There is a heavy debate within the economist fraternity and financial experts on whether the microfinance industry can reduce poverty and pursue its goal of profit. The debate still goes with the opposite school of thought, bringing up equally valid points. Lets us understand this in the context of Pakistan. The root and foundation of microfinance lie in its mission to uplift people from poverty and empower the economically marginalized.
Recently, however, there has been a significant shift in the paradigm of thought, transferring the objectivity of poverty alleviation to emphasizing sustainable economic growth and adopting the principle of market-based financial services. Thus, the microfinance industry has shifted focus to outreach and service efficiency. One of the main goals of this shift in focus was to make the microfinance industry self-sufficient to reach scalability. Scalability in any business provides the resources to expand its outreach to people who didn’t have access to the services before.
But the process is challenging. Pakistan was also no exception in facing obstacles in expanding its microfinance industry. Pakistan has faced problems with tradeoffs, and the only way to avoid them is to increase productivity, improve efficiency and focus on overall growth.
The market for microfinance in Pakistan is near about 25 million and 30 million borrowers. The government of Pakistan has made it a target to add 3 million more in 2010 and further increased the target to 10 million borrowers by 2015. The sector adopted extensive growth strategy methods to expand outreach the growth rate varied from a peak of 100 percent to a low 36 percent. Eventually, the growth rate stabilized at 52 percent in 2007. As a result, sectoral growth depends upon external factors like subsidized loans and tax exemptions.
Microfinancing in Pakistan
Pakistan did experience stable growth during the 1990s, but the economic growth wasn’t equal and left millions in poverty. The situation worsened because inequality began to rise parallelly despite economic growth. The most recent data revealed that over one-third of the country lived below the international poverty line at the start of the 21st century.
In response, the government of Pakistan has made its sole objective to roll out a policy as a part of an overarching strategy to alleviate poverty and to boost the microfinance industry to facilitate the upliftment of the poor. Also, the lack of internet makes what it is like to be a digital immigrant in a developing country. The policies will focus on acknowledging the microfinancing sector’s potential to bring about economic growth. The microfinancing sector development program (MSDP) was commissioned to increase investment in the microfinancing sector to initiate poverty reduction.
Pakistan didn’t have a formal centralized microfinancing sector, so it is relatively new to the sector both in concept and practice. Before the microfinancing sector development program took over, microfinancing was executed by non-profit NGOs, rural networks, or at least banks with specialized features of microfinance.
Except for a microfinance NGO based out of Lahore called KASHF, none of the microfinance institutes had experience doling out microcredit or any form of microfinancing service, which led to a state of unsustainability. It has been proven that ultra-poor graduation is the strongest case so far for why financial services must be a part of the solution to extreme poverty. Despite the abundance of micro-financing institutes, the microfinance penetration is below 5%, and overall, just 5.5 million poor people have signed up for the program.
To reach the under-served communities, the government of Pakistan established a central regulatory body to promote and create adequate infrastructure to expand microfinancing services to the economically marginalized. A piece of legislation was drafted to direct investment in those regions. The Khushhali Bank, one of the renowned retail microfinance institutes in the country, was one of the first institutes to receive its license under the Microfinancing Sector Development Program, which now serves over 250,000 clients.
The number is higher than all the clients of the NGOs put together. The bank has achieved a substantial while maintaining solvent and commercially robust. Following the footsteps of Khushhali Bank, there are now multiple institutions in Pakistan that dole out microfinancing services. Microfinancing can also be extended with Allianz launching sharia compliant mobile loan service.
Impact of Poverty
Before we discuss the impact of micro-financing on the economy of Pakistan, we have to ask how much better the program participants have fared compared to the people who did not participate in the program. Alternatively, how the non-participants would have fared in the presence of the programs? Of course, in a developing economy, keeping tabs with appropriate records is difficult, considering that a substantial part of the economy is agricultural and informal.
Gathering information is challenging in these parts of the developing community, with high chances of stumbling upon inaccurate and cross-sectional data. Even the accurate data are also half the truth. They do not consider the different circumstances the survey participant has gone through. So, the researchers have to settle for estimates and the average value of the survey participants. So, gauging the actual impact is difficult. Setting up a control group is also tricky, and eliminating bias becomes challenging.
Determining the effects of microfinance services isolated from the effects of external factors becomes the most significant task when studying such empirical data. If the microfinance service has been targeted in an area with poor infrastructure, then the study considers these factors.
Main Findings and Results
The growth pattern of microfinance in terms of expansion of its physical and financial infrastructure shows robust expansion. From 2004 to 2007, the microfinance industry has grown its networks in terms of the number of branches by three folds, including hiring staff members. However, the number of branches and employee strength increased more than the rate of borrowers and loan assets.
The total number of branches increased to 1165 from 362 branches, and the number of staff members increased to nine thousand five hundred and twenty-nine from two thousand nine hundred and thirteen. The rapid expansion of branches indicates the microfinance industry’s priority is to reach the people without expanding their financial assets. Similar growth patterns have been noticed in the case of three microfinance institutions.
The comprehensive growth strategy was implemented, considering the social objective and boosting performance numbers. In this case, the performance number means the number of people from low-income households signing up for the program.
However, most of the time, this strategy doesn’t work. If the institution expands before gaining financial leverage, it will spread itself too thin. Microfinance, on a majority, has to rely on the government for subsidized credit or funds. So the opening of new branches heavily impacts the workforce and the operational cost of the entire branch.
In contrast, if the expansion could have been done in a way that could be sustainable in the long term, it would have given them depth. During such times, the entire market share will be concentrated in just a few institutions controlling the industry and making rules according to their benefit. Only the three microfinance companies in Pakistan control the lion’s market share.
Breadth, Depth, Scope, and Worth of Outreach
The market for microfinance in Pakistan is near about 25 million and 30 million borrowers. The government of Pakistan has made it a target to add 3 million more in 2010 and further increased the target to 10 million borrowers by 2015. The sector adopted extensive growth strategy methods to expand outreach the growth rate varied from a peak of 100 percent to a low 36 percent. Eventually, the growth rate stabilized at 52 percent in 2007.
In response, the government of Pakistan has made its sole objective to roll out a policy as a part of an overarching strategy to alleviate poverty and to boost the microfinance industry to facilitate the upliftment of the poor. The policies will focus on acknowledging the microfinancing sector’s potential to bring about economic growth. The microfinancing sector development program (MSDP) was commissioned to increase investment in the microfinancing sector to initiate poverty reduction.
The Khushhali Bank, one of the renowned retail microfinance institutes in the country, was one of the first institutes to receive its license under the Microfinancing Sector Development Program, which now serves over 250,000 clients.
Real outreach is measured by the four dimensions: breadth, depth, scope, and worth. The overall breadth of a program is measured by the number of people who signed up for the program, which increased from 0.6 in 2005 to 0.8 million in 2006 and eventually to 1.2 million in 2007. So, the target put forth by the government has not been fulfilled.
Frequently Asked Questions
Q1. Why is it important to research your client’s requirements?
Not all clients go through the same circumstances as everyone else. There is not any one-size-fits solution to a problem. Not only is every client’s requirement different, but the community in which they grew up is also essential. So that’s why it is vital to research your client’s requirements.
Q2. How can research be used to benefit clients?
The services provider will at an advantage if they research their client. Research enables them to gauge their needs, desires, requirements, and wants.
Q3. What are positive attitudes toward customers?
A positive attribute towards your client involves maintaining a calm composure during client altercations. This enables a robust relationship between you and your client, which can benefit you long-term.
It is clear from the above research data that the microfinance industry went for an expansionist policy by extending its services to various parts of the country. The move has enabled penetration where banking services were not available. From 2004 to 2007, the microfinance industry has grown its networks in terms of the number of branches by three folds, including hiring staff members.
- Jonas Taylor is a financial expert and experienced writer with a focus on finance news, accounting software, and related topics. He has a talent for explaining complex financial concepts in an accessible way and has published high-quality content in various publications. He is dedicated to delivering valuable information to readers, staying up-to-date with financial news and trends, and sharing his expertise with others.
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