Microfinance and Poverty

alleviation
PRESENTATION:
Definition
• Finance that is provided to unemployed or low-income people or
groups.
• The provision of small loans (microcredit) to poor people to help
them engage in productive activities or grow very small businesses.
The term may also include a broader range of services, including
credit, savings, and insurance.
• Microcredit is the extension of very small loans to those in poverty
designed to spur entrepreneurship
 Brief History
• In 1976, Muhammad Yunus (Nobel Peace Prize Winner 2006) noticed that small
amounts of loans could make a big impact on the poor peoples’ lives.
• In 1976, Muhammad Yunus (Nobel Peace Prize Winner 2006) noticed that small
amounts of loans could make a big impact on the poor peoples’ lives. Muhammad
Yunus founded his Grameen Bank in 1983 to make very small loans perhaps £15 a
time to the poor and worthy. Since then it has loaned about £3 billion to more than
six million of the very poorest in Bangladesh and across the Asian sub-continent.
• Grameen today has some 2,468 branches in Bangladesh, with a staff of 24,703
people serving 7.34 million borrowers from 80,257 villages.
• Grameen’s methods are applied in 58 countries.
Working Model of Grameen Bank
• Manager first makes a round to the appointed area to introduce
Grameen policies and programs.
• Try to make the group of 5 or 6 people.
• Only two members can obtain loan at first.
After 6 weeks of successful repayment another two can apply for loan.
The leader can only receive loan at last.
• Repayment responsibility solely rests on the individual borrower.
• However if one member of a group defaults, that group will never
receive a loan from Grameen.
Microfinance clients
• Poor & low-income people
• usually self-employed
• Micro-entrepreneurs
• near the poverty line, both above and below
• Women are the majority of clients.
 Objectives
• To stop exploitation of the poor caused by expensive informal credit
• To provide small loans to poor people at relatively lower cost as
compared to accessible informal loans
• To finance economically and socially viable projects those cannot be
financed otherwise
• To empower women within households as decision makers and in
society through active economic participation
• To create maximum employment opportunities
• To create self sufficient and self-employed people and
• To reduce poverty, accelerate growth and improve the living
 Main features
The main features of the microcredit institution which differentiate it from other
commercial institutions are, it is
• A substitute for informal credit;
• Generally requires no collateral;
• Have simple procedures and less documentation;
• Mostly group lending;
• Easy and flexible repayment schemes
• Financial assistance of members of group in case of emergency;
• The most deprived segments of population are efficiently targeted, and the last
but not least is
• Encourage groups interaction with one another.
Why micro financing was needed
Formal financial services are rather difficult for the poor to access
because of their various compulsory requirements such as collaterals,
credit history, etc. Formal banks don’t lend out small loans as they can
make more money on a larger loan than on a small one and they also
don’t hold small savings accounts as they are not usually profitable.
Banks can make more money only if they provide financial services to
those who already have money. In these conventional financial
scenarios, the services provided by the MFIs are the only way to
overcome this problem.
Pakistan Perspective
• In Pakistan people living below poverty line are 29.4% which translates to 55
million
• Rural population is 63.09%
• Unemployment rate is 4.45%
• Micro credit seems to provide a permanent source of income. Its primary
objective is to enable the poor to change their life style positively and make
better than previous.
• To fight against poverty is a very significant and imperative goal .In our
country there is great potential of micro credit banks and markets where
thirteen million adults can avail this facility. This number is likely to enhance
with growing population.
Brief History of Microfinance in Pakistan
• Khushali bank Limited was initialized in 2000 as a part of the
Government of Islamic Republic of Pakistan’s poverty Reduction
strategy and its Micro credit Sector Development Programs.
• MSDP was developed with the assistance of Asian Development Bank.
With its headquarters in Islamabad Khushhali Bank Limited operated
under the supervision of the State Bank of Pakistan and various
central (Commercial) banks are its shareholders.
 Microfinance Institutes in Pakistan
• A microfinance institution (MFI) is an organization that provides
financial services to the poor.
• The common characteristic of MFIs is providing financial services to a
clientele poorer and more vulnerable than traditional bank client.
• Presently two specialized MFIs i.e. First Microfinance Bank Limited
(FMFBL) and Khushali Bank (KB) are operating in the country. In
Pakistan microfinance networks are being established for group based
trainings for the employees of various MFIs, among which Pakistan
Microfinance Network is the biggest one.
• The Pakistan Microfinance Network (PMN) is a network of organizations
engaged in microfinance and dedicated to improving the outreach and
sustainability of microfinance services in Pakistan.
 More MFIs
• Aga Khan Rural Support Program
• Sarhad Rural Support Program
• Rural Support Program
• Apna Microfinance Bank Ltd. (formerly NMFB)
• FINCA Microfinance Bank
• National Rural Support Programme Bank Ltd. (NRSP Bank)
• Pak-Oman Microfinance Bank Ltd. (POMFB)
• Tameer Microfinance Bank Ltd. (TMFB)
• The First Microfinance Bank Ltd. (FMFB)
• The Punjab Provincial Cooperative Bank Ltd
• U Microfinance Bank Limited
• Waseela Microfinance Bank
 Objectives of Micro finance Banks in Pakistan
• To provide credit with or without collateral security, in cash or kind to poor
persons for all types of economic activities including housing but excluding
business in foreign exchange transactions.
• To buy, sell, and supply credit to the poor people for industrial and agricultural
inputs, livestock, machinery, implements, equipment, and industrial raw
materials and to act as the agent for any organization for the sale of such good or
livestock.
• To carry out survey and research, and to issue publications and maintain statistics
related to the improvement of the economic conditions of poor persons.
• To provide professional advice to poor people regarding investment in small
business and cottage industries.
• To encourage investment in cottage industry and income-generating projects for
the poor people.
DEMERITS:
∙ A main disadvantage to micro-finance is that the deal is too small for the
lender to devote ample time and money to doing proper due diligence.
∙ Excessive and High interest rates than normal banks.
∙ As the capital is low the profits are also low.
∙ Most microfinance programs target women (due to higher repayment rates),
which may result in men requiring wife to get loans for them.
∙ Vicious cycle of debt, micro credit dependency, increased workloads, and
domestic violence associated with participation in microfinance programs.
∙ Low repayment rates in comparison with traditional financial institutions.
∙ Use of harsh and coercive methods to push for repayment.
 POVERTY
Poverty is a state or condition in which a person or community lacks
the financial resources and essentials for a minimum standard of
living. Poverty means that the income level from employment is so
low that basic human needs can't be met.
TYPE OF POVERTY
On the basis of social, economic and political aspects, there are different ways to identify the type of
Poverty:
1. Absolute poverty.
2.  Relative Poverty.
3.  Situational Poverty.
4.  Generational Poverty.
5.  Rural Poverty.
6.  Urban Poverty.

CAUSES OF POVERTY: According to the Noble prize winner South African leader, Nelson Mandela said:
“Poverty is not natural, it is man-made”. The above statement is true as the causes of poverty are
generally man-made. There are various causes of poverty:

• Political instability
• Poor infrastructure
• Government corruption
• Overpopulation
• Unemployment
• Division of agricultural land
• Large scale imports
• Lack of education
• Fluctuated foreign investment

EFFECTS:
Poverty is like a disease that has devastating effects on an individual. The major effects are as follows.

1. Effects on health
2. Effect on society: The effects of poverty on society are as follows: 

a) Violence and crime rate

b) Homelessness
c) Stress
d) Child labor
e) Terrorism

3. Effects on economy
POVERTY IN PAKISTAN:

Pakistan is an underdeveloped country. It has many stumbling blocks from the time of
creation till today and these stumbling blocks remain a challenge for every government
and authorities of the country. With each passing day the poverty rate in Pakistan is
increasing.
International Survey reports about Poverty in Pakistan:

• According to the 2011 statistics of world bank Pakistan is ranked among the 43
countries who are most exposed to poverty.
• SPDC (Social policy development center) Report according to the SPDC, 88% of
Baluchistan’s population, 51% of NWFP, 21% of Sindh and 25% of Punjab population is
prey to poverty and deprivation.
 CAUSES OF POVERTY FROM THE
PERSPECTIVE OF PAKISTAN
• POLITICAL DETERMINANTS:
• Non Transparency in Resource Allocation:
• There is lack of transparency in public sector planning, budgeting and allocation
of resources in Pakistan.
• This has led to a supply driven approach to service provision, with development
priorities being determined by the bureaucracy and a political elite which may
or may not be in touch with the needs of the citizens.
• The results manifest themselves in, for example, the existence of "ghost
schools" (which exist only on paper).
∙ Inflation: High inflation acts as a regressive tax on household incomes
by eroding purchasing power. Pakistan experienced double digit 10
inflation from FY1991 to FY1997

∙ Imbalanced Taxes: Pakistan’s tax system shows unfortunate proof of the

government’s corruption.

∙ The system does not differentiate between varying levels of income,

but instead focuses significantly on the poor. In fact, 
80% of the tax revenue comes from the poor for services including
utilities, petrol and mobile communication.
ECONOMIC DETERMINANTS:
• Low Rate of Capital Formation
• Use of Backward Technology
• Backward Agricultural Sector
SOCIAL DETERMINANTS
• Illiteracy
• Population Pressure
MEASURES TO ALLEVIATE POVERTY
ECONOMIC MEASURES:
• Raising the Stock of Capital and Foreign Exchange:
• Control on rapidly growing Population:
• Use of Advanced Technology:
SOCIAL MEASURES
∙ Islamic Economic System: Islamic economic system is the best economic system all over the world. Poverty
easily can be removed by adopting the Islamic economic system. This system is very useful to reduce
consumption, to increase investment, to remove corruption and unequal distribution of income and wealth.
∙ Remove the Illiteracy: Literacy rate in Pakistan is only 57 %, which is almost 100 % in developed countries. Due
to illiteracy, we have shortage of skilled and trained people. To alleviate the poverty, we have to increase the
literacy rate.
CULTURAL AND POLITICAL MEASURES

• Save the Resources from Litigations: Most of the population especially in rural areas is facing the problem of
litigations in developing countries like Pakistan. They are wasting resources in litigations. It is unproductive use
of income and reduction in saving and investment. Saved resources from litigations can be utilized to break
vicious circle of poverty.

• Political Stability: Political stability is essential for the development of any country. In developing countries like
Pakistan, there is political instability and the policy instability of the stable government. To get free from the
firm clutches poverty, political stability is needed.
GOVERNMENTAL REFORMS TO ALLEVIATE
POVERTY:
• DEVOLUTION PLAN: The Decentralization Plan revealed in March 2000, is an
essential governance reform that targets to replace the existing highly centralized
and control oriented government with a three‐tier local government system that
institutes “people‐centered, rights and responsibility‐based, and service
oriented” government structures. The important poverty determined facilities,
such as health and education, have been transferred to district and lower local
governments under this strategy. 
• ZAKAT AND USHR: The Zakat and Ushr Department was established in 1980,
which was based on Islamic traditions in which rich people should pay a specific
amount at the rate of 2.5% on their wealth to the poor.
• PAKISTAN BAIT‐UL‐MAL (PBM): It was set up as an autonomous corporate body in 1992. PBM
was established to work for poverty alleviation through its focus on widows, orphans,
disabled, needy, and poor people irrespective of caste, creed, or religion.
• MICROFINANCE ROLE IN POVERTY ALLEVIATION

A. THE PAKISTAN POVERTY ALLEVIATION FUND (PPAF):

PPAF was set up by the Government in 1997, with an initial equity of Rs.100 million, and with a
$100 million loan from the World Bank assistance to set up a credit line.

OBJECTIVES:
• The objective of PPAF's credit and enterprise program is to enable the poor to gain access to
capital to finance investment in income generating activities.
• Operating through NGOs and the Rural Support Programs (RSPs), PPAF provides loans to the
poor that are in the range of Rs. 9,500 to Rs. 10,000 and have no collateral requirements.
However, a market interest rate is levied on all loans.
B. THE KHUSHALI BANK: A key initiative of the Government in the microfinance sector is the
creation of the Khushhali Bank, a microcredit bank established in 2000 with ADB support.

OBJECTIVE:
• Its aim is to benefit the poor through income generation activities/small-scale enterprise and
small infrastructure projects.
• It is expected that the Khushhali Bank will be able to cover 30 districts, and have a loan portfolio
of Rs.7.6 billion, covering 600,000 households throughout the country within the next five years.

MICRO FINANCE AID IN POVERTY ALLEVIATION

Pakistan being a less develop country has little ability to save. The low level of saving leads to low level of
investment and to deficiency of capital. When the productivity of a country is low, the income will also be
low and so there will be poverty, poor economic growth and unemployment in the country.
∙ So in order to overcome these issues of unemployment, low economic growth and
low level of income the government of Pakistan took the initiative and introduced
Micro finance. They set up 2 autonomous bodies Khushali bank and PPAF. The main
aim of this program was to provide loans and funds to small businesses and poor
people to alleviate poverty and to boost economic growth in the country.
∙ Microfinance gives out micro credit to the poor thus mobilizes money in the market
which is utilized by the clients and invested in different sectors that generate
increased income. When income increases, rise in consumption of goods also
increases.
∙ When the domestic consumption is increased it decreases the imports and increases the
exports which ultimately increases the GDP and stabilizes the economy and leads to
economic growth overtime.
∙ Also the increased consumption can create an increased demand for products and to
meet the demand people will invest more which will create employment opportunities
thus people will start earning and support themselves and play their role in economic
growth.
∙ Microcredit helped our country in reducing poverty by providing the poor people with
credit facility to start a small business. It not only improved the economic condition of the
poor people but also had positive impacts on their social life through better standard of
living with greater access to education and health facilities. In this way the GDP and the
economic growth of the country gradually started to move towards betterment.