Micro-finance though much talked about has not really taken-off in Pakistan while it has contributed significantly to the alleviation of poverty in South Asia particularly in Bangladesh and to a lesser extent in India.
Micro-credit has been disbursed in most of the countries through non-government institutions that, over a period of time, have developed area or village specific products according to the needs of the poorer sections of society.
Most Pakistani micro-credit institutions never realised that the borrowers' need-specific financial products are essential for success even for micro-credit.
In the past few years, it has become very clear that simply replicating products and systems into very different socio-economic conditions does not work.
Hundreds of small NGOs with the noble intention of assisting the poor have operated with little success on the basis of replicating blueprints from the Grameen Bank in Bangladesh. This is substantiated by the fact that many Micro Finance Institutions (MFIs) are losing over a quarter of their clients every year - primarily because the MFI's products do not suit them.
Microfinance can be viewed as a limited product industry, whose principal products are short-term working capital loans and involuntary savings. Broadening and deepening outreach, as well as retaining more of the existing clientele, means attracting both new and old customers with products and services that better correspond to their preferences.
International experience has shown that Micro Finance Institutions (MFIs) typically break even on a customer only after the fourth or fifth loan. And yet, many MFIs worldwide suffer chronic problems with clients leaving their programs. This is true in case of many MFIs in Pakistan and the government sponsored similar institutions. Careful analysis of the reasons for these "drop outs" almost invariably points to inappropriately designed products that fail to meet the needs of the MFIs' clients.
The NGOs were the main force for credit disbursement in Bangladesh and India while similar institutions in Pakistan proved ineffective forcing the government to create a Micro Finance Bank to provide opportunities for the poor through micro-credit. It also sponsored the World Bank funded Pakistan Poverty Alleviation Fund (PPAF). These organisations again were established with the good intention but have delivered to a limited extent. The research and the insight needed for reaching the poor and ensuring them a sustainable income through suitable products is missing.
Though most MFIs aim to serve a wide range of clients, the majority, are clustered around just above and just below the poverty line. While poverty targeted programs tend to reach a higher percent of lower income clients, significant poorer populations self-exclude or are denied access. They include the destitute and to a lesser extent, the extreme poor.
The failure of micro-finance is blamed on the managers for failing to evolve a sustainable project. However analysis revealed that the managers were only putting into practice the decisions of the assembly. In reality, the depositors-members of the association ruled the assembly and they deliberated a high interest rate on deposit accounts to keep their interests safe; but this rate was not correlated to the lending rate.
In some cases, lenders succumbed to the final beneficiaries lobbying for easier access to credit.
This jeopardised the viability of the credit program. Some micro-finance NGOs survived for a while at the borrowers' expense because of high interest rates. However, the basic aim of ensuring some income for the poor was compromised in such cases. Independent studies show that prudent micro credit has a host of positive impacts on families that received it. A World Bank study in 1998 reported that 5% of Grameen Bank, BRAC, and RD 12 of BRDB borrowers move out of poverty each year.
Worldwide success stories in micro-finance reveal that the sponsors carefully studied the core financial needs in rural areas where most of world's poor live. They developed products that could satisfy the poor. Before initiating a loaning process in a particular area they ensured that sufficient demand existed in the rural areas for the specific products to make the provision sustainable.
It is not recommended to skip the research entirely as it usually costs more to fix badly designed parameters in the future than to conduct research to inform product development.
Most of local micro-finance institutions being too small do not have the resources to conduct proper research for the development of suitable products. A list of opportunities and threats regarding the demand for different financial products could be chalked out by exploring the socio-economic context; rural household economic activities and the risks they face; needs for financial services and their attitude towards them; and the strengths and weaknesses of the existing competition on the formal and informal local financial markets.
Villagers often have both farming activities and cattle breeding in one household, which means that people have diversified income sources, which is an opportunity to minimise lending risks.
Regions and even villages in the same region can vary by climatic conditions, and thus by business types and income levels. That way, the needs and capacities for micro-credit will vary across sub-regions.
The informal sector is far more vibrant than the micro-credit that fulfils the credit needs of the poor in Pakistan though they charge an exorbitant mark-up. Though the poor never come out of poverty while availing credit from the informal sector they tend to stick with it because the products devised suits them. Its main feature include the range of services provided, especially small daily deposits, short-term loans, small loans, and the speed with which services are provided.
The reciprocity is very much there, which is often a strong basis for financial transactions. The informal sector maintains unwavering discipline because non-performance is quickly punished and borrowers have to earn their loans. The low transaction costs, especially on the part of the borrower are another attraction. The proximity of the service provider to the clients also gives them confidence.
The argument for a market-driven agenda for microfinance takes place within a framework of long-term institutional sustainability. Without losing sight of the discipline of the best practice financial performance, one needs to also go beyond defining the industry only in terms of the financial ratios, which dominate today's measures of success. We should think in terms of how to efficiently gather client information, how to store it in a MIS, and how to use it effectively for clearly operational objectives.
Most small micro-credit disbursing NGOs in Pakistan fail to realise that credit should be a lubricant for the engine of feasible and profitable activities: if the lubricant is mistaken for the engine, the borrower may end up in a debt trap.
The poorest need very small loans with flexible repayment schedules: they do not like to subject themselves to rigid instalment amounts and schedules. They also need flexible deposit facilities: they would like to save any amount whenever they can and withdraw any amount whenever they need.
The MFIs should realise their limitations while disbursing credits. They operate with the aim of reducing poverty; however viability is essential to achieve this aim. Reaching the poorest is obviously much more expensive than reaching the poor - those who are around the poverty line. There are many reasons for this. First is the volume of lending. The poorest require smaller loan amounts and a lender will have to give more loans to achieve the required volume to break-even or make a profit. Microfinance, though an effective poverty alleviating instrument, is not suitable for all categories of the poor. For those trapped in chronic food insecurity with no asset base to protect themselves from the myriad web of shocks, microfinance can be ineffective and sometimes counterproductive. This section of society needs government intervention and not micro-credit.