The Need and Development of Microfinance

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Microfinance plays an important role in providing financial services to the economically active poor and needy. These financial services include the provision of loans, savings, money transfer services and leasing services. The research will discuss the significance of microfinance and how it helped to achieve social development through improvement in education, standard of living, employment creation, poverty alleviation, women empowerment and development of human capital. Many international donor organizations have also played an important role in the development of microfinance in Pakistan .The paper will discuss the contribution of these organizations and the evolution of microfinance with respect to changing policies and the involvement of different pioneering Banks and Institutions in Pakistan

Literature Review

Humle David (2000) focuses on the downside of microfinance in the article. This article focuses on the negative impacts of microfinance on the poor. It discusses the need to pay more attention on the negative impacts of microfinance on the poor than the positive impacts of providing the microfinance. The MFI'S which are responsible for providing microfinance loans to poor people give them opportunity to earn more but they do not provide micro finance to poor people in fact this microfinance becomes micro debt for these people as they are unable to repay loans and so reap less benefits of microfinance. Microcredit provided to poor people does not help in poverty reduction as it does not provide microfinance only to the poor but to the non-poor. It is only used as a strategy to reduce poverty reduction.

Mutalima KB Irene in the article basically covers four main important issues the need to survive as an organization, the situation of the women clients, levels of entrepreneurship and ambition and the market conditions. The articles talks about women from several perspectives which include the markets that they are serving, women leadership, women from development perspective, the micro finance industry and the efficiency of the micro finance groups. Most importantly the paper recognizes the fact that women are empowered financially and it presents enough evidence for the designing of the gender sensitive products that intend to serve the purpose of the pro-poor microfinance programme.Its important to recognize that micro finance has impact both on the institution and the beneficiary. Micro finance helps to improve and sustain the livelihoods of the poor and enhances a culture of sustainability, its ensures professionalism and a secure funding and provide a marketplace to fulfill the needs of women and improve their status so that they can better position themselves in the society.

The variables extracted from the article include women leadership, women empowerment and gender equality. Women leadership basically refers to the capacity that women can exercise over men to achieve some pre-determined objectives. Women empowerment refers to the powers that women can exercise and control. Gender equality refers to the balance between the rights of men and women in various arenas.

This article is of real importance to my research paper as it discusses the importance of gender equality and how it is observed in the micro finance sector. The market conditions that are prevalent in the micro finance sector and how they are administered by women leadership and women professionalism.

Khan Saleem Amer & Plateau Stefan discusses the services provided to the economically active poor usually for short to medium to terms. The significant feature of microfinance discussed in this article is its reliance on "social collateral."Collateral tries to solve the information problem and reduces costs for the lender. Banks takes physical collateral because they realize that their access to information about the borrower's business and related cash flows is limited to strict borrower monitoring entails costs. In case of microfinance this risk coverage is not applicable where the poor cannot provide collateral. The lender in this case has to rely on its estimates of future cash-flow and the past repayment behavior of borrower as a measure of debt capacity as well as the willingness t repay loans. The friend, neighbor or the family member is the judge of financial habits of a prospective borrower, these potential provide cross guarantees taking responsibility individually as well as collectively for the repayment of their fellow "group members". These social linkages when tied in mutually guaranteeing loan contracts provide social collateral.

The article further discusses that finance is a scarce resource for the poor. They borrow to build assets, these assets bring increased returns in the future by increased economic returns and improved standard of living. All the finance is not used to acquire assets. The grass root of finance is also known for other potentials like ability to nurture entrepreneurship, boost employment creation in an underdeveloped economy.

The global microfinance industry exhibits a variety of institutions. The two prevalent paradigms include Grameen Bank Bangladesh and BancoSol Bolivia. The Grameen Bank was established by Dr.Muhammad Younus -a Bengali professor of Economics. The practical use of finance was a direct development tool by providing tiny loans (less than US $10) to poor women in rural areas of Bangladesh. The experiment resulted in the establishment of Grameen Bank. In 1989, ACCION in collaboration with Bolivian businessmen started PRODEM-a nonprofit organization which provided small loans to micro-enterprises. Grameen Bank focuses on poverty alleviating and social development aspect while the Latin American model characterized by BancoSol blends the social objectives with financial sector development, financial markets integration and commercialization.

Evolution of Microfinance

First phase includes the government directed credit; this has history in Pakistan in the form of government directed/subsidized credit schemes particularly in rural areas. The different schemes include Youth Investment Promotion Society (YIPS), Self Employment Scheme (SES) and Yellow Cab Scheme. These schemes represent indirect government pressures on financial institutions, both public and private to engage in politically motivated directed loan.

The second phase includes the emergence of two pioneering development institutions -the Aga Khan Rural Support Program (AKRSP) and the Orangi Pilot Project (OPP).The first large scale practical implementation and conceptualization of development frameworks such as "social mobilization" and "group lending methodology " can be traced to AKRSP's microfinance model initiated in 1982.This also organized and mobilized Village Organizations (VO) and developed the health ,education and income generating initiatives.OPP was established by Akhtar Hameed Khan , the "Comilla Pioneer" and the father of rural development services which include housing, sanitation and education. The RSP Model represents the formulation and integrated development approach where the rural population was organized into VO's and the needs of the community was prioritized by development services such as education ,health , sanitation as well as financial services (microfinance).AKRSP endeavored to develop human , social and financial capital. The rural focused microfinance operations of NRSP have expanded into urban areas as well as under Urban Poverty Alleviation Program (UPAP).Although the microfinance best practices have been developed in the mid 1990's it is still in its experimental phase. The activity remained an NGO activity until to leasing corporations were involved which include OLP (Orix Leasing Pakistan) and NLCL (Network Leasing Company).

The phase includes the entry of commercial banks .The banks provided credit lines to NGO MFIs for on lending as microfinance loans and banks provided direct/retail finance to poor people. Habib Bank can be considered as a pioneer in the indirect lending strategy. Other banks included in this activity are The Bank of Khyber (BOK) and First Women Bank Limited (FWBL).The two other microfinance banks that are noteworthy include Network Bank and Rozgar Bank. By mid 90's microfinance institutions lead KASHF and NRSP which realized the need for the microfinance sector so as to give a voice and a platform for capacity building activities. The Pakistan Poverty Alleviation Fund (PPAF) was formed by the Federal Government and funded by the World Bank and its donors. The core program components include Credit and Enterprise Development and Community Infrastructure. The Regional MFI Networks have been established by the efforts of smaller NGO MfI's.The leading international microfinance donors include Asian Development Bank (ADB) and the Swiss Agency for Development Cooperation (SDC).

Jaffer Abbas ( 2010) incorporates the establishment of Kashf Foundation, which is a Pakistani organization offering microfinance product to women. Over the last fourteen years clients have received microloans of about $200 million.

The foundation was founded by Roshaneh Zafar in 1996.Pakistan like other developing countries, suffers from a high degree of financial exclusion which is positively correlated to poverty and gender. Kashf Foundation lends money to low-income households through providing credit exclusively to women. The clientele in Pakistan of women is about 50%.The economic empowerment program has grown from 913 female clients in 1999 to over 300,000 clients in 2010.The foundation is best known as a tool for alleviating poverty and helping those excluded from the financial sector in the economy. In the coming years the Kashf Foundation focuses on microfinance which is to become a specialized micro-finance institute, to improve the financial literacy of the community. The program will further focus to expand and to engage and empower adolescent girls and to educate them about the benefits of savings. It will further focus on to improve the financial literacy of the clients and to focus on microfinance products to meet business needs of the clients. In Pakistan Kashf Foundation is known as the first specialized microfinance institute.

Akhtar Shamshad (2006) in the article talks about the basic understanding of microfinance as a tool for poverty alleviation. It refers to the whole range of financial services to the lower-income people especially to the poor. These poor can use the funding to finance their businesses, acquire household people, improve consumption, and invest in health and education and fund emergencies and social obligations. Pakistan has entered into a new phase of microfinance development. There are a number of foundations for example the Kashf Foundation program modeled along the Grameen Bank of Bangladesh, the Taraqi Foundation and the Damen Foundation. The Pakistan Poverty Alleviation Fund (PPAF) and the Microfinance Sector Development Program (MSDP) promotes the development of the microfinance policy framework while funding select institutions through foreign exchange credit lines. The State Bank of Pakistan took an approach towards the development of the microfinance industry by developing politicallegal framework and promoting diversity and sustainability.

The microfinance business faces difficulty in assessing alternative sources of investment particularly equity investment which is a worldwide problem. Mobile Banking guidelines have been designed to facilitate, MFB's to penetrate their target market. Pakistan needs to encourage a paradigm shift in the rapidly evolving operating environment for the microfinance sector. There is a need to move away from the subsidization of microfinance loans, move away from multiple products, improve financial sustainability, enhance credit for lower income group and educate consumers.

Hussain Ishrat (2003) in the article discusses that there is the lack of adequate human and institutional capacity, shortage of local expertise and weak coordination among the various stakeholders that are indeed the factors inhibiting the growth of microfinance sector in Pakistan. The most effective way to utilize external recourses is to transfer technology and its adaptation. The microfinance overall expands the outreach of financial services and helps to achieve poverty alleviation in the country. The newly setup SME Bank provides credit to small and medium entrepreneurs through a newly setup bank, Zarai Taraqqi Bank Ltd and Cooperative Bank s to women entrepreneurs individuals and small firms through the First Women Bank. The article discusses the six elements for the strategy to promote and spread Micro-finance in Pakistan.

There is a need for strong political commitment towards supporting microfinance as an integral tool of poverty alleviation program. The program involves multiple actors and institutions community organizations, NGO's, public sector, private sector, Rural Support Programs in the delivery of Microfinance. Infrastructure, Social Services and Capacity building are clearly recognized and built in the program. The government is experimenting with a variety of institutional models for the delivery mechanisms and outreach to the poor. An innovative feature of the Microfinance sector Development is that poor segments of the population are much more prone to shocks they need to be protected. A risk mitigation and Deposit Protection Fund has been created to provide protection to the MFI's borrowers and depositors. The regulatory regime adopted by the SBP for Microfinance sector is that of a facilitator, guide and problem solver.

This article written (2009) objective in particular is to influence policy and program design to expand the outreach of Microfinance Institutions (MFIs) to rural women-who have not been sufficiently reached by current interventions, compared to men and urban women. There is a need to improve the client capacity to better manage and repay loans and utilize loans for more sustainable income -earning opportunities.

This article discusses the women in Afghanistan who have lack of ownership, and access to assets such as land equipment and materials. Most commercial banks are located in large cities and provide services largely conventional loans to qualifying people with collateral. Such practices exclude low-income women as they are least likely to have or possess the necessary collateral. According to the statistics provided in the article microfinance stands to bring extra gain to female clients as compared to male clients where the benefits appear to accrue to households of female microfinance clients.

Most of the microfinance however that majority of women income-earning activities are financed by microfinance institutions and these tend to be labor intensive and very traditional. So, the scope of business expansion and economic development remains limited. Despite the improvements in the socioeconomic status and the other benefits microfinance has brought to women, there are still barriers to the access and to the participation in the formal financial markets.

The article further discusses the barriers to women accessing microfinance services. According to the World Bank study in 2006 men hold the primary control over the loan resources even though the credit is granted in the name of the female member. There is an inability to repay loans which is directly linked to the failure of women to earn enough to extend and recover small loans appropriate to the scale of the business activity. There is also lack of complementary services this confirms that women's economic participation is largely restricted to activities that are inside the household. Even if Afghan women enter the financial markets through microcredit, they face major obstacle in accessing other types of markets that are necessary to make productive use of loans such as labor ad product markets. There is also gender based stigma as microfinance clients and non-clients showed discomfort with writing the names of women in the MFI documents. Women are also not aware of the MFI's official information so there is official information dissemination.

The recommendations for these gender sensitive interventions are that there should be increased control over the loans. The registration of property ad assets should be on the name of the men and women both. Incentives should be created for the formation of savings and credit groups. There should also be proper repayment of loans through monthly flexible payment schedules and lower interest rates. There should also be marketing support and complementary services to female clients..Training should also be provided to men and women and cultural restrictions and improvement in information dissemination.

Rhyne Elizabeth in the paper discusses the impact of Microfinance in different countries affecting the poor. Microcredit in southern India and Mexico contributed to the start-up and/or growth of tiny businesses operated by low income people. Microfinance in Thailand allowed people to manage day-to-day and seasonal variations in their incomes; such fluctuations are a big part of being poor. It introduced savings accounts to women in Kenya contributed to business growth. Loans in India and Mexico helped people make major purchases they would otherwise have a hard time making. Men in Manila and Sri Lanka expanded their businesses and increased profits while women didn't. Microloans in Thailand and the Philippines that were targeted toward the very poor actually reached the near-poor and moderately poor. In India, loans provided without empowerment or other social messages had no significant empowerment or social effect. During the first year and a half after a provider began offering microcredit in new villages in India, the average villager did not experience a significant increase in family income.

In the microfinance sector microfinance providers should strive to improve the products they offer. Supporters of microfinance should demand scale and sustainability when they make charitable contributions. The finding that microfinance plays a facilitating role and has mostly incremental effects on customers should signal supporters of microfinance to be cost-conscious.

Muhammad D Suliman (2010) in the article discusses the concept of microfinance which is to generate services for those people who are away from financial services and to pull them out from the vicious circle of poverty. The microfinance campaign started when Professor Younus first time granted a few dollars to an impecunious (basket maker) in the year 1974.The article also discusses that microfinance is the most appropriate way to empower the poor people and rise their income generating ability.

The article discusses the evolution of microfinance. The first microfinance institute in Pakistan was the Orangi Pilot project in Karachi and then the Aga Khan rural support program. In the 1990's the microfinance facilities are widely spread across the country ad any NGO's took momentum in this sector. In 1996 the Kashf Foundation was established which started work to provide facilities all over the country. In Musharraf regime the government firmly focused on poverty alleviation program. In this era the microfinance network increased very sharply because the government had chosen the microfinance tool to combat poverty. According to the Khushali Bank report a good number of investors had shown interest in microfinance as the interest rate and the rate of return was much higher than the conventional banking system. The number of clients who availed the microfinance facilities increased from 100,000 in 2001 to 1,400,000 in 2007.

The challenges that microfinance faces are the political interference, increasing competition, limited management capacity in MFIs ,innovative and diversified products ,stability of MFIs,MFIs profitability, improper regulations, high transaction cost and low level of knowledge. The opportunities that are existent include poverty alleviation, impact on health, social capital and economy, microfinance as a development tool, opportunity for commercial banks and women empowerment.

The article (2003) discusses that women are vital to economic and political development.Thet are rarely financially independent and the most vulnerable members of the society. Microfinance is a critical tool for reaching these women and has the ability to empower them and improve their lives. In Pakistan 34% of the population lives o n less than US$ 1.00 per day and 86% lives on less than US$ 2.00 per day. The demand for microfinance is great, many households require financial assistance and microfinance is serving on 3% of these. Microcredit is largely provided through nongovernmental organizations, some specializing in microcredit and others offering microcredit as one component in a larger development project. The challenges that microfinance has to face in Pakistan include creating sustainability, achieving formalization, targeting women .achieving sound portfolio management.

The article specifically talks about Kashf Foundation which is a pioneer in three regards. It provides holistic financial services model incorporating microcredit with life and health insurance and saving services. It was the first institute to recognize the need for a consumption or efficiency. It promotes female loan officers 60% are women.

Setboonsarng Sununtar & Parpiev Ziyodullo (2008) discusses the effect of microfinance on MDGs and a review of the impact assessment of Microfinance Institutions. The first MDG is to eradicate Poverty and Hunger. Microfinance contributes directly to reducing poverty by improving the income of poor people. The next target is to reduce half the proportion of people who suffer from poverty. Microfinance allows poor people to diversify and income resources. The second MDG is to provide universal primary education and studies show that children of MFI clients are likelier to attend and stay in school longer. The third MDG is gender Equality and Women Empowerment, majority of microfinance programs target women and they are more responsible in repaying than men. The fourth MDG is Children's Health, Maternal Health and Diseases.MFI client households appear to have better nutrition, living conditions and preventive healthcare than comparable non client households. Other goals of MDG include developing further an open, ruling based, predictable, non-discriminatory trading and financial system. The providing of financial services by MFIs to poor is an MDG goal. Since MFIs are the key to development of microenterprise operated by the poor, they allow the poor to produce products for the market. These products are also sold in export markets and so microfinance helps to enhance global partnership for development.

Ahmad Nisar Saba (2008) in this research paper discusses the importance of microfinance institutions in Pakistan. The microfinance institutions aim to help the poor by providing them finance at much lower rates. The paper also aims to discuss the microfinance policies in Pakistan and what steps have been taken to improve the financial services provided to the poor sector of the economy. The paper also analyses the positive impact of microfinance as it improves the lives of the individual clients especially the women who are better able to earn living for their families and many households who are living below the poverty line are able to earn more dollars per day. This has also helped to improve the standard of living of people. Micro finance institutions provide finance to help women clients more than men. Large financial institutions like the Asian Development Bank has helped to make improvements in the financial sector and improved the policies.

Theoretical Framework

Economic Development

Government development projects

Role of MFI's & their policies

Increase in income generating ability

Gender Equality

Socio-economic status


Financial literacy

MFI's awareness about micro loans

Development of human capital

Women Empowerment


Women rights

Women leadership

Role of NGO's

Social Development