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Microfinance: banking on the unbanked

Pakistan is ranked amongst the top three countries by the Global Microscope on the Microfinance Business Environment 2011 released recently by the Economist Intelligence Unit, a business information arm of the Economist group, publishers of the Economist. The report assesses and forecasts the political, economic and business conditions across 55 countries. The ranking moves Pakistan two notches up from the previous year to be in league with Peru and Bolivia. 

The report coming at the aftermath of the global financial crises sees microfinance enter a more mature and sustainable growth phase.

Pakistan has been a late starter in terms of recognising the importance of microfinance but having arrived at the scene has had several advantages. We have been able to review experiences across the globe and had embarked upon a path of commercial microfinance in the year 2000 that promotes good governance, sustainability and private sector-driven investment with an overarching policy and regulatory support.

The framework sets the right strategic direction going forward and despite having experienced multiple challenges recently in terms of population displacements due to security situation in the northwest part of the country, economic slowdown due to reduced local and foreign investment, energy crises, inflation and environmental hazards like floods and rains the microfinance Industry strives to achieve stability and growth.

Financial inclusion, an overarching global agenda, is pursued through development of appropriate policy and regulatory frameworks, given the specific environment and the country setting. These policies and regulations are evolved and respond to changes in the dynamics of the marketplace. Given the low levels of market penetration, it is imperative that a push towards financial inclusion is pursued rigorously so that microfinance is integrated in the mainstream financial system. This requires a focus on innovation and change that facilitates access of financial service across population, irrespective of their economic thresholds. 

 It is not unusual in most developing countries that financial services are available to a minority of the population and the majority has no savings accounts, does not receive credit from formal financial institutions and has no insurance policies. It seldom makes or receives payments through financial institutions. 

The reason for concern about widespread financial “exclusion” in developing countries is that access to a well-functioning financial system can economically and socially empower individuals, in particular poor people, allowing them to better integrate into the economy of their countries, actively contribute to their development and protect themselves against economist shocks. Inclusive finance-safe savings, appropriately designed loans for poor and low-income households and for micro, small and medium-sized enterprises, and appropriate insurance and payments services can assist people help themselves in increasing incomes, acquire capital, manage risk and work their way out of poverty. 

The emergence of micro credit, savings and insurance services in various developing countries over the past quarter century indicates that poor clients can be served despite the higher cost of small-scale transaction. Besides, the cost differential of serving poor customers has fallen as advances in information and communications technology is pushing down the costs of these transactions. 

Today, most developing countries have a range of retail financial service providers with different ownership structures and legal charters, specialized development finance Institutions, credit unions, cooperatives and member-owned mutual banks, generally established under national, regional or  district regulatory and supervisory framework provide financial services to poor and low-income households. In addition to these formal institutions, there are a number of financial services providers, including large non-governmental bodies that are not regulated by the banking or other financial authorities. 

However, over the past year or more, the global financial and industry landscape has changed dramatically. Microfinance is being challenged by the impact of an unprecedented global economic and financial markets crisis. Liquidity has tightened and credit spreads have been widened for microfinance institutions (MFI’s). 

Currency dislocations and the global recession are affecting MFI’s and their clients. MFI client’s household cash flows have been squeezed by inflation, especially arising from food and fuel price increases, and, for the first time in many countries, by reduced remittance inflows. Security is an emerging, but serious concern in many of the developing countries. 

Despite the severity of these challenges, microfinance institutions have shown comparative robustness in their capacity to weather the financial crisis. Public investors, multilateral and bilateral donors and lenders, as well as global microfinance networks, have stepped in and are providing emergency liquidity and large new financing facilities are helping to maintain a degree of stability and confidence in the sector. 

The managements are going back to fundamentals; tightening credit policies and procedures, diversifying funding sources, raising capital, hedging currency mismatches, and focusing more on human resources and training. Network leaders and investors are pushing for higher governance standards, improved transparency and better risk management. Finally, the sector is beginning to experience some consolidation and MFI mergers, with new holding company and diversified ownership structures emerging. 

The way forward is country microfinance strategies, supporting policies and regulatory frameworks that will be the core of successful build-up of a financial system and services that work well for the poor and low income households.

Today the process of democratization is giving voice to the less privileged in the society and we are witnessing rise in expression of discontent starting from Tahrir square and spreading to all corners of the world as an outcome of policies that lack social and economic equity and  do not benefit the majority. 

The microfinance experience globally and in Pakistan holds important lessons on how to pursue a sustainable path towards a financially inclusive society by banking on the unbanked and providing them access to financial capital and services.

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