Poverty Alleviation and Microfinancing in Pakistan
In response to these declines in small loans, the State Bank of Pakistan has acted to help recapitalize the microlenders in Pakistan. According to a recent report by Microcapital, Pakistan's central bank has launched three microfinance initiatives: the Microfinance Credit Guarantee Facility, the Institutional Strengthening Fund, and Improving Access to Finance Services Fund. The initiatives are part of $75 million Financial Inclusion Program (FIP), a joint venture between SPB and the UK Department for International Development. The objective of the three microfinance initiatives is to provide liquidity to the microfinance providers in response to tighter liquidity conditions and a sudden spike in inflation. In 2008, Pakistan’s inflation rate reached 20.8 percent, primarily due to rising world fuel and commodity prices. The announced initiatives are also in line with the aggressive goals outlined in the Pakistani government’s Poverty Reduction Strategy Paper. In the paper, the government has laid out an evidence based policy and set a target of reaching out to three million microfinance borrowers by the end of 2010 and 10 million borrowers by 2015.
The history of microfinance activities in Pakistan started with the launch of Orangi Pilot Project (OPP) in kutchi abadies (shanty towns) of Karachi in early 1980’s, according to a paper published by Abdul Qayyum and Munir Ahmed. In the late 1960s, prior to OPP, a few NGOs in the rural areas of Pakistan began to experiment with microcredit by offering subsidized loans. However, they mostly failed to reach the poor due to abuse and corruption. Now there are more than sixteen Micro Finance Institutions working in Pakistan. The MFIs in Pakistan can be divided into different groups based on their uniqueness that separates them from other financial institutions and makes them similar in terms of the way they function.
The first group consists of financial institutions with microfinance as a separate product line. The share of microfinance related activities of these institutions is up to 10 percent. This group includes Orix Leasing and the Bank of Khyber –both are profit making organizations and consider microfinance as a separate product line.
The second group refers to the specialized MFI’s, which includes two microfinance banks - The Khushhali Bank and First Microfinance Bank Limited (FMBL) - and two NGOs - KASHF Foundation and ASASAH. All these institutions completely focus on provision of financial services and also have commercial focus as well.
Third category MFIs related to activities of the Rural Support Programs which deals with integrated Rural Development Programs with microfinance as one of its activities. These organizations are National Rural Support Programs (NRSP), Punjab Rural Support Programs (PRSP) and Sarhad Rural Support Programs (SRSP). The last group consists of private NGOs. These NGOs are basically integrated development organizations with microfinance as one of their activities. These include Orangi Pilot Project, Sungi Foundation, Taraqee Foundation, Development Action for Mobilization and Emancipation (TRDP), Sindh Agricultural & Forestry Workers Coordinating Organization (SAFWCO) and Development Action for Mobilization and Emancipation (DAMEN), among others.
Khushhali Bank was established in August 2000 as part of the Government of the Islamic Republic of Pakistan's Poverty Reduction Strategy. The Pakistan Microfinance Sector Development Program (MSDP) was developed with the technical assistance and funding of the Asian Development Bank, which provided a US$150 million loan to the government of Pakistan, US$70 million being used for micro-loans provided by KB. Headquartered in Islamabad, KB operates under the central bank's supervision (State Bank of Pakistan) with several commercial banks operating as its primary shareholders.
The First Microfinance Bank, established by Agha Khan Foundation in 2002 as the first private sector micro-finance bank in Pakistan, is a premier non-commercial bank licensed by the State Bank of Pakistan under the regulatory framework of the Microfinance Institutions Ordinance 2001, issued by President Musharraf. It was created through a structured transformation of the credit and savings section of the Aga Khan Rural Support Program (AKRSP), an institution that had laid the foundations of the microfinance sector in the country in 1982, beginning in the Northern Areas and Chitral.
To highlight the positive impact of microfinancing on the lives of poor people in Pakistan, Microfinance Connect website has a number of success stories. For example, a Kashf Foundation customer Shehnaz tells the story of how she was able to keep the the business running while dealing with her husband's illness because of health insurance provided through the foundation's microinsurance program. Rashida Bibi, an Asasah customer, succeeded in doubling her dairy business revenue because of the microloan she received. Shopkeeper Mohammad Aijaz tells a similar story of increased business during the holiday season made possible by a Rs. 35000 loan from Tameer.
In Pakistan, the total banking sector serves around 6 million borrowers and 25 million depositors, implying a penetration rate of 3.6 percent and 15 percent respectively. In terms of access to microfinance, which means the availability of small loans, micro deposits and micro-insurance services to low income households, the current penetration rate is only 10 percent. In other words, 85 percent of Pakistan's population does not have access to any financial services at all, which inherently creates an uneven and an inequitable economic world, where the majority of people are financially marginalized. This situation drives the poor to rely on informal sources of funding like the unscrupulous moneylender, where the calculus of the relationship works to the detriment of the borrower. A well regulated and highly effective microfinance sector is, therefore, absolutely necessary to give hope to the poor in breaking the vicious cycle of dependence and poverty.
In addition to microlending for the traditional small businesses, there is a need in Pakistan to expand this effort by emulating the work of Grameen Shakti to empower villagers with electricity, water, sanitation and other necessities. It is one of more than two dozen organizations within the Grameen family of enterprises that is dedicated to improving the quality of rural life in Bangladesh. The lack of electricity results in low levels of human development, low productivity and widespread poverty in the developing world, including Pakistan. The governments of most developing nations, particularly in South Asia, have miserably failed in providing such a basic necessity as electricity to their people. About 40% of the people in both India and Pakistan have no access to electricity, the percentage lacking access in Bangladesh is even higher.
Microfinancing, along with social entrepreneurship, should be an essential component of non-government efforts in Pakistan and other developing nations to empower ordinary people to become self-reliant by lifting them out of poverty and teaching them the right skills to help themselves. “Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime.” This proverb has guided the efforts of late Dr. Akhtar Hameed Khan, acclaimed Pakistani social scientist and founder of Orangi Pilot Project. All efforts at alleviating poverty should be guided by this proverb that captures the essence of self-reliance.
Here is a Kashf Foundation video clip explaining how microfinance works in Pakistan:
Microfinance in Pakistan: A Silver Bullet for Development?
Microfinance Industry Overview
Pakistan Financial Sector Risks
Akhtar Hamid Khan's Vision
Grameen Foundation in Pakistan
Pakistan's Poverty Reduction Strategy
Grameen Shakti Solar Model For Pakistan
Job Losses Hit India and Pakistan
MicroCapital in Pakistan