.

Micro-Financing: A solution to Alleviating Poverty in Pakistan

ABSTRACT
The paper shows the relationship between microfinance and alleviation of Poverty in Pakistan, Pakistan is facing poverty since decades, Various strategies were adopted to alleviate poverty in the country but after the experiences of microfinance in other developing countries, Pakistan has also adopted the microfinance strategy in alleviating poverty, To show that microfinance has positive effects on income and living standard, Primary data was collected from the borrowers of District Swabi, The N SP !National rural support program" institution was taken as a microfinance institution# ise in $ncome level is taken as a dependent variable and %ducation, Profession, &ge, 'ender, martial status and number of dependents are the key independent variables included in the study the data was analy(ed using )icrosoft analysis toolpack# The results shows the positive impact of microfinance on living standard#

Introduction
Poverty is a worldwide problem* Poverty means non availability of basic necessities or low level of income# Poverty is defined in different ways by different authors* some has defined poverty as low level of income or insufficient money to meet their basic needs# Various programs have been initiated and strategies have been adapted to alleviate the poverty worldwide but only a few seems to be effective# +ne of the strong and efficient strategy to alleviate the Poverty is through microfinance, )icrofinance became an effective strategy after experimenting it in ,angladesh by its pioneer Dr# )uhammad -unus, who established the )icrofinance bank called 'rameen ,ank, Small loans were

Micro-Financing: A solution to Alleviating Poverty in Pakistan

provided to the poor specially to the female most of them were hand to mouth# The loans were very small in amount but the borrowers used the borrowed money in productive programs which generated the revenues and then repaid the loan to the microfinance institutions# )icrofinance institutions are operating worldwide through banks, N'+s, 'overnment Support Programs, and other private institutions# /ike other developing countries Pakistan is also the victim of Poverty, 'overnment of Pakistan has a keen interest in alleviating Poverty through various Programs and strategies among which the strategy of )icrofinance seems to be very effective# 'overnment of Pakistan has initiated microfinance programs to give opportunities to the poor to utili(e their potential skills and to make them independent, the role of banks $slamic microfinance institutions, 0 other private and non private institutions and especially the role of N'+s in alleviating poverty seems to be very effective# &lthough the poverty still remains and even through microfinance it is not alleviated but its amount is very limited# )ost of the studies and surveys conducted on microfinance and poverty alleviation in Pakistan shows the success stories# The failure of microfinance does not mean that the strategy is ineffective but there are some administrative issues which needs to be fixed# The main purpose of the microfinance institutions in Pakistan is to reach to the poor agriculturist as well as non agriculturist residing in rural areas and provide them micro loans to make them better off# Pakistan is an agricultural country and more than half of its population is dependent on agriculture and residing in rural areas# The literacy rate compared to other countries is very low, earning capacities due to poor health is also low, there are also some social dimensions because of that specially women are deprived of their rights, all these issues leads to moral ha(ards, disparities, and suicides# ,esides this strategy Pakistan1s microfinance industry is very small compared to other countries globally, the economic

>

Micro-Financing: A solution to Alleviating Poverty in Pakistan

outreach and the performance of the )3$s is not very satisfactory because the asset base of the microfinance institutions is also very low# The cost of the )3$s is high and the outcome is low# )icrofinance industry of Pakistan rose in .445s when the 'overnment of Pakistan and 6entral ,anks !ST&T% ,&N7" recogni(ed it a legal and separate sector# &fter this step many other institutions rose up to provide loans to the poor through group based methodology, Slowly and gradually microfinance saw an upward shift in 2555 with the emergence and establishment of 7hushali bank and setting up of the funding body PP&3!Pakistan poverty alleviation fund" and this sector was considered as an effective tool for providing financial services to the poor households, microfinance institutions are operating under 255. +rdinance of Pakistan and the national microfinance strategy was formulated by the State ,ank in 2558 and approved by the government of Pakistan to give further rise to the microfinance institutions and for the liberali(ation of the services they are offering to the poor nationwide# !9a: 0 7halid, 2554"

Literature Review
)icrofinance can be defined as giving access to poor people to borrow loan and explore their skills in productive capacities, these micro entrepreneurs spends the borrowed loan, generates income and repay the loan to the /enders#!D+, &, 25.." even without )icrofinance the poor can borrow from multiple sources, there are diverse devices through which poor can borrow, such as loans among families, friends, relatives which are often interest free#!&rmend;ri( de &ghion 0 )orduch, 255<, p# <8" 3ormal )icrofinance intermediaries provides a range of services to the poor such as loans, saving and insurance services and first ob=ective of these small institutions is to provide financial loans to poor and to earn enough to cover the operating and financial services, which is

Micro-Financing: A solution to Alleviating Poverty in Pakistan

called ?institutionist paradigm@ the second ob=ective is to achieve social goals this means focusing on alleviation of poverty and financial sustainability, this second ob=ective is defined as ?welfarist paradigm@ &ccording to )ustafa 0 $smailov !255A" $n developing countries poor people have innovative ideas but they don1t have enough finance to go for business which leads to more poverty, )3$s doesn1t only provide financial services but also social intermediation such as training, management development and financial literacy, which are normally not applicable in commercial banking# )icrofinance is provided in different forms* &ccording to Visconti !255A" )icrofinance innovation is the main solution in providing different forms of microfinance which includes rural money lending, group lending# Some estimates shows that worldwide there are .> million micro loan borrowers with BSD 8 billion in outstanding loans and generating repayment loans of 48 percent which are growing at a rate of >5 percent per year# &nd less than .A percent of the world1s poor people have access to microfinance, thus microfinance is a great tool for alleviating poverty worldwide# There are some studies which are against the )icrofinance, &ccording to 7arnani !2558" )icrofinance to poor doesn1t yield better results, and is not an efficient tool for alleviating the poverty, based on his empirical study he showed that microfinance can have negative effects because the poor become poorer due to debt burden# They can meet their basic needs but can not meet the needs with sustainability, &ccording to 7arnani instead of microfinance %mployment can eradicate poverty and also by increasing the wages of the labor# 6onventional microfinance has been successful worldwide but in muslim countries $slamic microfinance is also considered a great poverty alleviation tool# !&khter, &khtar, 0 Syed 7hurram, 2554" ,oth 6onventional and $slamic microfinance has been successful in alleviating poverty in developing world like ,angladesh, $ndia, $ndonesia other countries

<

Micro-Financing: A solution to Alleviating Poverty in Pakistan

and in Pakistan# $n Pakistan the effort to alleviate the poverty through microfinance was initiated in .4D5s by &griculture banks to provide loans to the farmers to ac:uire the re:uired capital, $n .4A5s &gha khan rural support program !&7 SP" was initiated to provide financial and social services to the poor people, &ccording to Pakistan )icrofinance network there are 25 to >5 million people re:uiring microfinance services in Pakistan !&li 0 )# &hsan, 25.5" $ntenational studies says that )icrofinance is used an instrument to alleviate poverty the efforts to alleviate poverty and economic empowerment stared decades ago in /atin &merica, ,angladesh and other developing countries, small loans to the impoverished people were provided, of whom most were the women, 'overnment of Pakistan has also focused on alleviating poverty by initiating different )icrofinance programs which are providing loans both to men and women but $n Pakistan there has been little impact of )icro finance on 'ender e:uity#!9ussein 0 9ussain, 255>" The /oan is currently provided to poor people through rural support programs and ,road based development N'+s, Specialised )icrofinance institutions, )icrofinance banks, 6ommercial banks and 6ommercial microfinance institutions in micro finance, Public sector +rgani(ations such as National savings +rgani(ation !NS+" and Pakistan Post Savings ,ank !PPS," and Support +grani(ation Pakistan )icrofinance network !P)N" !9amid 9ussein, 2554" )3$s +b=evtive to alleviate poverty is efficient $f they keep on providing sustained loans to their customers and to earn little =ust to meet up their operating expenses# &ccording to Sundaresan, p# 8. !255A, " )3$s can cut down their operating services by use of Technology, They can use cellular technology to deliver financial, health and social services to the poor through phone, The )3$s can work more faster and the borrowers search and information cost also reduces with the use of technology# $n Pakistan and elsewhere it is believed that if loan is repaid on the

Micro-Financing: A solution to Alleviating Poverty in Pakistan

specified time and loan among poor is distributed with no gap can yield better results, this approach is followed by several organi(ations in Pakistan such as &7 SP, N SP and P SP and have succeeded in increasing the number of borrowers!9ussein 0 9ussain, 255>" ,ut it is also recogni(ed that repayment doesn1t indicate efficiency of the )icrofinance sector because the they are forced to invest loan in productive activities to generate enough revenue or they have to pay from other sources such as family income, or informal lending due to pressure from )3$s# !9ussein 0 9ussain, 255>" Despite the problems faced by microfinance network in Pakistan, The programs to alleviate poverty are still progressive, and government of Pakistan has also a keen interest to regulate the establishment, ,usiness and operations of )icrofinance institutions# &ccording to Pakistan )icrofinance $nstitutions +rdinance !255." The purpose of the policies is to benefit the poor by providing financial, infrastructural, social services and economic =ustice specifically to women# The most successful country in achieving its goals to alleviate poverty is ,angladesh, the pioneer of )icrofinance while the Pakistan stands at bottom among ,angladesh and $ndia#!Eayyum 0 &hmad" Various microfinance institutions provide microfinance services to poor people in Pakistan# The Schematic model below shows the origin of these institutions working in Pakistan#

Micro-Financing: A solution to Alleviating Poverty in Pakistan

Source: Pakistan Microfinance Network (PMN) Microfinance Industry Assessment: A Report on Pakistan, 200 , P!2 "R#: www!microfinanceconnect!info

T eoretical Fra!ework

The theoretical framework is framed after an extensive literature review, &ccording to &rmend;ri( de &ghion 0 )orduch !255<" )icrofinance has alleviated poverty to a greater extent over the world, empirical evidence shows the rise in family incomes through the program of microfinance, however some studies also shows that there is no increase in the incomes of the poor but its to a limited extent# )icrofinance is thus considered a powerful tool to alleviate the poverty in developing countries# )icrofinance success can be seen in its pioneer country, ,angladesh# Fhere small loans changed the lives of the poor# &nd is now applied everywhere to alleviate poverty# Thus to find out the impacts of )icrofinance on poverty alleviation, we have included different

Micro-Financing: A solution to Alleviating Poverty in Pakistan

)icrofinance institutions working in Pakistan and integrated them as a combined tool to test its significance, )3$S like N'+s, ural support programs, 'overnment microfinance programs, $slamic microfinance +rgani(ations, )icrofinance ,anks# These institutions are considered as 7ey $ndependent variables influencing the dependent variable Poverty also taking into account the sub variables like entrepreneurial skills of the borrowers, education, age, 3amily si(e and gender to find out the impacts of )icrofinance# The schematic model below represents the relationship between variables#

)ethodologyG

Survey had been conducted in Swabi district, 7P7 Pakistan to find

the effects of microfinance on social and economic lives of the borrowers# +ut of N'+S, ,anks, and other microfinance institutions N SP !National rural support Program" was chosen, Euestionnaires were distributed among microfinance borrowers located in district swabi with the help of the staff working in N SP1s pro=ect# The sample si(e chosen was D5, .D :uestions were asked from the borrowers# +ut of D5 participants >2 responded to the :uestions asked# ise in income is taken as key dependent variable and the key independent variables included in the study are 'ender, &ge, %ducation, Profession, )arital status and number of dependents# To find the correlation between variables the first hand data is analy(ed through SPSS# Those who have responded to the :uestions that microfinance leads to rise in income level are assumed to be better off by the microfinance program# 3or the &ccuracy of results $ have not included the other minor :uestions asked through surveys# They are assumed to remain constant over time# The schematic model below represents the relationship between variables# The relationship of Age, Education, gender, Martial status and number of dependents is found one by one with Rise in income (through microfinance) taking as dependent variable

Micro-Financing: A solution to Alleviating Poverty in Pakistan

Sc e!atic Model

Poverty Alleviati on

ise in family $ncome

%ntrepreneurs %ntrepreneurship hip

Micro Finance

'ender

$ndividual 0 'roup lending

Profession

/evel of education

&ge

Number of dependents

.5

Micro-Financing: A solution to Alleviating Poverty in Pakistan

Results
"aria#les
Age

Category
25s >5s C5s <5s &bove Uneducated Literatre Matriculation Intermediate Graduation Post Graduates Agricultarist Non Agricultarist Yes Yes Yes Yes Yes Yes No Yes No Married Unmarried %i&orced

Fre$uency
5 > 2. > < 12 10 3 4 0 0 21 11 4 dependents ( ! " dependents (1! 2 dependents (#! 3 dependents (#! $ dependents (4! 1 dependent (4! 1 21 11 30 1 1

Education

Profession Dependents

Rise in Income Marital status

..

Micro-Financing: A solution to Alleviating Poverty in Pakistan

Correlation Matri%
Age Age (ducation Pro*ession Martial ,tatus No' o* %ependents -ise in Income 1'00 )0'4 0'1+ 0'00 0'02 )0'$+ Education 1'00 0'0" )0'12 0'2" 0'$ Professio n Martial Status # of Dependent s Rise in Income

1'00 0'00 0'1$ 0'03

1'00 0'0+ 0'00

1'00 )0'03

1'00

Means
Gender 0'"#++" Age 2'3 Education 0'+"22 4$ Profession 0'"0 3"2 Martial Status 1 # of Dependents 2' +#"2+31 Income 0'"4332

The first table shows the fre:uency distribution of the variables and the results of the correlation matrix shows correlation coefficient of the variables which takes the value between minus H. and I. The results shows that there is a positive correlation between education 0 and rise in income through micro loans, and positive relationship with profession whereas rise in income is negatively correlated with age and with number of dependents# The below table shows the averages of the variables column . shows that about 5#D8 responded to the :uestions were males, the average age is between C5s !Scaled at 2", %ducation level 5#4D means that most of the respondents are /iterate !scaled at .", The profession 5#D shows that most of the microfinance users are &gricultarists, The martial status one shows that most of them are married, number of dependents shows that averagely most of the respondents have about > dependents and 5#DC income average shows that most of the respondents income has risen#

Conclusion & 'iscussion

The results of the study shows that maximum of the respondents are in favor of microfinance# Those who are not in favor of microfinance have either low level of

.2

Micro-Financing: A solution to Alleviating Poverty in Pakistan

education, over age and high number of dependents# &s the correlation results shows that the key variables are correlated to each other, those whose incomes have not risen have either spend the income on basic necessities, have low level of education, over age, or high number of dependents# +ther minor :uestions which were asked from the respondents like their savings from income generated through microfinance and how would they rank microfinance institutions also shows that microfinance is a very effective strategy in alleviating poverty and also helps in raising living standard and the confidence level in investors# )icrofinance is applied worldwide to alleviate poverty and raise the living standard of the poor households, besides some issues which needs to be fixed The analysis done in this study shows that )icrofinance is a very effective tool in alleviating poverty in Pakistan and for the empowerment of men as well as women, specially in the rural areas where most of the people are agriculturist, have low level of education and high dependency ratio microfinance programs can play a key role in alleviating poverty and in building small medium enterprises which also will increase the 'ross domestic product of the country#

Reco!!endations () -) .) /) 0)
T e !icro*inance institutions s ould !ini!i+e t eir cost #y ada,ting latest tec nology suc as t e use o* cell , ones T e !icro*inance institutions s ould c arge low interest rate w ic will reduce t e re,ay!ent #urden on #orrowers Trainings and awareness ,rogra!s #e arranged to ,rovide ti!ely in*or!ation to t e #orrowers Micro*inance institutions s ould e%,and t eir network in rural areas and s ould ada,t an easy loan ,rovision strategy) Micro*inance institutions s ould give an e$ual o,,ortunity to wo!en and t e #orrowing criteria *or wo!en s ould #e low)

Li!itations & 'eli!itations

.>

Micro-Financing: A solution to Alleviating Poverty in Pakistan

The main problem faced in the study was data gathering D5 :uestionnaires were distributed among the microfinance users in district Swabi, due to social problems most of the women did not respond to the :uestionnaires only >2 people responded to the :uestions asked# There is a further need of research on poverty alleviation through microfinance in Pakistan# Due to less number of responses and less participation of women $ wasn1t able to include the other variables such as loan repayment sources, savings, interest rate etc# The other problem was that only N SP !National rural support program" was taken as a microfinance institution# To find the impact of microfinance on living standard others institutions should also be considered especially the role of N'+s, banks and $slamic microfinance#

eferencesG
9a:, &#, 0 7halid, J# !2554"# Social Performance eport 2554# ,y Pakistan )icrofinance network &khter, F#, &khtar, N#, 0 Syed 7hurram, &# K# !2554"# $S/&)$6 )$6 +H3$N&N6% &ND P+V% T- &//%V$&T$+NG & 6&S% +3 P&7$ST&N# &li, &#, 0 )# &hsan, &# !25.5"# ole and Performance of )icrocredit in Pakistan# niversity !est, C># &rmend;ri( de &ghion, ,#, 0 )orduch, K# !255<"# The Economics ofMicro"nance# The )$T Press 6ambridge, )assachusetts /ondon, %ngland# D+, &, &# !25.."# )icrofinanceG 6hampion in Poverty &lleviation and 3ailure in 3emale %mpowerment# etrieved from httpGLLpapers#ssrn#comLsol>Lpapers#cfmM abstractNidO4<>2>.0 9amid 9ussein, )# !2554"# State of )icrofinance in Pakistan#

.C

Micro-Financing: A solution to Alleviating Poverty in Pakistan

9ussein, )#, 0 9ussain, S# !255>"# The $mpact of )icro 3inance on Poverty and 'ender %:uity &pproaches and %vidence from Pakistan# 7arnani, &# '# !2558"# %mployment, Not )icrocredit, $s the Solution# ##R$ e%ibrary# etrieved from httpGLLpapers#ssrn#comLsol>Lpapers#cfmMabstractNidO4D24C. )ustafa, J#, 0 $smailov, N# !255A"# %ntrepreneurship and )icrofinanceH empowerment of poorH 6ase of &khuwat Pakistan# MA%AR&A%E$ & tool for

$'(ER#'T) #chool of #ustainable &evelopment of #ociety and Technology# Eayyum, &#, 0 &hmad, )# !n#d#"# %ffeciency and Sustainability of )icro 3inance $nstitutions in South &sia# *A+'#TA$ '$#T'T TE ,- &E(E%,*ME$T E.,$,M'.# (*'&E)# Sundaresan, S# !%d#"# !255A"# Micro"nanceEmerging Trends and .hallenges# B7G %dward %lgar Publishing /imited# Visconti, # )# !255A"# & Survey on )icrofinance for Developing 6ountriesG & Social esponsible $nvestment +pportunity# ##R$ e%ibrary# etrieved from httpGLLpapers#ssrn#comLsol>Lpapers#cfmMabstractNidO.2ACC82 &rmend;ri( de &ghion, ,#, 0 )orduch, K# !255<", P# 2.CH2.< !Pdf" The Economics ofMicro"nance# The )$T Press 6ambridge, )assachusetts /ondon, %ngland#