Microfinance — why poor miss out
POVERTY is a manifest deprivation in human welfare, and a multidimensional phenomenon. In addition to the lack of roti, kapra aur makan — the basic rights — it also includes the lack of ‘capability’ — to overcome illness, hunger, violence, ignorance and injustice.
Poverty means the absence of opportunity, empowerment and security, and not just the absence of food on the table. What is the way out? While not a cure for all ills, microfinance is the provision of financial services to low-income clients or segments, which usually lack access to banking and financial services.
More broadly, it is a phenomenon whose objective is ‘a world in which as many poor and near-poor households as possible have permanent access to an appropriate range of high quality financial services, including credit, savings, insurance, and fund transfers’.
Many microfinance banks serve the relatively less poor for a number of reasons: strict eligibility standards and a bias in their favour
According to the Planning Commission of Pakistan, 29.5pc of the population, or roughly ‘60m’ (we do not have accurate figure as the population census has long been pending), is living below the new poverty line of Rs3,030 per capita per month.
In monetary terms, the poverty line of Rs3,030 per month is still $1 per capita per day. But the World Bank has revised its estimate of the poverty line to $1.75 per capita per day.
The worrisome thing is that if, at the threshold of $1 per day, 30pc of the population is living below the poverty line, and if this threshold is raised to $1.75, then this would automatically imply that even more than 50pc of the population is living below the poverty line. The figures might be even higher if we talk about the under-nourished and food insecure population.
The ‘Government’s Vision 2025’ stresses a broader definition of poverty — one which includes health, education and other amenities alongside income and consumption. It promises an increase in resource allocation to improve service delivery, governance and innovation in the economy.
The Multidimensional Poverty Index, released earlier this year, measures deprivations experienced by individuals in health, education and standard of living thus reflecting upon other non-monetary facets of poverty.
In Pakistan, the microfinance sector has been operational in various forms and sizes for over four decades, but the financial inclusion programmes have an urban bias. Currently, 85pc of farmers are formally excluded from financial services. Agricultural loans only account for 7.6pc of total bank loans, and that too with lending concentrated in Punjab.
The informal credit market is dominated by Arthis (middle men), who charge exorbitant interest rates. The low level of funding is due to a number of reasons: such as the shortage of financial service providers and their unwillingness to serve the poor, the lack of awareness, financial literacy and education among the poor.
Currently, we have three different models of microfinance services, i.e. micro finance institutions (MFIs), micro finance banks (MFBs) and rural support programmes (RSPs). The market is dominated by MFBs followed by MFIs and then RSPs in terms of active borrowers and portfolio. Commercial banks and government owned institutions also provide microfinance services.
Microfinance goals for MFIs/MFBs/RSPs are there mainly to provide access to financial services to the poor; to develop sustainable societies; to channelise resources to micro and small enterprises, to create employment opportunities; to enable the rural poor to utilise available resources and generate income in their areas.
Have most of the microfinance providers been able to fulfil all, or some, of these objectives? The answer unfortunately is ‘no’. Many of them serve the relatively less poor for a number of reasons: strict eligibility standards and bias in favour of the relatively less poor clients.
Standard microfinance models are incapable of reaching the poorest of the poor as they charge high interest rates because of the transactional cost of issuing loans. Higher rates also ensure that all the risk aspects are covered though this adversely affects the poorest of the poor people.
The target market of microfinance is estimated to be 25-30m borrowers. The outreach of the sector is just 40pc of the target.
The key issue in microfinance is to ensure its access to the poorest of the poor, particularly those living in rural areas with grassroots social mobilisation. Experience of grassroots process of social mobilisation of such organisations can be found in the National Rural Support Programme Microfinance Bank and the Community Investment Fund. The Rural Support Programme Network can be helpful under strenuous efforts to improve the capability of the poor.
If poverty has to be alleviated, the inherent potential of the poor people needs to be harnessed. Rural and poor-centric credit initiatives need to be scaled up.
The writers work at the Rural Support Programmes Network and COMSATS Institute of Information Technology (CIIT), Islamabad, respectively.
Published in Dawn, Business & Finance weekly, October 10th, 2016