Microfinance and poverty reduction
It is interesting that this type of credit is not limited only to the developing/poor countries but also exists in the most developed country,the USA.
Initially an individual initiative, it is gaining the support from most of the governments and NGOs of the world. The man behind this whole project who has been given the Nobel Award in recognition of his services, has now become a most sought-after person in the world.
However, Dr Younas and his scheme of microfinance have not remained free of criticism. A development analyst, Sudhirender Sharma has commented that ‘he has landed the poor communities into a perpetual debt trap and ultimate benefit goes to the corporations that sell capital goods and infrastructure to the borrowers.’
Similarly, Mises Institute’s Jeffery Tucker has opined that, ‘ Grameen Bank and such other models are not economically viable and depend on subsidies in order to operate, thus essentially becoming another example of welfare.’ However, it is also a fact that in spite of this, Grameen has not only played a role in reducing the poverty in Bangladesh to some extent but has also helped to inspire 7000 micro lenders with 25 million clients worldwide.
The traditional banks are not supposed to provide finance to the poor due to various reasons.
First, the poor are not able to offer the banks collateral, a basic loan requirement. Second, due to large number of cases, the proportionate cost of processing as compared to the large loans becomes very high. Thus micro finance institutions are an ideal solution which are structured in such a way as to cater the requirements of the poor in an efficient manner.
As per official estimates, in Pakistan, where 34.46 per cent of Pakistan’s total population and 39.26 per cent of rural population live below the poverty line, micro-finance seems to be a viable strategy.
Significant progress has been made in the recent years as may be gauged from the fact that various microfinance banks and NGOs have invested about $400 million credit.
The number of borrowers has increased from 60,000 in 1999 to 90,0000 in December 2006. The State Bank of Pakistan is targeting three million microfinance clients by 2010 and 10 million by 2015. Currently, there are 1.5 million borrowers.
A recent study indicates that a persistent structural flaw is that the revenue earned from the services is not sufficient to fully cover the costs. This is not due to the fact that these loans are provided on concessionary terms but on the contrary the rate of return on these loans is 20-25 per cent --- much higher than the loans provided by the commercial banks.
The recovery of these loans is also 99 per cent which proves that these loans are not a financial burden on the lenders. The problem is that these institutions are not cost-efficient and it is necessary that the cost be lowered to the level of other South Asian countries. If it is not done, it would be difficult to provide a good service to the under-served.
Apart from this, the issue of microfinance cannot be seen in isolation. The increase/decrease in the number of potential borrowers and the reduction in poverty depend upon various factors such as population growth and the overall economic conditions.
Keeping in view the present trends if some marked improvement does not occur in the economic indicators, the number of poor will certainly increase substantially.