April 30, 2007
Micro credit and poverty
By Mohiuddin Aazim
Introducing micro credit is one thing but quite a different thing it is to ensure that it ultimately lifts the people from poverty. That can happen only when the quality and outreach of micro credit is such that it helps the borrowers raise their income and spending levels to improve their standard of living.
And that, in turn, depends on whether an institution has disbursed a micro credit to the right borrower for the right purpose in the right manner. Or else it has just booked a micro loan on its books to show its concern the poor.
The government launched in 2000 Micro Finance Sector Development Programme ( MSDP) and set up Khushhali (prosperity) Bank. At present, not only micro finance banks but commercial banks, rural support programmes and non-governmental organisations ( NGOs ) are also offering micro finance facility. Some 40 institutions in these categories are engaged in this business through 400 outlets.
Currently, microfinance institutions can offer up to Rs100,000 to a single borrower and there is no limit on the minimum amount of a micro loan. Till end-June 2006, these institutions had issued Rs6.6 billion micro credit to a million borrowers.
The government plans to increase this number to three million by 2010 through active implementation and monitoring of MSDP by the State Bank of Pakistan. But the potential for microfinancing is much larger as the number of poor Pakistanis is roughly 40 million.
Now, as the borrowers of micro credit are relatively less educated and least informed about how the financial world operates, and they have no access to heir lenders. They rather want the lenders to reach them and release a micro loan instantly with the least formalities involved. From the lendersâ perspective, what is most important is that they want to lend only to those who can repay on time and they also want to earn a reasonable net return on their lending.
As for the government, the main area of concern is whether or not micro financing is leading to a direct or indirect reduction in poverty. Perhaps, microfinance institutions are coming up to the expectations of the prospective borrowers. And there are reasons to hope that as competition gets fiercer, MFIs would not be lagging behind in reshaping their policies and practices in line with the demand of the market.
A more important thing to look at is whether MFIs are running micro credit business on sustainable basis. Lately, the policy makers have been encouraging the stakeholders to move away from relying on subsidised micro credit to making it a financially viable product. But one needs to differentiate between a purely commercial activity and a business that aims at improving lives of the poor on the one hand and ensures profitability on the other.
The founder of Grameen Bank, Prof Muhammad Yunus, who visited Pakistan last month said that microfinance should be viewed as a social business enterprise âthat serves a cause, covers the costs and also earns a reasonable rate of return.â While speaking at a seminar at the State Bank he said that microfinance should be viewed in this light if we want âto provide financial services to the poor and enable them to participate and exploit economic opportunities.â This offers a practical perspective of micro financing and Pakistan may also view the performance of MFIs in the same light.
So far NGOs and Rural Support Programmes have performed better than microfinance banks in reaching out to the different classes of the poor borrowers and in issuing micro loans.
If Pakistan wants to give a real boost to micro financing, it needs to spur large commercial banks to venture into this area more seriously. These banks can use their vast branch network, stable funding sources and big profits to set up microfinance subsidiaries and branches on the principle of social business enterprise.
Microfinance institutions have moved away from being subsidised to commercial viability of their operations which is evident from the fact that a Karachi-based microfinance is charging 36 per cent interest on micro loans ranging between Rs5000 and Rs100,000.
According to a State Bank study, the distribution of micro loans in agriculture and livestock has outstripped other sectors in past five years. To some extent it is good because the impact of micro loans on agriculture and livestock is more direct in terms of poverty reduction than in other sectors. An equally important area where micro financing can have a direct impact on poverty reduction is its disbursement among women. Internationally 90 per cent of micro loans go to women and in case of Grameen Bank 95 per cent.
This shows how critical it is to give micro loans to women if we want to use it as an effective tool for tackling poverty. Sadly though, the performance of micro finance in this area has not been up to the mark. In five years to 2005, the percentage of women borrowers of micro loans has fallen from 30 to 24 instead of witnessing a much-needed rise.
Senior bankers admit that whereas micro financing has come a long way in the last seven years microfinance institutions are yet to develop tailor-made products for different sets of clients. This raises a key question: do microfinance institutions conduct enough research before actually starting to issue micro loans so as to develop suitable financial products?
If all micro finance institutions do that it would help them undertake another kind of research which is more important from the macro economic angle. And that is, which group of people benefit from which kind of micro financing and what changes it brings in their lives in terms of increasing income levels and improving living standards.
Two-three years ago, Gallup Pakistan had conducted a study for Pakistan Poverty Alleviation Fund which showed that in general low-income households who borrowed from the PPAF were better off than they would have been without the loan. âOn average their income levels have risen, consumption increased and personal and business assets improved.â
âMoreover, their lifestyle, in terms of housing facilities and social status has also improved particularly for women borrowers. The benefits of PPAF loan emerge in terms of poverty reduction and improvement in basic lifestyle indicators.â
But an Asian Development Bank Report-- Targeting Efficiency of Poverty Reduction Programmes in Pakistan-- has discussed in detail this and other such studies. The report concludes that âthe results of the studies do not provide rigorous counterfactual calculations on the impact of micro credit on income and, hence, are at best suggestive.â
http://www.dawn.com/2007/04/30/ebr2.htm
Micro credit and poverty
By Mohiuddin Aazim
Introducing micro credit is one thing but quite a different thing it is to ensure that it ultimately lifts the people from poverty. That can happen only when the quality and outreach of micro credit is such that it helps the borrowers raise their income and spending levels to improve their standard of living.
And that, in turn, depends on whether an institution has disbursed a micro credit to the right borrower for the right purpose in the right manner. Or else it has just booked a micro loan on its books to show its concern the poor.
The government launched in 2000 Micro Finance Sector Development Programme ( MSDP) and set up Khushhali (prosperity) Bank. At present, not only micro finance banks but commercial banks, rural support programmes and non-governmental organisations ( NGOs ) are also offering micro finance facility. Some 40 institutions in these categories are engaged in this business through 400 outlets.
Currently, microfinance institutions can offer up to Rs100,000 to a single borrower and there is no limit on the minimum amount of a micro loan. Till end-June 2006, these institutions had issued Rs6.6 billion micro credit to a million borrowers.
The government plans to increase this number to three million by 2010 through active implementation and monitoring of MSDP by the State Bank of Pakistan. But the potential for microfinancing is much larger as the number of poor Pakistanis is roughly 40 million.
Now, as the borrowers of micro credit are relatively less educated and least informed about how the financial world operates, and they have no access to heir lenders. They rather want the lenders to reach them and release a micro loan instantly with the least formalities involved. From the lendersâ perspective, what is most important is that they want to lend only to those who can repay on time and they also want to earn a reasonable net return on their lending.
As for the government, the main area of concern is whether or not micro financing is leading to a direct or indirect reduction in poverty. Perhaps, microfinance institutions are coming up to the expectations of the prospective borrowers. And there are reasons to hope that as competition gets fiercer, MFIs would not be lagging behind in reshaping their policies and practices in line with the demand of the market.
A more important thing to look at is whether MFIs are running micro credit business on sustainable basis. Lately, the policy makers have been encouraging the stakeholders to move away from relying on subsidised micro credit to making it a financially viable product. But one needs to differentiate between a purely commercial activity and a business that aims at improving lives of the poor on the one hand and ensures profitability on the other.
The founder of Grameen Bank, Prof Muhammad Yunus, who visited Pakistan last month said that microfinance should be viewed as a social business enterprise âthat serves a cause, covers the costs and also earns a reasonable rate of return.â While speaking at a seminar at the State Bank he said that microfinance should be viewed in this light if we want âto provide financial services to the poor and enable them to participate and exploit economic opportunities.â This offers a practical perspective of micro financing and Pakistan may also view the performance of MFIs in the same light.
So far NGOs and Rural Support Programmes have performed better than microfinance banks in reaching out to the different classes of the poor borrowers and in issuing micro loans.
If Pakistan wants to give a real boost to micro financing, it needs to spur large commercial banks to venture into this area more seriously. These banks can use their vast branch network, stable funding sources and big profits to set up microfinance subsidiaries and branches on the principle of social business enterprise.
Microfinance institutions have moved away from being subsidised to commercial viability of their operations which is evident from the fact that a Karachi-based microfinance is charging 36 per cent interest on micro loans ranging between Rs5000 and Rs100,000.
According to a State Bank study, the distribution of micro loans in agriculture and livestock has outstripped other sectors in past five years. To some extent it is good because the impact of micro loans on agriculture and livestock is more direct in terms of poverty reduction than in other sectors. An equally important area where micro financing can have a direct impact on poverty reduction is its disbursement among women. Internationally 90 per cent of micro loans go to women and in case of Grameen Bank 95 per cent.
This shows how critical it is to give micro loans to women if we want to use it as an effective tool for tackling poverty. Sadly though, the performance of micro finance in this area has not been up to the mark. In five years to 2005, the percentage of women borrowers of micro loans has fallen from 30 to 24 instead of witnessing a much-needed rise.
Senior bankers admit that whereas micro financing has come a long way in the last seven years microfinance institutions are yet to develop tailor-made products for different sets of clients. This raises a key question: do microfinance institutions conduct enough research before actually starting to issue micro loans so as to develop suitable financial products?
If all micro finance institutions do that it would help them undertake another kind of research which is more important from the macro economic angle. And that is, which group of people benefit from which kind of micro financing and what changes it brings in their lives in terms of increasing income levels and improving living standards.
Two-three years ago, Gallup Pakistan had conducted a study for Pakistan Poverty Alleviation Fund which showed that in general low-income households who borrowed from the PPAF were better off than they would have been without the loan. âOn average their income levels have risen, consumption increased and personal and business assets improved.â
âMoreover, their lifestyle, in terms of housing facilities and social status has also improved particularly for women borrowers. The benefits of PPAF loan emerge in terms of poverty reduction and improvement in basic lifestyle indicators.â
But an Asian Development Bank Report-- Targeting Efficiency of Poverty Reduction Programmes in Pakistan-- has discussed in detail this and other such studies. The report concludes that âthe results of the studies do not provide rigorous counterfactual calculations on the impact of micro credit on income and, hence, are at best suggestive.â
http://www.dawn.com/2007/04/30/ebr2.htm
