Wednesday, September 23rd, 2020
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A narrow track towards south-east, almost 17-km from Chakwal leads to a typical Punjabi village of Dheedwal. A large banyan tree and a small pond, a nostalgic scene resisting change, welcome as one enters the town. Azhar Abbas runs a shop overflowing with fizzy drinks, snacks and numerous other colorful items commonly seen in a village's grocery store. The odd item, in a corner is a photocopy machine. "I was planning to buy the machine for more than two years, but I didn't have enough spare money. Then with a small loan of Rs 30,000, from an MFI, I realized my dream. My business has grown significantly, and I have no problem in repaying monthly instalment. People are happy that they get this facility close to their home" explained an exhilarated Azhar. He along with other 7 million clients of microfinance sector are realizing their aspiration through services provided by more than 35 microfinance organisations and banks that are regulated by the Securities and Exchange Commission of Pakistan (SECP) and State Bank of Pakistan (SBP), respectively.

Historically, the microfinance movement started because of market failure. As the traditional mainstream bankers, partly due to their training but mostly due to their operational model, were sceptical that the bottom of the pyramid client is a viable business proposition. Then came some visionary bankers to the poor, led by people like Dr Akhtar Hameed Khan and Dr Mohammad Yunus who had conviction that "we are all entrepreneurs. For millions of years that we were on the planet, we never worked for anybody. We didn't send job applications." The world started believing that a small loan of few thousand rupees, provided to a poor person, after a few cycles could be the panacea to women empowerment, higher literacy rates, improved healthcare and everything under the sun for poverty alleviation. Microfinance became the epiphany for development world. The reverence for the instrument further elevated when Yunus was bequeathed Nobel Prize. Symbolically, it was for peace rather than for economics.

Ever since the microfinance movement started, there are questions of its effectiveness as a tool for poverty alleviation. My personal experience spanned over 10 years and based on interaction with hundreds of clients, including daily wage earners, carpenters and other skilled workers, village grocery store owners, women micro entrepreneurs of saloons, handicraft, embroidery, spare parts, farmers and others, is that it undoubtedly assists those who are enterprising and benefits everyone else who wants to manage their irregular cash flows. This is also validated by numerous randomized control trails, statistically robust empirical evaluations and individual case studies that I have come across.

As I was transitioning from commercial financial industry to microfinance sector, a commonly asked question perturbed me as well. How can a small business owner or a farmer pay market-based rate and still earn a decent return? As I interacted with the clients on a frequent basis, I understood that two factors contribute towards repayment capacity; the rapid stock turnover of small businesses and utilization of idle resources.

Let me elaborate these briefly in the context of microfinance. By turnover, it means how many times a borrower can sell products and services produced or bought through a loan in a fixed period. As a carpenter in Matiari explained. He got a loan of Rs 40,000 and had an equity of Rs 20,000. During a month, he generally produced table set for small hotels, schools and offices with a total sale of Rs 120,000 he revolved the loan thrice a month with the help of fulltime assistant. His profit margin was around 40-45% (not including his salary). After paying off monthly loan instalment and the assistance of 18,000, he earned an average of Rs 35,000.

This brings me to the second important factor of utilisation of idle resources. These poor families have very limited resources, few assets and some basic skill, which cannot be employed profitably without additional funding which indicate that opportunity cost of these assets and skill is close to zero without a loan. What micro loans do is to deploy these unutilised resources of human labour and time gainfully. In addition to these, other resources such as those parts of a house which were unutilised before the small loan, become productive resources when a grocery store is opened in the room located towards a busy street, a few goats purchased and raised alongside a buffalo and a handicraft business started in the courtyard.

For other clients, the loans help them manage their cash flows, as in the case of farmers who must wait for 6-8 months for the crop to mature. Microfinance institutions with set rules, procedures and commitment to code of client protection, monitored by two regulators and PMIC, provide them an alternative to the Arthis. Although, these middle men have played an important function in the economy but the way they treat poor farmers and the rate they charge is an open secret. The role of MFIs' is also critical in educating their clients in utilising money prudently, which most of them perform religiously.

There are many clients that are borrowing for many years, mostly for expanding their business and cash flow management not unlike large corporates. Why we don't see them getting out of poverty very quickly, because these are small size loans of average Rs 43,000 and it takes time for a family to graduate out of poverty. Intergenerational mobility is not easy to achieve even in high income countries where access to education is free, however substantial improvement has been observed in microcredit clients, in one of the studies carried out over long term in Bangladesh.

Microfinance may not be a perfect instrument, as if anything in this world is, for every poorest of the poor. I would nevertheless emphasize once again that it is certainly effective for those who are enterprising and would use it responsibly.

Successive governments in Pakistan have supported microfinance in the past with consistent policies, making it one of the success stories in the country where subsidies were provided to establish a sector and now, hardly any subsidy is offered contrary to many other industries. One of the reasons that Bangladesh achieved most of the MDGs was attributed to its robust microfinance sector. The role of financial inclusion is also important in achieving sustainable development goals (SDGs). A recent study by an international bank reveals that per capita income of Bangladesh would exceed India by 2030 and women participation in work force is a major factor. It should be noted that MF is one sector in Pakistan which proudly serves more women than men. 86% of funds provided by apex lender, PMIC, an entity funded by PPAF, Karandaaz (through DFID) and KfW caters to women. The current government understands these benefits and with the hard times ahead, I am confident that it would keep on supporting the sector at the policy level.

Copyright Business Recorder, 2019


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