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Reducing Poverty Through Micro-finance

Reducing Poverty Through Micro-finance

Publication Year : 2020
Explore More : Blog

Micro-financing is a significant financial sector development that specifically impacts those without access to, or neglected by, financial institutions. The modern concept was formally introduced in the 1970s with the establishment of Grameen Bank by Professor Mohammad Yunus.

Grameen is for exclusive use of the poor. Micro-finance institutions relax financial constraints on poor and help them in becoming entrepreneurs, generating income, wealth and self-sufficiency. In this way it has emerged as an effective developmental approach that helps the poor get rid of the poverty trap.

Pakistan Microfinance Network (PMN) was established in 1998 to represent emerging Micro Finance Institutions (MFIs). Later, in the year 2000, Pakistan Poverty Alleviation Fund (PPAF) was set up as an apex organization, with the support of World Bank, to provide wholesale refinancing to MFIs. Currently, the sector reaches 2.8 million active borrowers.

The micro-finance sector in Pakistan started off with complete reliance on grants, international lenders and subsidized debt to meet its funding requirements. To fund future accelerated growth and reach 10 million active borrowers, the industry would require additional debt of PKR 300 billion keeping in view the prevailing growth in loan sizes and outreach (PMN report 2010).

Three different micro financing models are prevailing in Pakistan at this time; interest-based micro-financing (via banks), interest free micro-financing (via NGOs) and interest free skilled based micro-financing (via training centers).

In the year 2000, as part of its Poverty Reduction Strategy, the government set up Khushali Bank (KB) with the a USD 150 million loan from Asian Development Bank. On average KB disburse 25% loans to females and 75% for male entrepreneurs. The loan recovery ratio is around 98%. Conventional micro-finance has earned enormous fame across the world, but found limited acceptance in Muslim countries due to religious reasons. According to the Prophet (PBUH), when Riba becomes common in any society, it causes hunger and poverty. Islam therefore discourages and prohibits conventional interest-based micro-finance services.

In addition to micro-finance banks and institutions, specialized and multipurpose NGOs also provide micro-finance services. Akhuwat Foundation (AF) was established in 2001 to provide interest free micro-finance in the form of Qarz-e-Hassana (following Islamic mode of financing) to the poor. AF use local religious places for loan disbursements and encourages its borrowers to donate to Akhuwat’s program. This helps their members once the borrowers themselves have gained enough economic stability. The transformation of borrowers into donors is one indicator of the change Akhuwat envisaged. Studies report repayment rate is approximately 97%.

Finally, another mode of micro finance entrepreneurship has emerged in the country that is training centers for entrepreneurship loans. Centre for Entrepreneurial Development (CED) at Institute of Business Administration (IBA), Karachi is one such example. They have a six-month fast track entrepreneurship program to train rural youth in pursuing agriculture-based business opportunities and spur innovation and growth. Though, these trainings are not free of cost and only rich can afford them.

Both conventional (interest based) and Islamic (interest free) modes of micro-finance are available in Pakistan and are growing at a steady pace. However, conventional financial institutions mostly serve the rich. Heavy collateral and mark-up requirements limit borrowing ability of the poor in conventional financial institutions. Interest based micro finance does not fulfill this objective due to lower acceptability in Muslim countries. On the other hand, interest free skilled based micro-financing is better than interest free non- skilled based micro-financing. It is more innovative and sustainable in terms of poverty reduction in a sense that before entering in to the world of entrepreneurship individuals got skills (via training from training centers) to run their business in more innovative and effective way. But here again the training fees are quite high. Considering the prevailing modes of micro-financing available in the country does micro-finance really reduce poverty?