Financial sector plays a pivotal role in the national economy. The privatisation process and market competition is making it more and more competitive and attractive for the consumers of selected segments of society. Nevertheless, it has yet to make big strides in national economy particularly with reference to project financing despite the fact that it has already gone a long way to give impetus to economic growth due to consumer financing.

One of the grey areas where the financial sector is yet to show its commitment is micro-financing that has become synonymous with poverty alleviation. The success of Grameen Bank in Bangladesh under the leadership of Noble Laureate Dr Yunis Khan and its satellite branches/offices in a few other developing countries, the micro-finance magic is a proven phenomenon.

What exactly is micro-financing? How does it really differ from commercial financing? Why should commercial bankers step into it? Should it be exclusively left to the government to share the burden of alleviating poverty? These and a few other questions are attracting the attention of bankers, economists, social scientists and government policy makers.

Quest for micro-financing

During 90s socio-economic and political developments triggered a sort of chain reaction of events that were conducive for increasing poverty and social inequality in the country. Consequently, according to official information poverty increased to 30.6 per cent by 1998-99 and further increased to 34.4 per cent by 2000-01 because after 1999 the government had the compulsion of pursuing tight fiscal policy to reduce fiscal deficit as demanded by the IMF. During first three years of present government’s seven years rule, economic growth remained subdued to slightly more than 3.0 per cent of GDP. It picked up subsequently and according to government’s claim poverty stood reduced to 23.9 per cent by the end of FY2004-05. These figures are contested by independent analysts. The WB estimates that poverty has reduced by more than 5.0 per cent only despite a high average economic growth of more than 7.0 per cent during past four years. The government is committed to reducing poverty by half, that is, to around 17.0 per cent by 2015 to achieve the UN MDGs. It wants to achieve these goals through high economic growth and by enhancing the role of micro-financing.

Micro-financing is recognised as an effective tool of pulling poor and vulnerable segments of a society out of poverty by creating self-reliant business opportunities for them by lending small loans at comparatively reduced interest rates with minimum documentation or collateral. It is one of the major pillars of Pakistan’s poverty reduction strategy. Since FY02 micro-finance disbursement has been on the increase from Rs1.0 billion to Rs6.06 billion during FY06. According to an estimate during past four financial years total disbursement has been more than Rs10.0 billion and the number of beneficiaries has increased to more than 1.0million. Pakistan’s first micro-finance bank, Kushhali Bank has been playing a leading role in extending credit to poor borrowers. The bank has 150 outlets in 88 districts of the country and has plans to extend its reach to poverty-hit areas of FATA. According to Kushhali Bank president "we are operating a sustainable model for removing poverty in the country and were being helped by the ADB that provided $150.0 million to the Bank." The Kushhali Bank is also utilising $320.0 million provided by the ADB for this purpose.

According to press reports, the SBP is presently processing around a dozen applications for establishing micro-finance banks and one-third of them are likely to be allowed to establish the banks. Only a sizable number of micro-finance banks with a commitment to reach out to the poor segments of the society can dent poverty in the country. But, there are a few reservations about functioning of micro-finance banks in the country compared to the working of mother bank of micro-financing, the Grameen Bank of Bangladesh.

The most significant point in this context is about the rate of interest that the micro-finance banks charge on disbursed loans. The Kushhali Bank charges an interest rate that varies from minimum 20.0 per cent to maximum 30.0 per cent. It is an extremely high interest rate by any stretch of imagination particularly when it is to be paid by members of deprived segments of society who borrow small loans to pursue small business to become self-reliant financially. The First Micro Credit Bank owned by Agha Khan Foundation and the First Women Bank Limited established by the federal government are providing micro-credit at lower interest rate of around 14.0 per cent.

In addition to the issue of high interest rate, the banks demand tough documentation. They work as a deterrent for the poor loan seekers not to opt for it. It is therefore, imperative to successfully manage micro-financing as a tool of poverty alleviation by reducing interest rates and minimising the requirements of documentation.

The second important point is about empowering women in the country. The experience of Grameen Bank clearly shows that women are highly reliable and responsible borrowers. This should prove equally correct in Pakistan also.

The demands on micro-financing are tremendous in case one were to look at the huge task on reducing poverty and empowering the women. In absolute term, according to one estimate the number of poor persons has decreased from 49.23million in 2001 to 36.45million in 2004-05. This is a very huge number to be pulled out of poverty in the midst of serious problems of unemployment, low wages, high inflation particularly of food items that runs into two digits. According to an analysis there are around 10.0 million households in the country who need micro-credit. A large number of these people live in far-flung and remote areas of the country where access is limited.

Government’s strategy

Poverty alleviation is a global issue and is also the concern of UN, multilateral organisations and developed countries. WB Report-2007 estimates about quantum of poverty in 2004 compared to 1990 are quite revealing. According to the report, "proportion of people living on less than $1.0 a day fell to 18.4 per cent in 2004 leaving an estimated 985million people living in extreme poverty compared to total number of 1.25 billion in 1990. Two-dollar a day poverty rates are falling too, but an estimated 2.6 billion people, almost half the population of the developing world are still living below that level in 2004."

According to the report the developing countries have achieved a solid 3.9 per cent annual growth in GDP per capita a year since 2000. It contributed to rapidly falling poverty rates nearly in all developing regions.

High growth in China between 1990-2004 and in other South Asian economies, according to the WB estimates helped reducing poverty for more than 260million people. In direct contrast to reduction in poverty in Asian countries, the number of people living in extreme poverty in Sub-Saharan Africa has remained the same as it was in 1990, 298million because the region has remained politically unstable. This is a matter of concern for all those who really want to see poverty reduced among the developing and least developing countries.

Poverty alleviation in Pakistan is a challenging problem. It, in fact, "goes beyond growth and poverty rates." Problems allied with poverty manifest themselves in widening gap of income inequalities among different segments of society, inter-provinces and intra-provinces income inequalities and lack of social sector development that adversely affects health and education for the poor, lower and mid-level segments of the society despite increase in per capita income.

Factors such as fiscal and monetary imbalances are showing up in terms of high rate of inflation, unmanageable current account and fiscal deficit and increase in public debt. They are making the task of reducing poverty difficult. With a heavy baggage of these issues, will the government’s two pronged strategy of sustaining high economic growth, higher spending in public sector and invigorating micro-financing really alleviate poverty in the short and long term perspective?

The strategy should deliver the result, that is, Pakistan should be in a position to reduce poverty by half by 2015. Even if one were to go by the WB figure of reduction in poverty by around 5.0 per cent in the country against 10.0 per cent reduction in poverty given by the government officials, it should be satisfying. At least there is breakthrough in addressing the problem. Economic growth is likely to be more than 7.0 per cent by the end of current fiscal year because of around 4.0 per cent growth in agriculture sector and high growth in the manufacturing and services sector. This would have a positive effect on poverty alleviation.

Conclusion