Increasing political and economic instability coupled with the ongoing international economic crisis could potentially be a threat to the country’s microfinance sector. Roshaneh Zafar of Kashf Foundation writes about the reasons for the government to pay more attention to the sector
Pakistan’s economy has been severely impacted by the recent inflation in food prices and the meltdown in the global financial system. Where the impact has been severe overall, the effects have been particularly pronounced at the bottom-of-the-pyramid (BOP). In such challenging economic conditions, the microfinance sector offers hope as it takes financial services to the very doorstep of the BOP. All across South Asia, and the rest of the world, microfinance has traditionally enjoyed stellar recovery rates, in the range of 99%. Such outstanding rates are a testament to the trust-based relationship between clients and microfinance institutions (MFIs). Unlike conventional banks, MFIs lend to low-income clients without any form of collateral. The instrument employed to ensure high recovery rates is the notion of group or peer support, where 5-20 members get together to jointly support each other’s recovery. These networks, with time, become not only transaction points for collecting loans, but also sources of associative strength and learning. For example, Kashf Foundation’s impact assessments have shown that women’s self-confidence and self-worth improves as a result of interaction with peer groups.
In the past year, the Pakistani economy has faced multiple challenges including an out of control fiscal deficit, a yawning gap in the balance of payments, a plummeting exchange rate and a very steep inflation in energy and food prices. The Sensitive Price Index (SPI), which measures the weekly cost of living for the BOP, has been increasing at an average rate of 31% over the last six months of 2008. The relentless increase in food prices, in particular, has quickly eroded the purchasing power of low-income households as they tend to spend a larger proportion of their incomes on basic consumption needs. A recent research study carried out by the Kashf Foundation showed that, on average, low-income households are spending 66% of their household income on food. Microfinance institutions (MFIs) offer a rare ray of hope, but they cannot surmount every challenge. In order to truly appreciate the efficacy of microfinance for low-income households, one has to evaluate the sector, especially in the context of a country that lacks social safety nets. Continuous access to loans provides low income households with the ability to enhance and diversify their income sources. Research has shown that microfinance households are able to earn 55% more income than non-microfinance households on average, thus allowing such households to pay for better food, better healthcare and better education for themselves and their families. In fact, microfinance clients are seen to spend 20% more on education of their children than non-microfinance households. Demand-oriented savings products can provide low-income households with the opportunity of managing future cash flows, and thus reduce financial vulnerabilities.
Currently, Pakistan faces tough challenges on the international and national stage. The biggest threat to the microfinance sector in Pakistan is misguided and myopic intervention by the elected representatives. Such interventions carry the potential to actually wipe out the gains of the decade-long growth in the sector. For example, in certain areas of the Punjab—Pakistan’s most populous province—elected representatives have made statements claiming a general amnesty from micro-loans. Such irresponsible statements have created an environment of poor credit discipline all across the sector. These national-level challenges call for immediate, direct and focused efforts from the economic managers in Pakistan. For microfinance to operate smoothly, it requires certain enabling conditions like political impartiality, rule of law and contract enforcement.
In the long run, if the government does not step in and address these issues, we could see a wave of credit indiscipline that could negatively affect the quality and the outreach of the sector, along with the credit-worthiness of low-income borrowers. Moreover, if the microfinance sector is not able to avert this crisis then this will not only lead to a complete drying up of investment capital for the BOP, but will also expose Pakistan to a whole host of economic and social problems: rampant unemployment, hunger, morbidity, and full-scale social unrest. This will only exacerbate the tough economic challenges that Pakistan is presently facing. Credit discipline is, indeed, a public good. Therefore, there is a very strong need for a direct and focused government policy for the protection of the microfinance sector from such irresponsible, ill-advised and myopic political intervention.
Extract:
The biggest threat to the microfinance sector in Pakistan is misguided and myopic intervention by the elected representatives. For example, in certain areas of the Punjab, elected representatives have made statements claiming a general amnesty from micro-loans. Such irresponsible statements have created an environment of poor credit discipline all across the sector
