn into the now-famous Grameen Bank. Since 1976, Grameen has served 3.12 million borrowers and disbursed $4.18 billion in loans.
Providing credit to those not otherwise served by formal financial services institutions caught on internationally, and the Grameen approach spread quickly during the 1980s and 1990s, particularly in Indonesia and Latin America. The target clientele for microfinance services include female heads of households, pensioners, displaced persons, retrenched workers, small farmers, and micro-entrepreneurs, each of whom falls into one of four poverty levels: destitute, extreme poor, moderate poor and helpless non-poor. Target clients tend to work in the informal-legally and politically unregulated-sector, mainly in urban areas of developing countries but ever more in rural areas and even in industrialized countries.
With the geographic expansion of microfinance has come an explosion of organizations providing credit to the poor. Julie Paxton, author of a 1996 World Bank report that attempted to inventory microfinance providers worldwide, wrote "compiling a universal list of institutions providing financial services to the poor in developing countries is a bit like counting granules of sand on a beach." At the time Paxton was able to identify at least 1000 institutions each serving at least 1000 clients. Today, microfinance providers offer credit to some 20 million households worldwide.
In the Microfinance Handbook, Joanna Ledgerwood classifies these suppliers as formal, semiformal, or informal. Table 1.1 below, replicated from her book, gives examples of each type. Formal institutions, observing the success of semiformal microfinance institutions, have started going down market to the moderately poor with their commercial services. Semiformal institutions, the main drivers of the recent microfinance interest group, often receive support from external donors. For example, the Caisse Villageoise d'Epargne et de Credit (CVEC), a credit union in rural Cameroon, receives technical and financial assistance from the German development agency Gesellschaft fur Technische Zusammenarbeit (GTZ). Informal providers are usually indigenous, local sources of credit that may charge anywhere from no interest to usurious rates for their loans. Informal providers rarely have international associates or donors, and likely make up the bulk of providers in the micro credit world.