MICROFINANCE during the last century was seen as a panacea for poverty alleviation, but since then there has been greater understanding of it as one among a variety of tools to facilitate development and positively impact the lives of the poor. Nevertheless, numerous studies reveal that access to even the most modest form of financial services can economically and socially empower people, especially women.
The UN’s Sustainable Development Goals (SDGs) mention access to finance seven times for achieving sustainable development in the next 15 years as financial services could help end hunger, achieve food security, improve nutrition, promote sustainable agriculture, achieve gender equality and empower all women and girls, promote sustained, inclusive and sustainable economic growth, provide decent work, build resilient infrastructure, promote inclusive and sustainable industrialisation and foster innovation.
When compared to other South Asian countries access to finance in Pakistan is very low and close to Sub-Saharan Africa. A comprehensive set of coherent and sequential reforms have recently been put in place to enhance financial inclusion in a significant manner by the government, the State Bank and other stakeholders.
Since 2000, the apex-lending body for the sector has been promoting microfinance and incorporating a number of lessons from the experiences of other countries to avoid the mistakes made by others. For instance, borrowers are registered with the Microfinance Credit Information Bureau to ensure that they are not taking multiple loans beyond their repayment capacity and a code of conduct amongst organisations ensures that borrowers use the loans for productive purposes and that they are fully aware of all associated costs.
Microfinance is not, however, limited to loans, which is a general misconception. It also includes savings opportunities, remittances and insurance facilities — all of which are critically important for the poor, especially during emergencies or crises where savings and insurance can provide that vital cushion for survival.
Over the past three decades, impact assessment studies and researches across the globe, which could be numbered in the hundreds, in microfinance have witnessed a dramatic growth among academic schools. Microfinance has gained universal consensus as an effective tool for alleviating poverty, and wellbeing improvement, while helping local economies through self-employment, new firms formation, and income distribution.
The role of microfinance goes beyond business investment, to include the improvement of the economic wellbeing of households which translates into improvements in health, nutrition, children education and standard of their life.
A 2015 study spanning over 20 years conducted by Shahidur R. Khandker and Hussain A. Samad of the World Bank confirms, “that microcredit programmes have continued to benefit the poor by raising household welfare. The beneficial effects have also remained higher for female than male borrowers”.
In the development sector support to the ultra-poor and vulnerable poor is provided through other tools. Grants and asset transfers ensure that the segment of the population that is not economically active is able to slowly participate in income-generating activities. The experiences of poor farmers in India taught the Pakistani microfinance sector that only those people with entrepreneurial capacity and a poverty score of at least 18 should be eligible for loans while those who have a lower score need support to graduate to that level.
The poverty graduation approach has been developed as a result of this learning arising from participation in a global research project led by Duflo, Bannerjee, Karlan, et al (2015) that assessed the effects of asset transfers (grant-based) on the poorest households across eight countries over a four-year period. The results for Pakistan were extremely positive.
Thus, the ultra-poor are recipients or beneficiaries of grants, not loans, while the economically active are given access to finance — where they choose to take a small loan to set up or expand a small enterprise which keeps them employed, generates employment in the community and gives them increased income.
Meanwhile, there is a huge demand and supply gap in the microfinance sector as penetration stands at almost four million active borrowers, whereas the estimated market size is 21m. With more than 15m individuals and enterprises un-served, the key stakeholders are partnering to form the Pakistan Microfinance Investment Company to support institutions which provide responsible and sustainable access to financial services for underserved individuals and enterprises that achieve job creation, increase incomes and improve the lives of the poor.
In less than two decades, Pakistan is realising the promise of microfinance where access to financial services facilitates the creation of enterprises, gives poor people access to working capital and provides insurance and savings facilities.
The writer heads the Financial Services Group at the Pakistan Poverty Alleviation Fund.
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