Role of microfinance (MF) in poverty alleviation and issues, challenges it is facing currently

HIRA KHAN

Microfinance is a growing concept which is spreading its route rapidly. MF provides small loans to unemployed individuals, poor people and to small enterprises. The potential market for MF is roughly being considered around 6-7 million households which generally 1/3 of the total households in Pakistan.

MF sector reaches 3.1million active borrowers with a Gross Loan Portfolio (GLP) of Rs 6.1 billion, whereas the deposits of MFBs stand atRs3.6 billion. The operational self-sufficiency (OCC) has remained over above 100 in the past three years for the industry in spite of the fluctuations. In Pakistan, this industry is also contributing by employing over 17000 individuals and this figure is increases gradually.

Pakistan ranked at 6^th with 5.7 M (+25.9%) of borrower FY 2017 and with 1.8 B (+39.6%) of loan portfolio FY 2017 (dollar). Global account access has been increased from 62% in 2014 to 69% in 2017 as by Global Findex Data.

According to a recent research, there are some challenges which microfinance sector facing these days. Besides the challenging factors such as, high transaction cost, political interference and diversified products, whenever any natural disaster happens, MFIs or MFBs have to face difficulty. But the noticeable thing is that despite the challenges and some natural disasters in past, the sector is growing continuously. This is due to the fact that, any disaster and challenges have their impact in one place at a time and are usually area specified due to which they do not have a significant impact on overall country and GLP kept on increasing.

From the interviews and research surveys, the illiterate people are with 41.93%. Among active borrowers of MF loans, the ratio is high among males with 77.41%. Only people with the ratio of 15.9% have detail idea about MF. The borrowers have high percentage with 48.30% who take MF loans for the purpose of Agriculture. There are 75.80% of current / active borrowers who increase their earnings and observed change in their living standards after availing this loan. 67.70% borrowers believed that MF has main objective of poverty alleviation besides other objectives.

It is observed that women borrowers are committed more in repayment of loans. There is an inverse relation between poverty and MF and between Unemployment and MF. The most important finding about MF is that, economic development is directly affected by growth of MF. When sector grows, economy also grows as it provides source of income / earnings to poor people which directly contributes to the GDP of country.

State Bank of Pakistan (SBP) and Government of Pakistan has together played very important role in the development and growth of MF-sector by establishing the corporate divisions for MF-sector. It is developing extensive trainings to officers in order to make them equipped with knowledge and techniques. Consultant groups are hired from outside country to provide assistance to develop MFBs. For the growth of sector, SBP has taken several policy measures and issued some prudential regulations for MFBs.

It can be clearly observed that MF services are now widely used and promoted for as a key strategy for poverty alleviation and as a social mobilization tool, specifically for poor and the sector grows over the year in Pakistan and in the rest of the world also.

It is to be recommended that, MFBs which currently continue with their operations should also open branches near the rural areas and other neglected small areas so that the poor people from those areas can be more facilitated by avoiding the inconveniencies of travelling to city.  Secondly, the collateral starts on PKR. 150,000 and above. If limitation on General Purpose Loans exceeded by SBP by starting the collateral above the amount of PKR. 300,000, then customers can be facilitated more.

Hira Khan is a student at COMSATS University Islamabad, Lahore Campus.