NEWS WIRE: Pakistan: The Case of Microfinance in the Post Crisis World

Original news wire here.

Pakistan, January 7 – Pakistan’s economy in 2008 has been impacted by the melt down of the global financial system, however, certain indicators in the economic set up have progressively affected households at the bottom of the pyramid. Over the past year, the Pakistani economy has faced many challenges including a growing fiscal deficit, a plummeting exchange rate and an increased inflationary pressure caused by rising energy and commodity prices. The Sensitive Price Index (SPI) which measures a basket of goods related to food items has been growing at an average rate of 31 percent over this year, while energy prices have increased over 6 times. The relentless increase in food prices in particular has quickly eroded the purchasing power of low income households, who tend to spend a large proportion of their income to meet their basic consumption needs. For example Kashf Foundation research has shown that on average low income households are spending 66 percent of their household income on food.

The current economic scenario creates a multidimensional dilemma for microfinance institutions (MFIs). MFJs traditionally provide financial services to the “unbanked” or such households that are not included in the documented and formal economy. Microfinance includes a broad range of demand oriented services, including but not limited to credit, savings, insurance and remittances. The main question to ask is how is and can the growing food inflation and economic crisis impact on microfinance operations? The first impact could of course be on the ability of low income households to service their existing loans, which could in turn negatively impact the portfolio quality of outstanding loans. It is important to look at the case of Bank Rakyat Indonesia (BRI), a publically owned commercial bank with a large micro-loan segment, during the Far East financial crisis of 1997/98. During the height of the financial crisis in Indonesia BRI’s 3 million borrowers continued to repay their loans through out the crisis and today BRI is rated amongst the top high earning banks in Asia with an ROE of 28 percent.

However, in Pakistan the issue to watch at the moment is not the ability of low income households to service their loans or the impact on demand for further loans. For example Kashf Foundation research has shown that clients are taking on new jobs or establishing new businesses, in order to increase family income in this time of duress. 1500 of clients surveyed have even established a new business to increase cash flow, while 9900 of females have joined the work force. This trend will certainly enhance the demand for micro loans. The growing issue that is emerging in Pakistan and which can actually wipe out the gains of the decade long growth of the sector is that of political intervention, which can lead to massive defaults and high systemic risk. In certain areas of the Punjab, political representatives have made statements claiming that micro loans are written off, which has created an environment of poor credit discipline across the sector. In the long run, such a wave can negatively affect the quality and the outreach of the sector, along with the credibility of low income borrowers.
All across South Asia and the rest of the world, microfinance has traditionally enjoyed high recovery rates, in the range of 99 percent, and the entire basis of the relationship between the client and the microfinance institution is based on trust. Unlike traditional banks, microfinance institutions lend to low income clients without any form of collateral or strong legal measures. The instrument used to ensure high recovery rates is the notion of group or peer support, where 5-20 members get together to jointly support each other’s recovery. These networks with time become not only transaction points for collecting loans, but also become sources of associative strength and learning. For example Kashf Foundation’s impact assessments have shown that over time women’s self confidence and self worth improves as a result of interaction with peer groups. Recent events in Pakistan can significantly damage the one asset that low income clients have traditionally enjoyed, that is, their credibility. Credit discipline is indeed a social good and it is important that a clear and structured policy be established by the government to protect the sector from irresponsible political intervention.

It is also important to understand the significance of microfinance for low income households, especially in the context of a country that lacks social security. The first thing to establish is that microfinance works best with the economically active poor, in other words microfinance is certainly not the panacea for poverty alleviation. Continuous access to loans provides low income households the ability to enhance and diversify their income sources. Research has shown that microfinance households are able to earn 55 percent more income than non-microfinance households on average, thus allowing such households to pay for better food, better healthcare and better education for themselves and their families. In fact microfinance clients are seen to spend 20 percent more on education of their children than non-microfinance households. Demand oriented savings products can provide low income households with the opportunity of managing future cashflows and thus reduce financial vulnerabilities. Pakistan has yet to demonstrate an effective microfinance model that relies on savings from low income depositors. Recently, Kashf Foundation along with International Finance Corporation (IFC), the Shorebank International, Triodos Bank Netherlands and Women’s World Banking Microfinance Equity Fund, has established the Kashf Microfinance Bank Limited with the vision to provide 1 million low income depositors with financial access.

Microfinance can also be seen as a way of building a more stable and equitable economic system. The notion of financial inclusion implies that each and every household should have access to a regular and affordable set of financial services. In Pakistan, as an industry the overall penetration rate is quite low and only 10 percent of those households that require microfinance have access to such services, as compared with other countries in the region.

As an industry the microfinance sector is at its infancy, it is therefore imperative that we avoid and prevent political intervention in the sector from growing, for this will jeapordise the financial health of the entire industry, at a time when low income households need these services most.

Let us give people like Saima a chance of survival and a better livelihood, for access to sustainable financial services is far better than providing her with charity. Saima’s story resonates with courage, pride and conviction for only 5 years ago Saima and her family were heavily indebted to local money lenders. As result of this, her husband was about to sell the house they owned, when Saima was approached by Kashf Foundation staff to take a loan of Rs 8,000 to start a business of making hand embroidered dresses.

Today Saima says” I employ 35 women from the village earning around 6,000 per week. Seeing my drive and passion has given other women from the locality the strength and the courage to venture into running their own enterprise, “It is our responsibility to protect the economic rights of millions of women like Saima across Pakistan so that we can build a society that values prosperity with dignity.

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