Micro Financing

Microfinance Defined

Microfinance is the provision of a broad range of financial services such as deposits, loans, payment services, money transfers, and insurance to poor and low-income households and, their microenterprises Microfinance has evolved as an economic development approach intended to benefit low-income groups. The term refers to the provision of financial services to lowincome clients, including the self-employed. Financial services generally include savings and credit, and some microfinance organizations also provide insurance and payment services

SCOPE:

MicroFinancing has greatest scope in the world especially in developing countries like Pakistan. Because mostly people don’t have high income and low purchasing power and MF institutions target market as low income group and it is common impression that poor people need and use a variety of financial services including deposits, loans etc. they use financial services for some reason like seize business opportunities, improve homer and living standard, deal with large cope with emergencies.

SERVICES PROVIDE BY MICRO FINANCE BANK: So many services provide by MFI. Providing loans; car financing; home financing, personnel loans, taleemi loans. o

PROVIDING LOANS:

The important service is provided by Mf is given loan. These loans are provided from some productive activities like; starting new business, expansion of business; improving life etc.

o CAR FINANCING:

MFI also assist those people who cannot pay total amount at once. So, these MFI gave them car on installments like UBL car financing scheme is too popular and too many people taking advantage from this scheme.

o HOME FINANCING: Pakistan is a poor country. Purchasing power of Pakistan is very low. So many people are living on rent. They cannot have too many amounts to purchase homes. MFI’s provide loans be considering their job stability and take security for it.

o PERSONNEL LOANS:

MFI also obtain personnel loans. Those people who have permanent employment and stable jobs. This credit facility depends on the income of an individual.

o TALEEMI LOANS:

MFI also provide financial aid to the students who cannot bare educational expenses but want to study. MFI assist them in return of some security and it would have to pay after completing the education.

CHALLENGES AND OPPORTUNITIES OF MICRO FINNACING: The Government has indicated its willingness to speed up the pace of structural reforms to meet the major challenges of

REDUCING POVERTY:

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The basic motto of the government to eliminate the poverty and bring prosperity in the country. MFI providing small loans and other credit facilities to the poor and lowincome groups; which are beginning positive changing like their standard of living group and earning have increased o

IMPROVING SOCIAL INDICATORS:

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IMPROVING THE FISCAL AND BALANCE OF PAYMENTS POSITIONS:

Inadequate access to productive resources and social services has resulted low social indicators and low employment opportunities. This situation is compounded in rural areas; where access is more difficuilt. So, by providing small loans and credit facilities they can over come this issue and can improve social indicators.

Pakistan is a poor country whose balance of payment always in deficit, because of low productivity, lack of resources and lack of productive men’s power. If MIF provide loans new business can be established. And export of Pakistan can be improved which create balance of payments.

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RESTORING INVESTOR CONFIEDENCE:

Due to poor economy of Pakistan investors are hesitating to invest their money in Pakistan but MFI’s can boost up. Because provide loans to local people new business will stable. Economy will go up and this situation may motivate to them for investing their funds.

Achieving higher growth on a sustainable basis

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Another objective of MFI is that to achieve high development and bring innovation in the economy, which improve GDP of the country and give sustained to the economy.

PRINCIPLES OF MICRO FINANCE 1. Poor people need a variety of financial services, not just loans.

Like everyone else, the poor need a range of financial services that are convenient, flexible, and affordable. Depending on circumstances, they want not only loans, but also savings, insurance, and cash transfer services.

2. Microfinance is a powerful tool to fight poverty.

When poor people have access to financial services, they can earn more, build their assets, and cushion themselves against external shocks. Poor households use microfinance to move from everyday survival to planning for the future: they invest in better nutrition, housing, health, and education.

3. Microfinance is about building permanent local financial

institutions. Finance for the poor requires sound domestic financial institutions that provide services on a permanent basis. These institutions need to attract domestic savings, recycle those savings into loans, and provide other services. As local institutions and capital markets mature, there will be less dependence on funding from donors and governments, including government development banks.

4. Micro credit is not the best tool for everyone or every situation.

Destitute and hungry people with no income or means of repayment need other kinds of support before they can make good use of loans. In many cases, other tools will alleviate poverty better—for instance, small grants, employment and training programs, or infrastructure improvements. Where possible, such services should be coupled with building savings. 5. The role of government is to enable financial services, not to

provide them directly.

National governments should set policies that stimulate financial services for poor people at the same time as protecting deposits. Governments need to maintain macroeconomic stability, avoid interest rate caps, and refrain from distorting markets with subsidized, high-default loan programs that cannot be sustained. 6. The key bottleneck is the shortage of strong institutions and

managers.

Microfinance is a specialized field that combines banking with social goals. Skills and systems need to be built at all levels: managers and information systems of microfinance institutions, central banks that regulate microfinance, other government agencies, and donors. Public and private investments in microfinance should focus on building this capacity, not just moving money.

FUNCTIONS OF MICRO FIANANCE o Small loans, typically for working capital; o Informal appraisal of borrowers and investments; o Access to repeat and larger loans based on debt capacity and repayment performance; o Secure savings products. o To provide financing facilities, with or without collateral Security o To accept deposits o To encourage investments in such cottage industries and income generating projects for poor persons as maybe prescribed; o To mobilize and provide financial and technical assistance and training to micro enterprises

o To invest in shares of any body corporate, the objective of which is to provide microfinance services to poor persons

NETWORK MICRO FINANCE BANK

The MFN has played an important role in helping the industry develop and improve upon key issues in microfinance. This special group of institutions is committed to transparency in their operations, thus advancing the standards of performance in microfinance. Through their vision and drive to provide the best services possible to the working poor, the members of the Microfinance Network are playing a fundamental role in revolutionizing the process of poverty alleviation. By providing microfinance practitioners and institutions with a forum for information exchange to take place

o SEMIANNUAL INSTITUTIONS: The number of registered NGOs is estimated at 12,000 to 20,000, two thirds of which are in urban areas in inverse relation to population and poverty distribution. Most rural NGOs are single community or village-based groups registered as communitybased organizations. Of the 100 that seem to supply some Microfinance they are the primary promoters of micro financing in Pakistan and demand of MF in Pakistan is quoted 5.6 m household while nearly 1% could get these facilities The NGOs providing MF can be broadly classified into two categories: o Multi sectoral NGO’s engaged in composite services: like education, health, infrastructure, and community development. These NGOs offer micro credit as a minor program component. o Other types of NGOS provide core activity like provide 107,000 active loans with aggregate loans outstanding of US$ 18.3 million (PKR 1.1 billion), and savings of US$ 19.5 million (PKR 1.17 billion).

o INFORMAL SOURCES: Informal sources account for about 83% of the credit supply. Three principal informal sources of credit are

(i)

Commercial creditors linked with marketing intermediaries, commission agents, village traders, and shopkeepers;

(ii)

Land-based credit arrangement landlords to farmers for inputs consumption needs; and

extended by and to meet

(iii) Socially based arrangements of friends and family (the most numerous). Both in rural and urban areas, mainly supply short-term credit at terms that reflect the weak bargaining power of the poor, particularly for land-based credit arrangements and provide loans for fulfill their consumption needs with out interest

FORMAL SOURCES

Formal refers to an organized, registered and regulated system of institutions providing microfinance services. The involvement of formal sources in microfinance has increased during the last two decades. This greater involvement has 126 stemmed from (a)The expansion of the scope of formal institutions into microfinance through downscaling (for example, Government Savings Bank, Thailand); (b)Establishment of linkage programmes with semi-formal sources of different types (Self-helpGroup-Bank Linkage Programme, India); (c)The emergence of formal institutions focused on microfinance (for example, Grameen Bank of Bangladesh and Khushhalibank in Pakistan); (d) Reforms of state-owned financial institutions (for example, unit desas of Bank Rakyat Indonesia); (e) The introduction of microfinance programmes by the governments through non-financial institutions (for example, Viet Nam Womens’ Union); and

(f) Entry of private sector institutions (for example, Badan kredit-desas owned by Indonesian villagers). Cooperatives are also playing a significant role as financial intermediaries in the region, particularly in India, Sri Lanka, Thailand and Viet Nam. However, the formal operations concentrate mostly on providing credit facilities, and savings mobilization has yet to receive adequate attention, with few exceptions.

MICRO-FINANCE INSTITUTIONS

o formal institutions, such as rural banks and cooperatives; o semiformal institutions, such as nongovernmental organizations; and o informal sources such as money lenders and shopkeepers

FORMAL INSTITUTIONS

1. Khushali Bank 2. The First Micro Finance Bank Ltd 3. Network Micro Finance Bank

THE FIRST MICRO FINANCE BANK LTD. Almost 60-70% of the population in Pakistan is deprived of financial services with the majority of them being poor. The management of FMFB believes that this large segment of the population is very much bankable and access to microfinance services can bring substantial positive change in their lives. FMFB is looking ahead to cover as many of this poor segment of the population through its micro finance services with a major focus on women the service which are being provided by this bank are o

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Microfinance Intermediation - Loan Products, Saving Products, Micro Insurance Products, and other Financial Services; Social Intermediation – Group Formation for building human and social capital for sustainable financial intermediation; Enterprise Development Services – non-financial services that assist micro-entrepreneurs; Social Services – non-financial services that focus on well being of micro entrepreneurs. This includes health, nutrition, education and literacy trainings.

Khushali Bank

Khushhali Bank is the country's first major initiative to bridge the demand for microfinance services. Integral to microfinance services is the intensive and sustained social support for mobilization, management and development of all clients of the bank and their access to basic infrastructure services. As a for-profit, commercial microfinance institution, our purpose is to: 1. Establish a sustainable, scalable pro-poor financial services platform with retail delivery capacity to reach 600,000 poor households by the 2006. 2. Catalyze an enabling environment, within microfinance sector can develop in Pakistan.

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3. Assist the central bank in setting up an appropriate and responsive regulatory framework within which microfinance institutions can operate on sustainable grounds, thereby expanding outreach to the poor. 4. Promote transparency, financial rigor and good governance as leading indicators of excellence within the microfinance sector in Pakistan.

USE OF FINANCE IN DIFFERENT FIELDS: POVERTY: Microfinance has emerged as one of the most effective instruments of fighting poverty. The Khusshali Bank, which is now entering third year of its operations, has opened branches in 35 districts. So far it has disbursed Rs.1.3 billion to about 75,000 poor borrowers. Branches of Khusshal Bank will be opened in all the districts of the country. Pakistan Poverty Alleviation Fund (PPAF), which was set-up to provide wholesale credit to microfinance institutions, including NGOs, has significantly increased overall lending. So far it has provided loans of about

Rs.860 million for on lending to 82,805 beneficiaries through various NGOs in all parts of the Pakistan.

FINNACIAL DEVELOPMENT AND POVERTY ALLEVIATION

A central aspect of this programme is the development and transformation of the financial sector. Financial sector development is critical because access to financial services is an important factor in the accumulation of capital among our people and has been shown to reduce vulnerability to extreme poverty. A large amount of research and practice has shown that the permanent deepening of financial markets to provide access to the poor can achieve the following outcomes: •

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Economic growth and job creation can be stimulated, as small business development and access to housing finance generates new cycles of accumulation and contributes to higher levels of effective demand. Poverty can be reduced, as access to finance, in the form of savings and credit in the hands of the poor, can enable them to build assets; while these and other services, such as insurance, can play a vital role in 'smoothing' the income of the poor, and so reducing their vulnerability to financial and economic shocks. These factors are key in building viable communities and contributing to the sustainable livelihood strategies of poor households. Social exclusion, of which the apartheid system was a most extreme form, can be overcome as the divide between financial 'insiders' and 'outsiders' is eradicated.

CONCLUSIONS

The landscape of microfinance is changing as a result of increasing understanding of how the poor use money and their diverse demands for financial services. Correspondingly, the microfinance industry is evolving into an increasingly commercial operation to serve a larger segment of the potential market. A number of challenges need to be overcome to facilitate and accelerate this process to realize the vast potential of microfinance. This calls for a comprehensive approach, as outlined above, that takes cognizance of the diversity of microfinance development issues across countries. ADB

interventions in support of microfinance pursue this approach to catalyze the development of sustainable microfinance systems in the region. With a view to leveraging its support, ADB is coordinating with other funding agencies involved in microfinance and enhancing the involvement of its private sector operations in microfinance.

http://www.adb.org/gender/practices/microfinance/default.asp www.adb.org http://www.anc.org.za/ancdocs/pubs/umrabulo/umrabulo23/micro-finance.html www.kitakyu-u.ac.jp (PDF) http://www.pakistaneconomist.com/database2/pakbanks.asp www.unescap.org (PDF) www.sbp.org.pk (PDF) http://www.khushhalibank.com.pk/ http://www.mfb.com.pk