Traditional banking has been about collecting the savings of millions of small depositors and putting them as loans and advances at the disposal of the very few who belong to the upper classes. Microfinance does just the opposite. It gathers funds from large institutions, governments as well as from the savings of its clients and spreads these financial resources over hundreds of thousands of small creditors who mostly belong to the marginalized sections of the society and desperately need finances to be able to maximize the benefits accruing from their labor and skills. Finance capital in microfinance is thus diverted towards skills and labors of the many and not merely towards the already accumulated capital in the hands of the few.
The concepts of equity and justice demands that the marginalized segments of the population should have equal access to capital and opportunity to improve their condition. It is also a moral imperative that those who can give only their labor and skills as inputs in the production process do get a fair return for these invisible but crucial “assets”. The absence of this results in worst forms of exploitation and has made the poor poorer and the rich richer. Those who have gained some skills and are willing to work hard should get their returns through the direct sale of their produce or services in the market.
Microfinance on a very limited scale with marginal or zero collateral had been initiated by some NGOs in Pakistan in 80s, but despite their best efforts lack of resources and professional expertise remained a severe limitation in expanding their good work. However, something that astonished everyone was the fact, that while the ratio of stuck up loans in traditional banking was depressingly high the number of bad loans was very low in microfinance. The poor not only used the loan most productively but always returned the money they had borrowed except where unforeseen circumstances had resulted in heavy losses to their businesses.
Although on a very small scale, these were success stories which generated a lot of interest both locally and internationally; this experiment deserved to be studied and expanded on a commercial scale. The Government of Pakistan with the assistance of the Asian Development Bank and local and multi-national banks finally took the decision to set up the first licensed microfinance bank by the name of Khushhalibank regulated and licensed by the State Bank of Pakistan.
In a matter of few years Khushhalibank expanded its network to the remotest areas of the country. Its particular beneficiaries were those who were marginalized. Women, the inhabitants of remote areas whom the winds of progress had passed by and who had never known what a bank or a financial service means guided by the staff of Khushhalibank started to venture into enterprises that they had never known before. Inspired by the success of Khushhalibank several other microfinance banks from the private sector started business duly licensed by State Bank of Pakistan. More recently encouraged by the wide spread use of mobile phones in the country microfinance banks have started exploring new channels of distribution through mobile phone banking for the marginalized in cooperation with telcos.
Microfinance banking has many spin-off benefits as well. With rising unemployment rates traditional economists have been advocating large scale investments in industries and public works for generating more job opportunities. However, the unfavorable ratio of large investments against the limited number of new jobs created has been a major challenge in this model. Microfinance, on the other hand basically depends on human inputs. This is a model where many times more employment opportunities can be created by investing a fraction of the funds needed otherwise. Another area where microfinance has had a significant impact is that of skill development. Those looking for new opportunities for enhancing their earnings are encouraged to improve their skills and to learn new skills for making a productive use of them through microfinance.
The microfinance idea is fast catching up. Motivated by success stories in their close neighborhoods more and more people are attracted towards changing their lives and earning better livelihoods through the assistance of microfinance institutions. In the last 10 years a large population has benefited from microfinance and it is estimated that approximately 2 million active borrowers are currently taking advantage of the microfinance facility in Pakistan, and the number is fast growing. In a vast sea of poverty that prevails in our country these may be small islands of relative well being, but we can now say with confidence that one day there shall be many such islands.