Microfinance in South Asia: review

By Amer Saleem Khan

Micro-finance Institutions provided financial services to at least 35 million poor South Asian families by 2005. However, this represents around 15 per cent of the total potential market of at least 270 million families. This was reported by a recently published World Bank report titled “Micro-finance in South Asia - Towards Financial Inclusion for the Poor”. The publication provides a comprehensive review of all aspects surrounding the microfinance sector in South Asia comprising of the countries of Afghanistan, Bangladesh, India, Nepal, Pakistan and Sri Lanka. It presents useful data and research material by a variety of international researchers in a meaningful context hence creating a coherent picture of microfinance in South Asia.

The report looks at microfinance in South Asia in terms of outreach, products, delivery mechanisms, performance and regulatory environment. It also crystal gazes into the future scenarios likely to face the sector. The report’s coverage on the Pakistan microfinance sector is noteworthy.

In terms of potential and actual outreach, Pakistan has an estimated poor population of 50 million individuals requiring credit facilities to the tune of $1.7 billion. Out of this total potential market, microfinance institutions have catered to only approximately 580,000 clients representing coverage of less than 2 per cent. Total reported credit outstanding provided by microfinance amounted to $50 million which is 3 per cent of the total credit requirements.

The report, right at the beginning, comments that in Pakistan microfinance sector has seen considerable government attention due to the poverty alleviating potential through these type of institutions. However, the sector’s leadership has failed to go beyond the social development paradigm. Two large, indirectly state sponsored institutions Khushhali Bank and National Rural Support Programme are the biggest players in Pakistan. Furthermore, over 84 per cent of the total outreach is provided by five major microfinance institutions. This trend showing dominance of a few large organisations in terms of outreach is common among all South Asian countries covered in the report. The report also emphasised that the specialised microfinance focused NGO programmes grew faster over the last two years.

The NGO-microfinance model is reported to be dominant in Pakistan mirroring the situation in other countries of the region. However, NGOs have the limitation that they cannot offer deposit products directly to their clients. Some NGO-microfinance (and particularly RSPs) have tried to mobilise deposits indirectly by involving commercial banks as cash conduits and safe-keepers. However, due to issues revolving around lack of institutional credibility and lack of regulatory structures for NGO sponsored savings mobilisation, the deposit mobilisation efforts of most NGO-microfinance institutions have had mixed results. Furthermore, it may also be noted that deposit mobilisation is a more operationally demanding task as compared to credit delivery hence usually not much focused upon by NGOs.

Apart from NGOs, regulated financial institutions such as Commercial Banks and micro-finance banks (established under SBP’s microfinance regulatory umbrella) as well as leasing companies are also active in grassroots finance. The report mentions the inadequate product delivery mechanisms prevalent in the six newly established microfinance banks. Only Khushhali Bank, as mentioned above, is considered to be a national institution with a major micro-finance clientele. The report mentions that commercial banks have invested in equity of microfinance banks but again these investments are mostly seen as a token investment reflecting their corporate social responsibility stance. Apart from commercial banks, four leasing companies are also active in MF sector in Pakistan through provision of the innovative micro-leasing product with clientele of around 5000.

The dormant role of commercial banks in microfinance in Pakistan is similar to the situation elsewhere in South Asia where inappropriate branch structures and products of commercial and development banks have seen little downscaling towards the poor populace. However, a successful example such as the Indian ICICI Bank is mentioned by the report to highlight that the formal financial institutions can play a role in microfinance through innovation and vision. The report also reminds us that Grameen Bank - the pioneer of the modern microfinance movement itself started as a specialised development bank and it has reached an astonishing figure of over 5 million clients.

The report draws our attention to another potential but neglected microfinance delivery channel - the post office. It is pointed out that the post office network in most of South Asian countries is larger than the bank branch network. There are 8000 commercial bank branches in Pakistan as compared to over 12000 post office network. Most surprisingly, the Pakistan Post Office had over 3.5 million clients who bought remittance, savings and insurance services from their local post offices; these clients earned the post office more revenue than the core business of postal services. Similarly, Indian postal service is also the largest bank in the country in terms of frequency of deposits and number of accounts (124 million). The role of post offices as remittance channels has an established tradition in South Asian countries especially Pakistan. Their large rural and urban network as well as cultural accessibility for the poor populace makes them ideal microfinance institutions. However, post office infrastructure is contracting due to the recent institutional reforms aimed at rationalisation and financial efficiency.

Microfinance is basically a financial intermediation process whereby financial resources are channelled to poor households in the form of financial products and services. Financing structure of microfinance institutions plays an important role in all operational aspects including pricing, delivery methods and other organisational aspects. The report also provides a snapshot of financing sources for South Asian microfinance institutions and comments that these institutions have accessed money from depositors, donors, social investors, national/regional apex funds as well as financial institutions such as development banks. In comparatively mature markets such as Bangladesh and India, historically dominant donor funding is slowly giving way to commercial debt from financial institutions and deposits. On the other hand, Pakistan and Afghanistan are still seen to be maintaining dependency on donor funding although debt financing in terms of funding from apex institutions is expanding. In financial terms, Pakistan microfinance sector is seen to be highly under-leveraged in the sense that the institutions have very high capital adequacy ratios (averaging over 45 per cent). A positive implication for this is that the microfinance institutions can assume a significant amount of debt for their future expansion. They need to demonstrate their capacity to upscale their operations and provide adequate proof of financial sustainability to potential commercial lenders. The emergence of microfinance banks show a move towards commercial financial activity in microfinance. However, the report also points out that the investors in these microfinance banks are not expecting to earn profits in the next five years dampening the pressure on these institutions to show sustainability over the medium term period. This situation, the report says, is akin to the highly subsidised donor-funding environment of the NGO sector.

The report also looks at the sustainability element of the MF sector in South Asia. Leading microfinance institutions in India and Bangladesh have reached operating self-sufficiency. Smaller institutions, particularly in India are still lagging behind, however, the report mentions that commercial banks in India are increasingly partnering with the microfinance institutions to expand the latter’s funding capacity and lending volumes so as to achieve sustainability.

The situation in Pakistan is not painting an encouraging picture as the major microfinance institutions responsible for the bulk of outreach have negative return on assets with operational self-sufficiency less than 100 per cent. Only 42 per cent of the client outreach is attributable to profitable microfinance institutions. The report mentions low portfolio yields and operational structure exists for this situation. Most microfinance institutions in Pakistan are not focusing on MF and spreading themselves thin over a variety of developmental initiatives. This compromises their ability to upscale their programmes. The pressure by the government and the society at large to keep interest rates low is also playing its part.

The report also reviews the impact assessment initiatives of microfinance activities in South Asia. Most of the studies quoted in the report, conducted throughout the region reported increase in income, promotion of gender empowerment as well as greater access to health and education. For Pakistan, the comparatively fewer studies done on impact also confirmed the above results. However, it is highlighted that the impact studies have their own methodological pitfalls, which undermine unbiased analysis. The report presents institutional level social rating and social performance management as alternative impact assessment methods which try to avoid the usual pitfalls associated with client level impact assessment activities.

Regulatory environment for the microfinance sector has also taken shape in the region. Bangladesh, Nepal and Pakistan have comprehensive regulatory systems for microfinance. The report urges caution in embracing tighter regulation specifically for the microfinance sector. Regulation should facilitate outreach and institutional development rather than creating hurdles. It gives the example of Pakistan where although prudential regulations for micro-lending operations and establishment of microfinance banks were promulgated, the sector did not see a major boost in either outreach or sustainability of institutions because of that. More time is required to see the long-term impact of fast regulatory efforts on the Pakistan microfinance institutions sector.

In conclusion, the report predicts that the future of microfinance institutions is with large, financially sustainable and specialised institutions. These institutions will have access to diverse, commercially oriented funding sources particularly deposits. It is also predicted that technology will play a greater part in financial service delivery. ATMs, mobile phones and hand held devices will be extensively used to facilitate customer interaction and operations management. These positive changes will take effect only if the right economic and political environment prevails in the region promoting prosperity and stability. Last but not the least, the growth of grassroots finance will also greatly depend on the ability of the sector leaders to look beyond social responsibility towards financial markets development.

Microfinance
Facts and requirements

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By Tauqir Haider

Monday,JUNE 11,2007

Pakistan has a large informal economy, which the government is trying to document and assess. Approximately 41 per cent of adults are literate, and life expectancy is about 62 years. The population, about 165 million in 2006, is growing at about 1.96 per cent.

Relatively few resources have been devoted to socio-economic development or infrastructure projects. Inadequate provisions of social services and very high birth rates in the past have contributed to a persistence of poverty. Recent study has concluded that the fertility rate peaked in the 1980s, and has since fallen sharply. Pakistan has a family-income Gini index of 41, close to the world average of 39.

The high population growth in the past few decades has ensured that a very large number of young people are now entering the labour market. Among the seven most populous Asian nations, Pakistan has a lower population density than Bangladesh, Japan, India, and the Philippines. In the past, excessive red tape made firing, and consequently hiring, difficult. Significant progress in taxation and business reforms has ensured that many firms now are not compelled to operate in the underground economy.

In late 2006, the government launched an ambitious nationwide service employment scheme aimed at disbursing almost $2 billion over five years.

Pakistan government spent over 1 trillion Rupees (about $16.7 billion) on poverty alleviation programs during the past four years, cutting poverty from 35 per cent in 2000-01 to 24 per cent in 2006. Rural poverty remains a pressing issue, as development there has been far slower then in the major urban areas.

Evolution of micro finance

Microfinance is a term for the practice of providing financial services, such as micro credit, micro savings or micro insurance to poor people. By helping them to accumulate useable large sums of money, this expands their choices and reduces the risks they face. Suggested by the name, most transactions involve small amounts of money, frequently less than 100 USD.

The recent statistics show that almost 25 per cent of the country’s population lives in absolute poverty. And within this, microfinance is recognised to be a significant poverty alleviation tool. Encouraging is also the positive growth in his sector over the past six years.

There are five Micro Finance Institutions like microfinance institutions, rural support programmes, and other NGOs doing microfinance as part of their integrated operations, and commercial finance institutions or commercial banks involved in microfinance.

Micro Finance consists of 24 NGOs, 6 Micro Finance Institutions, 5 commercial finance institutions and 6 rural support programmes. Khushhali Bank claims to have a current annual coverage of 100,000 clients.

Loans and savings are the two key services that are currently being provided by the micro-finance sector. The average size of loan taken by poor households from NGOs is about Rs16,540 at an interest rate of 18-20 per cent per annum.

Microfinance in Pakistan is relatively a new concept as compared to other countries in the region. The NGOs and Rural Support Programs has been the major player in the sector since early 1980s covering about 5 per cent of more than 6.5 million poor households in the country. Considering the low outreach levels of this important poverty alleviation tool and need for development of a pro-poor financial infrastructure, we adopted a Microfinance policy to demonstrate government’s commitment to promote this sector and facilitated establishment of Khushhali Bank, a public private partnership, with the twin objective of substantially increasing outreach in the medium term and giving a model institution to the private sector.

The policy mainstreamed the concept of sustainable Microfinance, recognised it as an important component of country’s financial system and encouraged private sector entry into banking with the poor. To give a formal shape to the policy, a legal framework for establishment of MFIs in private sector was enacted which allowed institutional diversity for provision of microfinance services. The framework is applicable only on MFIs interested in mobilising public savings to finance their operations; the NGOs and other programs undertaking microfinance from sources other than public savings are not covered under the framework.

Present scenario

Presently there are two formal microfinance banks operating in the country while licensing applications for two more banks are under process and a renowned NGO is at final stages of preparation of its proposal for conversion into a formal microfinance bank; the size of formal microfinance banks is likely to grow to 5 banks by the close of this year. The outreach of these two banks has extended to 44 districts so far and 125,000 poor families have accessed credit from these institutions, amounting to Rs2.12 billion. Both the banks are targeting the poor women who have so far been neglected. Their recovery rates at 96 per cent plus are also satisfactory. The PPAF has so far provided Rs3.02 billion in credit to 278,000 borrowers and Rs1.11 billion for community physical infrastructure Projects.

State Bank of Pakistan has framed a separate set of prudential regulations for microfinance banks in consultation with stakeholders and microfinance practitioners to ensure sound risk management systems in microfinance banks and require them to remain focused on their core market viz. the poor and their micro enterprises. The simplicity and allowing flexibility and innovation in this emerging component of financial system while ensuring effective regulatory and supervisory oversight of MFBs are the major features of the regulations.

Recommendations

Bangladesh the world leader in microfinance is yet to have a formal framework for microfinance, then how policies and regulations could be instrumental in promoting financial services to the poor. The conducive policy environment however, is required both for formal and informal microfinance programs. The NGOs and donors etc wouldn’t initiate their programs in areas/countries having restrictive policy environment.

The microfinance initiative however, will have to be accompanied by other initiatives like substantial investment in infrastructure, education and health, to create business, investment and capacity building opportunities for the poor and enabling them to productively avail MF services. The combined effect of microfinance and other developmental and social sector initiatives could make a visible impact on poverty and miseries of the poor.

Role of women in this sector is required to be established. No doubt, women have greater tendency to reinvest their savings, not only for expansion of their businesses, but also for education, nutritional needs and health care of their families that a strategy is needed for low income, developing countries to achieve all the Micro Finance goals.

Presently, apart from factors like a lack of infrastructure and the absence of an overall congenial business and administrative environment, hurdles like inadequate financial resources, lack of access to technology, education, business-related training, lack of social services and net working etc bar women entrepreneurs from entering the realms of the organised sector. A strategic approach is needed to address these issues, both at the individual and national level.

The question whether the inclusion of micro-finance eroded the collective spirit of cooperatives arises because of the tensions inherent in the collective community interest and the individual self-interest, the policy of using the collective savings as collateral for individual default and the dichotomies implicit in its conception of the village organisation as a hybrid credit union. While one of the objectives of a credit union is to encourage its members to save and to obtain a reasonable rate of interest on these savings, there is another objective which can be construed as being directly in conflict with this objective which is to create sources of credit at a fair and reasonable rate. The lower the interest rate charged on credit, the lower the interest allowable on deposits.

Conclusion

So it is concluded that the growth in micro finance activities will uplift the basis of the crunching demographic and poverty facts of a developing country like Pakistan. But the government should not feel it an offload task since the individuals have started their attempts on personal levels rather a combined government and individual effort can produce the results one can dream.


http://jang.com.pk/thenews/jun2007-w...6-2007/p10.htm

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