Access to financial credit remains a cause of concern for entrepreneurial businesses in Pakistan. On the “Ease of doing Business” index, Pakistan ranks at 105th place. Among the factors incorporated to arrive at these ratings, items such as getting electricity, registering property, getting credit, protecting investors and paying taxes have been factored in.
Dr. Muhammad Yunus an esteemed economist and founder of the Grameen Bank in Bangladesh was awarded the Nobel Peace Prize in 2006 for his pioneering efforts in enabling poverty reduction by means of easy access to financial credit. He is accredited for providing means to the poor people of Bangladesh to reach financial self-sustainability. In 2004 he said, “if we are looking for one single action which will enable the poor to overcome their poverty, I would go for credit. Money is Power.” What we see in economies with similar population dynamics, as Bangladesh is the prevalence of the vicious cycle, something that the poor find very difficult to shake off. The vicious cycle stems from their low incomes and causes a domino effect.
Although the diagram is self-explanatory, its effect can be translated into a poor household of Pakistan using some basic assumed facts. The average per capita income in 2011 was Rs. 8,500 per month, assuming that the average household size in 2011 was 5 resulting in an average of Rs. 1,700 per person per month. The picture presented by these figures is dismal. An average household therefore cannot even sustain emergency expenses let alone have a savings oriented outlook. Having nil or very meager savings then hinders any entrepreneurial opportunity to flourish and thus people remain less productive and unable to utilize their potential to improve their economic situation. This is the vicious cycle of poverty in effect.
However, there have been examples where this vicious cycle of poverty has been broken and people have been facilitated to start a self-sustaining life. Case in point would be Bangladesh’s Grameen Bank’s outreach to its clients providing them easy access to financial credit for startups and small home based businesses. Similar success stories are also present in Pakistan. Khalid Pervaiz is a fabric shop owner in Dharampura, Lahore. With a small shop, selling unstitched cloth material he faced struggle to provide for his family. He wished to expand his business in order to improve his lifestyle and for this he faced the mammoth task of arranging for finances. Khalid approached Kashf Microfinance Bank Limited (KMBL) for a loan of Rs. 300,000 to increase his inventory level and stock up for the busy season. Combining his business acumen with financial planning, he was not only able to repay the loan but also continue the cycle 3 consecutive times. Today, Khalid is living his dream. He has moved his family out of the slums and now lives in a rented house in a good locality. He attributes his success to KMBL.
Institutions such as KMBL are some of the active microfinance providers in Pakistan. The microfinance landscape in Pakistan has the following basic divisions.
Microfinance Banks: These are licensed and prudentially regulated by the State Bank of Pakistan to exclusively service microfinance market such as Khushhali Bank, Tameer Microfinance Bank and Kashf MicroFinance.
Microfinance Institutions: Microfinance institutions provide specialized microfinance services to the needy such as Akhuwat and the Orangi Pilot Project.
Rural Support Program: Programs such as the National Rural Support Program, Punjab Rural Support Program, Sarhad Rural Support Program and Thardeep Rural Development Program run microfinance operations as part of multi-dimensional rural development programs.
The importance of such microfinance providers can be measured by the potential expected benefit they can offer to the borrowers. Their success in alleviating poverty is also dependent on how the borrowed funds are being utilized. Let us assume that the borrowed money is put to optimum use, it shall directly impact the capital accumulation part of the vicious cycle described above. With this capital, the enterprising individual of the household can establish a small start-up based on the skills he/she has. According to the observations of Dr. Yunus, women have brought forward their more enterprising nature. They tend to be more disciplined borrowers and adopt a more community centric approach to business, which in turn leads to social and economic uplift of their community. A recent story published in an English daily highlighted the story of one such entrepreneur who out of sheer necessity started her business by using her credit card to book exhibition halls at prestigious hotels. She would then organize exhibitions of artificial jewelry and handicraft makers by inviting the manufacturers to set up their stalls. She reminisces that most of her clients were from the middle class and to facilitate their business, she would not charge them for the stall if their artifacts had not sold. Thus, not only did she manage to earn a living for herself but also provided an avenue to the manufacturers of our local artifacts. Her initial handholding provided them the much-needed exposure and now, a number of them have not only established their business themselves but also exporting their merchandise.
Microfinance therefore, is a tool for empowering the poor and in a broader context an enabler of the economic development process. International figures quoted by The Consultative Group to Assist the Poor (CGAP) acclaim the positive impact of microcredit.
- “In Bangladesh, Bangladesh Rural Advancement Committee (BRAC) clients increased household expenditures by 28% and assets by 112%. The incomes of Grameen members were 43% higher than incomes in non-program villages.
- In El Salvador, the weekly income of FINCA clients increased on average by 145%.
- In India, half of SHARE clients graduated out of poverty.
- In Ghana, 80% of clients of Freedom from Hunger had secondary income sources, compared to 50% for non-clients.
- In Lombok, Indonesia, the average income of Bank Rakyat Indonesia (BRI) borrowers increased by 112% and 90% of households graduated out of poverty.
- In Vietnam, Save the Children clients reduced food deficits from three months to one month.”
Often though, eyebrows have been raised on the high cost of credit extended by microfinance institutions. There are reservations (not only in Pakistan but internationally as well) that interest on microcredit is very high. “Microcredit may be inappropriate where conditions pose severe challenges to loan repayment. For example, populations that are geographically dispersed or have a high incidence of disease may not be suitable microfinance clients. In these cases, grants, infrastructure improvements or education and training programs are more effective. For microcredit to be appropriate, the clients must have the capacity to repay the loan under the terms by which it is provided.”
It is very important to understand the underlying factors associated with the high cost of microcredit. Since the banks are extending credit to clients with nil or insubstantial credit history, it is impossible for them to have a fair idea of the borrower’s repayment behavior. They cannot validate how the client has performed on previous loans and whether or not they have been delinquent. This blind spot creates a huge risk for the bank that is translated into high cost. Moreover, in the cases of startups, the risk on the banks’ side is further accentuated since there is no history available to forecast the business’ performance. There are no figures available to estimate the annual turnover or the expenses and thus the banks are forced to work on their own assumptions to assess the future health of the business.
These factors amalgamate to edge microcredit onto the high cost side but its overall effect to provide an economic boost cannot be disregarded. Yes, there shall be instances of defaults and non-performing loans but those shall be eclipsed by the success stories of others who have been disciplined and determined. As quoted by CGAP and observed by Kiva a non-profit organization head quartered in San Francisco with a mission to connect people through lending to alleviate poverty.
“Poor people, with access to savings, credit, insurance, and other financial services, are more resilient and better able to cope with the everyday crises they face. Even the most rigorous econometric studies have proven that microfinance can smooth consumption levels and significantly reduce the need to sell assets to meet basic needs. With access to microinsurance, poor people can cope with sudden increased expenses associated with death, serious illness, and loss of assets”.