The roots of microfinance lie in a social mission of enhancing outreach to alleviate poverty. More recently, there is a major shift in emphasis from the social objective of poverty alleviation towards the economic objective of sustainable and market-based financial services. In other words, the new focus of microfinance involves a trade-off between outreach and efficiency. One implication of this changed focus is that microfinance institutions will have to be financially self-sufficient to meet the objective of enhanced outreach. The microfinance sector in Pakistan is also faced with the challenge of enhancing outreach on a sustainable basis. One way to minimise the trade-off is to improve efficiency and productivity through intensive growth strategy of the sector itself (i.e. the Microfinance sector) – Generally not advisable, see below.

The target market of the microfinance sector in Pakistan is estimated to be 25 to 30 million borrowers and the government has set the outreach goal posts to at least 15 million by 2020. According to the State Bank of Pakistan’s (SBP) official policy, the role of microfinance is: “Pivotal for inclusive and sustainable economic growth of the country; crucial to livelihood creation; and a key driver of grass-root level development.” Although the microfinance sector emerged in Pakistan with a delay of more than two decades (as compared to its other South Asian neighbours, Bangladesh and India), the sector today is growing tremendously – in fact outpacing the early entrants in South Asia. Pakistan today has a well-recognised legal and regulatory framework for microfinance and is being ranked among the top countries for microfinance regulations by the Economist Intelligence Unit (EIU) of the Economist Magazine. The SBP has consciously promoted a healthy competition in the sector by: Ensuring a strong presence of the private sector; promoting growth of inclusive financial services; and by encouraging innovative business models. Again, from its official website: “SBP’s aim is to ensure access to financial services for all segments of the population, particularly to the poor and marginalised groups by using microfinance .” However, this does not mean that all is well. According to a recent research carried out on the sector by Pakistan Economic and Social Review, although the microfinance sector in Pakistan adopted an extensive growth strategy (over the last decade) and made some good progress in various indicators of outreach and performance, yet the challenge remains for increasing the breadth, depth and scope of its outreach at a low or lower cost.

The operational and financial sustainability of the sector is weak and remains to be addressed. The overall cost per borrower is increasing and the productivity ratios are also low. The most likely reason for a weak financial position of the sector is the inappropriate and costly growth strategy of over-expansion, which one believes has adversely affected the cost and productivity of this sector. The typical interest rates on microfinance loans in Pakistan are today ranging at around 35% or more, which in 2005 were significantly lower. Group wise analysis suggests that in Pakistan , MFBs (Microfinance Banks) are the least efficient, whereas, the MFIs (Microfinance Institutions, e.g. Kashf) have so far performed the best. In order to minimise the trade-off between the social and commercial objective of microfinance , the sector needs to concentrate less on extensive expansion and focus more on utilising the existing human and financial resources. A simplistic approach may entail that the targets set by the sector can simply be achieved by adopting an intensive growth strategy, but as pointed out earlier, this approach of merely focusing on growth cum expansion may essentially be the wrong way forward!

In particular, the success of microfinance largely depends upon the practices of the specific bank, which finances poor people. A good example: BRI (Bank Rakyat, Indonesia). It provides technical and moral support to the people it lends money to. Also, it does well by seeing to it that collaterals like motorcycles, cars, cattle, and land etc are chosen to secure loans so that in case the clients fail to repay, the collateral in itself is not only monetarily sufficient but also of a nature that can easily be managed in a poor community. Besides this, it excels in its risk management, internal audit, financial procedures, transparent systems, dedicated staff, and in devising a very fair cum clear matrix of ‘success’ incentives, both for its staff and its clients. Nearly all studies (especially Obamuyi, 2009) are unanimous in determining that poor credit culture and low risk management can result in a low rate of return, which can finally end with the failure of the scheme itself. Lastly, to the nay-sayers who instead believe that the best way to actually help the poor and to alleviate poverty in general is to simply give them cash without strings attached and let them decide what they would like to do with it. According to this school of thought, when the individual capacity of the poor to improve their own conditions is given some respect, poverty is magically reduced.

A recommended read in this regard: Just Give Money to the Poor: The Development Revolution from the Global South, by David Hulme, Joseph Hanlon and Armando Barrientos. Also, there are the views of LSE economist cum anthropologist, Jason Hickel’s and David Roodman (his book, ‘Due Diligence) that “microfinance doesn’t work. The best estimate of the average impact of microcredit on the poverty of clients is zero”. Their findings being that there exists no real evidence that microfinance-based poverty alleviation projects actually lift their users out of poverty. According to them, microcredit loans simply end up wrapping the poor in layers of more and more debt. In fact, not only does microfinance fail to help the poor, it actively hurts them. This is because the central mechanism of any microfinance project is to increase the consumption of the poor by giving them a small loan. As data from South Africa shows, this does happen; nearly 94pc of microfinance users there were found to be using the money to purchase something. The result, of course, is that they are unable to pay off previously existing debts, or more regrettably, in failing to use the money to generate new income. In Bangladesh, there is an active lobby, which advocates that even the success story of the Grameen Bank now stands exposed as an overblown claim. According to a 2007 study conducted by Q K Ahmad of Dhaka University, 1,189 out of 2,501 people surveyed could not pay back their microcredit loans on time. Further, Ahmad found that nearly three quarters of the defaulters had to take another (usually very high interest) loan from a moneylender or sell personal assets to actually pay off the loan. So quite unsurprisingly, a World Bank study from 2009 found a fall in membership in microfinance ventures!

Then where lies the solution? I suppose, governments when devising a policy on microfinance , just need to balance the above two starkly different thought processes. Surely a ‘responsible’ microfinance structure (as in case of Indonesia) in Pakistan has a significant role to play in helping it to alleviate poverty and in ensuring equitable growth.