Poverty and unemployment are the two major issues prevailing in developing countries including Pakistan. One of the identified constraints i.e. lack of access to financial services makes the people unable to come out of poverty. Poverty remains a serious concern in Pakistan, particularly in its rural areas. Inadequate access to basic services and financial and other resources; disempowered communities, particularly the exclusion of women from the public sphere and the development process; low social capital; ethnic and religious strife; a spate of natural calamities in recent years; have all contributed towards the persistence of poverty in the country.
The preliminary estimates suggest that the national poverty rate may increase by 2.5% to 4% points, pushing between 5.8 and 9 million people into poverty.
According to Asian Development Bank, Basic Statistics Report April 2022 the total portion of the population of Pakistan living below the National Poverty Line is 21.9%. The Annual Growth Rate of Real GDP per employed person is 1.2%.
What is it all about?
Microfinance is about providing financial services to the poor who are traditionally not served by Conventional financial institutions.
Three features distinguish microfinance from other formal financial products:
- The smallness of loans advanced and or savings collected,
- The absence of asset-based collateral, and
- The simplicity of operations.
The microfinance sector emerged during the last decade of the twentieth century to provide access to financial services. It is now recognized as an important component of poverty reduction strategy by the governments of many developing countries. More than 70% of people living under the poverty line in Afghanistan, Bangladesh, Bhutan and Vietnam have access to a microfinance institution (MFI) through a credit card or loan.
Generating self-employment opportunities is one of the most important means to fight against poverty and solve the problem of unemployment. The Scheme of Microfinance program proves useful in raising the poor at the poverty level by providing them with Financial and other services. It also helps in mitigating the financial problems of poor people. The incapability of microfinance institutions in generating a large number of funds is a big challenge in the growth of the microfinance program and due to this these institutions should look for other sources of funds. In short, microfinance is noticeable in bringing confidence and courage among poor people.
Pakistan is at a crossroads
The microfinance sector in Pakistan has always been a large part of what most small businesses rely on for their survival. It is an important aspect for different sectors in Pakistan such as agriculture, trade and industry. The population of Pakistan is growing rapidly which creates more challenges for the future of this country mainly the financial sector which is considered the number one challenge.
In Pakistan, the microfinance sector has a large scope in opening new avenues to underprivileged people. In terms of financial inclusion, microfinance has so far been able to prove its worth as it is benefitting more than 5 million households across Pakistan’s capital cities and rural areas. In addition, it also allows small businesses that otherwise fail due to inadequate working capital to survive and thrive.
The microfinance sector in Pakistan needs to undergo a major transformation as segments of the industry face a paradigm shift. The sector’s ability to meet new challenges is also crucial so that it can remain competitive and differentiate itself from its competitors. This article examines the prospects and challenges faced by the microfinance sector in Pakistan, with a particular focus on the role that women can play in providing better financial services.
Microfinance is one of the fastest-growing sectors in Pakistan. The sector provides financial services to the poor and vulnerable through micro-enterprises and self-help groups. In total, there are around eight million micro-enterprises across the country. There are several advantages and disadvantages associated with this sector, but the biggest challenge comes from a lack of awareness among people regarding its utility.
More importantly, there are few regulatory strategies that can be used currently to tackle issues of financial inclusion amongst vulnerable persons. Microfinance has been hailed as a quick-fix solution to poverty and its participants are often regarded as deserving beneficiaries in times of need. There are many challenges present in the sector to be considered before implementing it finally. Moreover, microfinance institutions are mostly located either in urban areas or in the development process at large; accordingly, those areas often face challenges due to their location.
The microfinance sector in Pakistan is now recognized as a major player in financial inclusion. With nearly 46 institutions operating in the country, the sector is striving to offer financial services to the unbanked segment of the population.
According to the government’s official statement, the Pakistan Microfinance Network (PMN) is the national association for retail players in the microfinance sector with a membership of 46 microfinance providers, counting microfinance banks (regulated by SBP) and non-bank microfinance companies (regulated by SECP). The microfinance sector generally offers services in three categories of micro-credit, micro-savings and micro-insurance.
It is also identified that by building on sustainability, the microfinance sector is not only spreading geographically but also catering to specific market segments. It is increasingly relying on commercial funding sources to fuel its growth. Furthermore, the sector is keenly adopting digitization to bring down its costs and expand outreach. As the sector matures, new problems and risks are emerging. With growth rates in double digits for greater than five years now, the rapid growth can pose a serious problem for the players.
Statistics show that Micro-credit witnessed a 3 percent fall in growth with active borrowers during FY2020, while the gross loan portfolio recorded 6 percent growth reaching Rs 324.15 billion. Micro-savings, furthermore, recorded a growth of 35 percent under active savers increased to over 64 million and the value of their savings rose to Rs 374.4 billion, an increase of 40 percent over the same year.
Statistics also show that the number of policyholders in the micro-finance sector fell to 7.3 million by the end of the year 2020 along with the value of the sum insured which fell by 8 percent, stood at Rs 244.65 billion. Since the last decade microfinance sector rapidly has grown in the world and mainly in Pakistan.
How it can contribute?
The microfinance sector in Pakistan has the potential to contribute substantially to poverty reduction in a number of ways:
- It can help reduce poverty by providing low-cost products to those who would otherwise not have them (e.g., basic deposits for saving, loans for start-ups and small businesses).
- Credit transfers through microfinance services can reduce the pernicious effects of interest rates on the poor.
- It can help reduce informal sector employment and enhance market efficiency by expanding access to financial services.
A major challenge for the future development of the microfinance sector in Pakistan is to get more confidence from the public. A proper education system should be created which includes information about microfinance, banking, savings and financing methods. In addition to this, it is important to increase community participation in microfinance programs.
Issues and challenges
- Cultural barriers: Many cultural rules and expectations create obstacles in the way for women to avail of financial services and make use of loans to run their businesses.
- Husband’s control over loans: A great part of the loans taken by married women are used by their husbands.
- Use of loans for smooth consumption: A large number of people live below the poverty line though they obtain credit both from formal and informal sources.
- High rate of interest: Microfinance institutions are charging high rates of interest 32 to 48% than the existing rates in the banks. The lack of ability to get a loan at reasonable interest rates is one of the most important challenges for micro businesses.
- Geographical constraints: Geographical problems such as weak networks with people living in rural areas, poor administration and information about the area are the big elements.
- High transaction costs: The process of lending involves large operational costs and dangers associated with information irregularity and virtuous hazards.
- Lack of specific skills: Microfinance institutions provide loans to people who are poor, as microfinance banking is diverse from traditional banking so it needs specific skills, which are
- Domestic violence: Access to loans by women creates tension and domestic violence among them. Husbands forced their wives to get a loan but women are responsible to repay the loan which they do not use them.
- Nonavailability of financial services: In developing countries, most of the people living in rural areas are financially weak. Their main source of income is based on agriculture. They are not able to raise their income due to less production which is the result of limited resources for buying sufficient inputs needed.
- A loan used for nonproductive purposes: Sometimes a poor person utilizes the loan for nonproductive purposes such as modification of a house, repayment of old debt or to meet their requirements in society. So, microfinance cannot help in the reduction of poverty.
- Design of appropriate financial products for the poor: Access to credit and financial services by the poor in order to improve agriculture production, The MFIs financial products are not suitable for agriculture-related investment as these products are specified by small loan periods, no grace periods, weekly repayment and a small amount of loan.
- Lack of Collateral: Microcredit banks generally required collateral for a specified amount of financing. Due to this, only well-performing clients get benefitted from these institutions.
- Shortcomings between demand and supply of credit: To fulfill the shortcomings between desire and accessibility of credit is the most important challenge.
- Low availability of funds: Small entrepreneurs were poorly financed as a result of various factors such as unsuitable policies of the govt. money lenders charge high rates of interest, and small personal savings among people and they also do not have the important document to avail of the bank services. In short, it is concluded that this low availability of funds is the most important reason for the bad outcome of micro-enterprises.
- Other challenges: Inappropriate laws and regulations, tough competition, new and different variety of products, profitability, constancy and less controlling capability of microfinance institutions, scattered population, cultural barriers and attitude, lack of training and consultation, the constancy of exchange rate, Inflation, inadequate infrastructure and non-availability of the market and economic data.
What could be done?
Poverty is a multifaceted phenomenon that includes, but goes beyond lack of adequate income. The overarching objective of development in many countries has been and continues to be the eradication of all facets of poverty. Rapid as well as well distributed growth in income has always been viewed as an instrument for achieving this objective.
There is a growing need for research and analysis of the microfinance sector in Pakistan where rural banking has been used as the primary provider of financial services to the poor people. Also, development progress must be analyzed with respect to potential problems like irreplaceable social and economic functions of bank branches and other income sources integrated into an efficient system.
Any socio-economic development initiative, unless it is implemented by the government or a major private organization, will not be successful purely on its own. This can be because of the lack of leadership or resources, skill and infrastructure to support it. Access to finance for individuals and small businesses is one of the most important needs and challenges in today’s modern world.
Pakistan has in the last 3 years initiated a bold reform program for accelerating growth as well as a focused third-generation microfinance sector development program providing a conducive policy framework and support mechanisms to encourage private investments in the sector.
The framework allows everyone to contribute to poverty reduction according to their priorities and competency. It provides NGOs with long-term resource support for social services as well as microcredit in a transparent manner based on the quality of their outputs. The State Bank of Pakistan provides a regulatory framework allowing for the establishment of licensed MFIs, which can mobilize resources from local markets.
The government has set up mechanisms for sharing social intermediation costs and risks of banking with the poor. The government will continue to play a catalytic role and it is now for the donors, private investors, civil society institutions and development organizations to take advantage of and make their contribution to poverty reduction, in a sustainable manner.
The author, Mr. Nazir Ahmed Shaikh, is freelance writer, columnist, blogger and motivational speaker. He write articles on diversified topics. Mr. Shaikh could be contacted at email@example.com.