Microfinance Defined

Microfinance is the provision of a broad range of financial

services such as deposits, loans, payment services, money
transfers, and insurance to poor and low-income households and,
their microenterprises Microfinance has evolved as an economic
development approach intended to benefit low-income groups.
The term refers to the provision of financial services to low-
income clients, including the self-employed. Financial services
generally include savings and credit, and some microfinance
organizations also provide insurance and payment services

SCOPE:
MicroFinancing has greatest scope in the world especially in
developing countries like Pakistan. Because mostly people don’t
have high income and low purchasing power and MF institutions
target market as low income group and it is common impression
that poor people need and use a variety of financial services
including deposits, loans etc. they use financial services for some
reason like seize business opportunities, improve homer and
living standard, deal with large cope with emergencies.

SERVICES PROVIDE BY MICRO FINANCE BANK:

So many services provide by MFI. Providing loans; car
financing; home financing, personnel loans, taleemi loans.

o PROVIDING LOANS:
The important service is provided by Mf is given loan.
These loans are provided from some productive activities like;
starting new business, expansion of business; improving life etc.

o CAR FINANCING:
MFI also assist those people who cannot pay total
amount at once. So, these MFI gave them car on installments like UBL
car financing scheme is too popular and too many people taking
advantage from this scheme.

o HOME FINANCING:
Pakistan is a poor country. Purchasing power of
Pakistan is very low. So many people are living on rent. They
cannot have too many amounts to purchase homes. MFI’s provide
loans be considering their job stability and take security for it.
 o PERSONNEL LOANS:
MFI also obtain personnel loans. Those people who
have permanent employment and stable jobs. This credit facility
depends on the income of an individual.

o TALEEMI LOANS:
MFI also provide financial aid to the students who cannot bare
educational expenses but want to study. MFI assist them in return
of some security and it would have to pay after completing the
education.

CHALLENGES AND OPPORTUNITIES OF MICRO

FINNACING:
The Government has indicated its willingness to speed up the pace
of structural reforms to meet the major challenges of

o REDUCING POVERTY:
The basic motto of the government to eliminate the
poverty and bring prosperity in the country. MFI providing
small loans and other credit facilities to the poor and low-
income groups; which are beginning positive changing like
their standard of living group and earning have increased

o IMPROVING SOCIAL INDICATORS:

Inadequate access to productive resources and social
services has resulted low social indicators and low
employment opportunities. This situation is compounded in
rural areas; where access is more difficuilt. So, by providing
small loans and credit facilities they can over come this issue
and can improve social indicators.

o IMPROVING THE FISCAL AND BALANCE OF PAYMENTS

POSITIONS:
Pakistan is a poor country whose balance of payment
always in deficit, because of low productivity, lack of resources
and lack of productive men’s power. If MIF provide loans new
business can be established. And export of Pakistan can be
improved which create balance of payments.

o RESTORING INVESTOR CONFIEDENCE:

 Due to poor economy of Pakistan investors are
hesitating to invest their money in Pakistan but MFI’s can
boost up. Because provide loans to local people new business
will stable. Economy will go up and this situation may motivate
to them for investing their funds.
o Achieving higher growth on a sustainable basis
Another objective of MFI is that to achieve high
development and bring innovation in the economy, which
improve GDP of the country and give sustained to the
economy.

PRINCIPLES OF MICRO FINANCE

1. Poor people need a variety of financial services, not just loans.
Like everyone else, the poor need a range of
financial services that are convenient, flexible, and affordable.
Depending on circumstances, they want not only loans, but also
savings, insurance, and cash transfer services.

2. Microfinance is a powerful tool to fight poverty.

When poor people have access to financial services,
they can earn more, build their assets, and cushion themselves
against external shocks. Poor households use microfinance to
move from everyday survival to planning for the future: they
invest in better nutrition, housing, health, and education.

3. Microfinance is about building permanent local financial

institutions.
Finance for the poor requires sound domestic financial
institutions that provide services on a permanent basis. These institutions
need to attract domestic savings, recycle those savings into loans, and
provide other services. As local institutions and capital markets mature,
there will be less dependence on funding from donors and governments,
including government development banks.

4. Micro credit is not the best tool for everyone or every situation.
 Destitute and hungry people with no income or
means of repayment need other kinds of support before they can
make good use of loans. In many cases, other tools will alleviate
poverty better—for instance, small grants, employment and
training programs, or infrastructure improvements. Where
possible, such services should be coupled with building savings.

5. The role of government is to enable financial services, not to

provide them directly.
National governments should set policies that
stimulate financial services for poor people at the same time as
protecting deposits. Governments need to maintain
macroeconomic stability, avoid interest rate caps, and refrain
from distorting markets with subsidized, high-default loan
programs that cannot be sustained.

6. The key bottleneck is the shortage of strong institutions and

managers.
Microfinance is a specialized field that combines
banking with social goals. Skills and systems need to be built at
all levels: managers and information systems of microfinance
institutions, central banks that regulate microfinance, other
government agencies, and donors. Public and private
investments in microfinance should focus on building this
capacity, not just moving money.

FUNCTIONS OF MICRO FIANANCE

o Small loans, typically for working capital;
o Informal appraisal of borrowers and investments;
o Access to repeat and larger loans based on debt capacity and
repayment performance;
o Secure savings products.
o To provide financing facilities, with or without collateral
Security
o To accept deposits
o To encourage investments in such cottage industries and
income generating projects for poor persons as maybe
prescribed;
o To mobilize and provide financial and technical assistance
and training to micro enterprises
 o To invest in shares of any body corporate, the objective of
which is to provide microfinance services to poor persons

NETWORK MICRO FINANCE BANK

The MFN has played an important role in helping the
industry develop and improve upon key issues in microfinance.
This special group of institutions is committed to transparency in
their operations, thus advancing the standards of performance in
microfinance. Through their vision and drive to provide the best
services possible to the working poor, the members of the
Microfinance Network are playing a fundamental role in
revolutionizing the process of poverty alleviation. By providing
microfinance practitioners and institutions with a forum for
information exchange to take place

o SEMIANNUAL INSTITUTIONS:
The number of registered NGOs is estimated at 12,000 to
20,000, two thirds of which are in urban areas in inverse relation
to population and poverty distribution. Most rural NGOs are single
community or village-based groups registered as community-
based organizations. Of the 100 that seem to supply some
Microfinance they are the primary promoters of micro financing in
Pakistan and demand of MF in Pakistan is quoted 5.6 m
household while nearly 1% could get these facilities
The NGOs providing MF can be broadly classified into two
categories:
o Multi sectoral NGO’s engaged in composite services:
like education, health, infrastructure, and community
development. These NGOs offer micro credit as a
minor program component.
o Other types of NGOS provide core activity like provide
107,000 active loans with aggregate loans outstanding
of US$ 18.3 million (PKR 1.1 billion), and savings of
US$ 19.5 million (PKR 1.17 billion).

o INFORMAL SOURCES:
Informal sources account for about 83% of the
credit supply. Three principal informal sources of credit are
 (i) Commercial creditors linked with marketing
intermediaries, commission agents, village traders,
and shopkeepers;

(ii) Land-based credit arrangement extended by

landlords to farmers for inputs and to meet
consumption needs; and

(iii) Socially based arrangements of friends and family (the

most numerous). Both in rural and urban areas, mainly
supply short-term credit at terms that reflect the weak
bargaining power of the poor, particularly for land-based
credit arrangements and provide loans for fulfill their
consumption needs with out interest

FORMAL SOURCES
Formal refers to an organized, registered and regulated
system of institutions providing microfinance services. The
involvement of formal sources in microfinance has increased
during the last two decades. This greater involvement has 126
stemmed from

(a)The expansion of the scope of formal institutions into

microfinance through downscaling (for example,
Government Savings Bank, Thailand);

(b)Establishment of linkage programmes with semi-formal

sources of different types (Self-helpGroup-Bank Linkage
Programme, India);

(c)The emergence of formal institutions focused on

microfinance (for example, Grameen Bank of Bangladesh
and Khushhalibank in Pakistan);

(d) Reforms of state-owned financial institutions (for example,

unit desas of Bank Rakyat Indonesia);

(e) The introduction of microfinance programmes by the

governments through non-financial institutions (for example,
Viet Nam Womens’ Union); and
 (f) Entry of private sector institutions (for example, Badan
kredit-desas owned by
Indonesian villagers). Cooperatives are also playing a
significant role as financial intermediaries in the region,
particularly in India, Sri Lanka, Thailand and Viet Nam.
However, the formal operations concentrate mostly on
providing credit facilities, and savings mobilization has yet to
receive adequate attention, with few exceptions.

MICRO-FINANCE INSTITUTIONS
o formal institutions, such as rural banks and cooperatives;
o semiformal institutions, such as nongovernmental
organizations; and
o informal sources such as money lenders and shopkeepers

FORMAL INSTITUTIONS
1. Khushali Bank
2. The First Micro Finance Bank Ltd
3. Network Micro Finance Bank

THE FIRST MICRO FINANCE BANK LTD.

Almost 60-70% of the population in Pakistan is deprived of
financial services with the majority of them being poor. The management of
FMFB believes that this large segment of the population is very much
bankable and access to microfinance services can bring substantial
positive change in their lives. FMFB is looking ahead to cover as many of
this poor segment of the population through its micro finance services with
a major focus on women the service which are being provided by this bank
are

o Microfinance Intermediation - Loan Products, Saving

Products, Micro Insurance Products, and other Financial
Services;
o Social Intermediation – Group Formation for building human
and social capital for sustainable financial intermediation;
o Enterprise Development Services – non-financial services that
assist micro-entrepreneurs;
o Social Services – non-financial services that focus on well
being of micro entrepreneurs. This includes health, nutrition,
education and literacy trainings.
Khushali Bank
Khushhali Bank is the country's first major initiative to
bridge the demand for microfinance services. Integral to
microfinance services is the intensive and sustained social
support for mobilization, management and development of all
clients of the bank and their access to basic infrastructure
services.

As a for-profit, commercial microfinance institution, our purpose is

to:

1. Establish a sustainable, scalable pro-poor financial services

platform with retail delivery capacity to reach 600,000 poor
households by the 2006.

2. Catalyze an enabling environment, within which the

microfinance sector can develop in Pakistan.

3. Assist the central bank in setting up an appropriate and

responsive regulatory framework within which microfinance
institutions can operate on sustainable grounds, thereby
expanding outreach to the poor.

4. Promote transparency, financial rigor and good governance

as leading indicators of excellence within the microfinance
sector in Pakistan.

USE OF FINANCE IN DIFFERENT FIELDS:

POVERTY:
Microfinance has emerged as one of the most effective
instruments of fighting poverty. The Khusshali Bank, which is now
entering third year of its operations, has opened branches in 35
districts. So far it has disbursed Rs.1.3 billion to about 75,000
poor borrowers. Branches of Khusshal Bank will be opened in all
the districts of the country. Pakistan Poverty Alleviation Fund
(PPAF), which was set-up to provide wholesale credit to
microfinance institutions, including NGOs, has significantly
increased overall lending. So far it has provided loans of about
Rs.860 million for on lending to 82,805 beneficiaries through
various NGOs in all parts of the Pakistan.
FINNACIAL DEVELOPMENT AND POVERTY ALLEVIATION
A central aspect of this programme is the development and
transformation of the financial sector. Financial sector
development is critical because access to financial services is an
important factor in the accumulation of capital among our people
and has been shown to reduce vulnerability to extreme poverty.
A large amount of research and practice has shown that the
permanent deepening of financial markets to provide access to
the poor can achieve the following outcomes:

• Economic growth and job creation can be stimulated,

as small business development and access to housing
finance generates new cycles of accumulation and
contributes to higher levels of effective demand.
• Poverty can be reduced, as access to finance, in the
form of savings and credit in the hands of the poor,
can enable them to build assets; while these and other
services, such as insurance, can play a vital role in
'smoothing' the income of the poor, and so reducing
their vulnerability to financial and economic shocks.
These factors are key in building viable communities
and contributing to the sustainable livelihood
strategies of poor households.
• Social exclusion, of which the apartheid system was a
most extreme form, can be overcome as the divide
between financial 'insiders' and 'outsiders' is
eradicated.

CONCLUSIONS
The landscape of microfinance is changing as a result of
increasing understanding of how the poor use money and their
diverse demands for financial services. Correspondingly, the
microfinance industry is evolving into an increasingly commercial
operation to serve a larger segment of the potential market. A
number of challenges need to be overcome to facilitate and
accelerate this process to realize the vast potential of
microfinance. This calls for a comprehensive approach, as
outlined above, that takes cognizance of the diversity of
microfinance development issues across countries. ADB
interventions in support of microfinance pursue this approach to
catalyze the development of sustainable microfinance systems in
the region. With a view to leveraging its support, ADB is
coordinating with other funding agencies involved in microfinance
and enhancing the involvement of its private sector operations in
microfinance.

http://www.adb.org/gender/practices/microfinance/default.asp

www.adb.org

http://www.anc.org.za/ancdocs/pubs/umrabulo/umrabulo23/micro-finance.html

www.kitakyu-u.ac.jp (PDF)

http://www.pakistaneconomist.com/database2/pakbanks.asp

www.unescap.org (PDF)

www.sbp.org.pk (PDF)

http://www.khushhalibank.com.pk/

http://www.mfb.com.pk