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How and when did microfinance start in Pakistan? "Microfinance may be defined as the financial services needs including credit, savings, insurance and payment transfers etc of the poor household and their micro enterprises"(SBP). The use of this tool is not new to Pakistan, but only recently in 2001 a formal ordinance was passed and Khushhali bank became the pioneer formal institution other Institutions came to existence such as Kashf Bank and have come up with several products to reach the objectives of allowing the poor to break out of the miserable cycle of poverty, with many success stories. Before this formal institutions were available The Agha Khan fund for Economic Development 1996 had their institution working to help the poor solve their financial problems. Since our focus will be on the lending that is the small loans of microfinance other informal institutions also existed.
The microfinance institutions in Pakistan are facing a population of approximately174 million where 64% is rural population and a poverty rate above 17% where not everyone below the poverty line are targeted, instead, the middle four out of six economic groups are served by MFIs. The unemployment is also very high above 15%. The number of microfinance institutions has rapidly taken a pick in the country however they are only nearly 25 institutes which is still not enough when we look at the population size of the country and when we see the credit need as well as other services which the MFIs are offering. The other services include savings, insurance, fund transfers services, livestock loans and consulting and training. Insurance of these products is newer however as far as the small and medium enterprises the awareness and utilization of the products under insurance are increasing in demand as the concept of hedging due to high uncertainties has increased accredited to the political unrest, corruption, gangster activities and inflation which is causing failures to many businesses. Now that we are talking of small businesses they are not doing too well accounted to exogenous reasons which is becoming a problem for microfinance institutions as the load of non-performing loans is ever increasing. An issue faced by other banks too. The self sustainability of microfinance becomes questionable when such issues are not well managed as microfinance institutes in Pakistan are mainly grants. shareholders capital and savings. The microfinance institutions also have prudential regulations by the SBP to which they must abide and the reserve requirements also become hurdle to sustainability the other important hurdle is the expansion requirements which must be met.
1.2 Characteristics in the Role of Informal credit markets in Pakistan and different types of sources of informal credit.
The role of informal credit markets in Pakistan is quiet significant and the markets have existed forever now, Pakistan contains of tribes and farmers the tribesmen were dependent on the tribe leader for loans to cater for emergencies on the other hand what history shows the landlords had more brutality and while they gave money to their farmers they also charged interest and when farmers were/are not able to return their daughters are used their lands are taken away and so on. These loans are to cater for family emergencies such as funerals, weddings, and guests or purchase of an important asset. Later on came the informal money lender trend he gave money on interest against collaterals such as land registrations, jewels and other precious assets that the borrower might own. So mainly there were three sources of informal credits a) through the leaders of the tribe b) the landlord c) the money lender others included relatives and friends that is if you are fortunate enough a relative or friend who is doing better might lend the borrower the benefit of such a loan was that there was no interest requirement and that it was not as stressful as any of the above mentioned sources.
Coming to the characteristics of the lenders we know that they are the rich and influential of the society with the ability to obtain repayments. Now coming to the characteristics of the borrowers these borrowers have no security, they have volatility and uncertainty of income as their income depends on these rich who are the purchasers of the goods these borrowers sell. Most of the borrowers are living below the poverty line, they are mostly self employed and uneducated, they do not have any fringe benefits and in case of Pakistan there are hardly any unions some private institutions try to cover for that distance but are influenced hence the MFI existence has changed the scenario for the borrowers even though the borrower characteristics are the same for beginners and improved for the ones who have made effective utilization.
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The characteristics of informal loans are also important in the role that they play such as the accessibility, varied interest rate and at times none at all, no lengthy procedures to be followed and no commitments are important the contract is completely negotiable.
1.3 Credit information, credit access and credit creation capacity of microfinance institutions.
Credit information and credit access from the survey conducted and from the thorough study of the marketing and sales policies of the banks we can conclude that the banks are doing a hard job in providing information regarding the credit policies and facilities. The significant increase in the number of borrowers to more than 1,000,000 in 2011 (mixmarket) is a over the period is a confirmation to their hard work. One of the reasons can be the SBP requirements of opening a specified number of new branches every year. The incentive of promotion given by the MFI in case of bringing a target number of borrowers also energizes the bank staff to do so. Access side is also doing well the facility of availing a micro loan from a MFI is present in all areas irrespective of the under development, bank staff deployed in the form of groups is dispatched and visits the potential customers offering them a door to door service. These customers then form groups and obtain loans. As for the credit creation capacity of the MFIs, they are surely in trouble as MFIs are exposed to high risk by offering loans to those who do not have sufficient incomes. Moreover their interest rates are low and their sources of funds include grants, savings and shareholder capital. With the policies that were there in Pakistan that is extensive growth rather than intensive growth policies the sustainability became questionable. To meet the credit creation capacity the MFIs have moved towards privatization they have worked on their policies, come up with incentives such as a bigger loan on successful repayments.
However it is difficult to conclude if the increased credit access has improved the living standards henceforth to make a conclusion I am doing this study.
Economic Liberalization, Privatization of the banking sector and small loans by commercial banks; Historic Overview.
The banking sector of Pakistan has been privatized at a large scale, many mergers and acquisitions took place over the short period. This encouraged healthy competition and exceptional improvements took place, people are aware of and are exposed to improved and diversified facilities which allow them to avail the best possible opportunity. One of the result of these new facilities and products are the small loans by the commercial banks, it was also analyzed to be a strong tool in order to penetrate in the market. (find evidence in the articles and write about it)
1.5 Microfinance network, products and services in Pakistan.
Microfinance has come up with diversified products and services. From the in depth analysis theses products may be classified into broad categories of gender biased products and services focusing on women, business loans which may be divided in to three subcategories of business start -ups, working capital and purchase of fixed asset of a business, lastly are construction funds which only a few MFIs are offering.
bank has introduced specialized programs such as Jafakah Aurat, earthquake livelihood, Distance learning programs, small infrastructure programs and scholarship programs and these are the specialized programs besides these there are many other simpler products and services such as the live stock loan, agricultural loan, working capital loan, new business loan and asset purchase loan. Moving on to the second biggest institutions Kahsf Bank is the Kamyab karobar credit given for working capital or purchase of fixed asset only.
Assessing Productivity, efficiency and efficacy of microfinance lending.
Pakistan has lacked behind in all three departments due to the adoption of wrong growth strategies such as extensive based strategies when they should have adopted intensive based strategies "this would have reflected in improved performance, efficiency and productivity. Instead the sector adopted extensive growth strategy which involved huge investment in physical infrastructure and rapid increase in recruitment and branch network." (Rauf & Mahmood, 2009) The strategy also removed it focus from the primary social objective towards the sustainability as the measures were cost ineffective. As a result further effect was on the efficacy/usefulness of the lending products as interest variations and procedural limitations came in.
Outreach, pro-gender biases, lack of training and managerial skills.
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Before we are able to comment on outreach it is necessary that we understand the dimensions of outreach and then analyze and make conclusions regarding the outreach of Microfinance in Pakistan. Pakistan has lacked behind in outreach due to the adoption of extensive growth strategy that it followed rather than the intensive growth strategy that it should have followed. "Outreach has six dimensions" (Rauf & Mahmood, 2009) however we'll refer to the major breadth and depth which have remained below due to the above stated reasons.
The MFIs surely have a pro gender bias towards the females as the main objective of Micro credit initiative was to make women financially independent so that they could get rid of their miseries, women have always been marginalized for the worst in the society but this is one of the few effort where the women are being marginalized for better. Microfinance is also part of the MDGs.
There is a significant lack of training and managerial skills since specialized MFI trainings to the bankers as well as the users of the fund are not available.
Issues and concerns.
Issues and concerns are associated to micro finance and micro credit are huge at macro level, these services encourage economic activities they help businesses to survive through the hard time and they maintain a flow of cash in the economy which is much needed by a developing economy such as Pakistan's. There is however a need to regulate the MFIs in order to achieve the most cost effective results and reaching the maximum of entrepreneurs, who will not only benefit themselves but will also be able to help others. Such a stimulus activity if well handled will lead to a healthier and peaceful society where everyone has a better standard of living, one of the expected results that is why it is part of the MDGs.
Hence to ensure that economic activities continue it is necessary to have such programs with the right utilization patterns and policies by the MFIs as well as the Government.
Keyword and definitions.
Utilization for business:
Internal financial constraints to SME borrowers before the Utilization of loans.
The objective of the study is to test the proposition how the incremental income is affected by the utilization pattern of the SME borrowers and the effect personal characteristics can make. As theory and past studies show that there living standards are improved by the utilization and personal characteristics of the borrowers.
The chapter will discuss the articles and past researches and their conclusions in detail as well as the reasoning to the variables that were taken for the theoretical framework. The discussion will also discuss how the focus for the research was narrowed to the hypothesis under study.
2.1 Financial exclusion and Building financial Institutions for deprived and vulnerable.
In all societies we have social classes the most marginalized being the poorest who are not just the most deprived and vulnerable to volatility in incomes but are financially excluded before the MFIs informal credit markets were the only source of help they had.
At the time that Microfinance came in the region there were no financial facilities for the poor Professor Yunus was the pioneer personality for this activity in the region. He was dean of economics at a university in Chittagong and while he conducting field work with his students he met some female respondents and there he encountered women who were short of $25 and hence were not independent and suffering they had the skill and everything else needed he talk of these encounters in his book (Yunus, 1999). That was a time when Bangladesh was struggling hard for it independence. This is where the Grameen bank came into existence the pioneer Financial Institution for the deprived and vulnerable. Microfinance soon became the part of the MDGs (MDGs) and Pakistan being the developing country adopted the measures. MFB Ordinance 2001(SBP) was the first formal step taken by the Pakistan government giving birth to the first Microfinance bank "Khushhali Bank".
If financial exclusion of the deprived continues it will decrease the living standards of the poor as well as the other social classes. Their entrepreneurial abilities would go waste.
2.2 Informal credit markets in developing countries; Review of terms and conditions, sources and utilization.
Coming to Informal credit markets in developing countries lets first look at the importance of informal markets and how they have been defined "Informal credit markets those which are not regulated or monitored by the banking authorities account for much of business credit in developing countries. " (Timberg, 1984)Further the article states them as an important part of the financial system and talks of the "reciprocal relation with growing enterprises" (Timberg, 1984). This view is shared by other writers which include Murdoch who has done vast amount of research in the field. The Informal sector has been part of the financial systems from centuries now there are several forms of sources of these loans, namely local money lenders in the community known as "" this is the most common source in the rural areas however in the urban sector there are other agencies who are lending for businesses who are "lending on the basis of cash flow from those businesses the agencies are mostly the investors, both of these types of informal credit sources usually require no collaterals and are based on personal relations and reputation of the borrower, then sources for other than business use include loans from the employees this can be for the purpose of social events in the family, illness and so on. Other sources include borrowing from a relative who is better off and able to spare some cash, a friend who is willing and able to help these two of forms can be for all sorts of utilizations from a social event of wedding to funeral, illness to business constraints, repair of home or catering for emergency guests. These sources are also more of reputation based than any long procedures to be followed, collaterals be provided and a huge benefit of these small loans is that their terms and conditions are not rigid and these loans are available on the convenience and mutual agreement of the lender and borrower, however evidence from Ledgerwood shows that this may vary with respect to country context, ethnic views, and religious views. This evidence if further strengthened with the arguments given by (Poverty and Social Impact Assessment, 2006) .The potential sources are also mentioned in the book Bankers to the poor by Muhammad Yunus. The utilization for the business purposes is discussed in detail by Murdoch and Rutherford as well in their individual and combined research. Researchers have been mostly conducted with respect to India.
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