Poverty Alleviation & Micro Finance
Institutions
Performance and Future Challenges
Faheem ul Islam
Lahore University of Management Sciences (LUMS)
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Human Development
• Three core values of human
development
– Sustenance: The ability to meet
basic needs
• Include food, shelter, health and
protection
– Self-Esteem: To be a person
• A sense of worth and self-respect
– Freedom from servitude: To
be able to choose
• Is the concept of human freedom
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Development
• Development is both a physical reality and a state of
mind – three objectives of development are
– To increase the availability and widen the distribution of
basic life-sustaining goods such as food, shelter, and
protection
– To raise levels of living, including, in addition to higher
incomes, the provision of more jobs, better education, and
greater attention to cultural and humanistic values
– To expand the range of economic and social choices
available to individuals by freeing them from servitude and
dependence not only in relation to other people and nationstate but also to the forces of ignorance and human misery
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POVERTY
Is pronounced deprivation in human well-being/development, and
comprises many dimensions. It includes low incomes and the
inability to acquire the basic goods and services necessary for
survival with dignity.
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Concept of Poverty
• Poverty is an ethical concept, not a statistical one.
• Inherent in the term “poverty”, when applied to human beings,
is the notion of a life situation that should not exist.
• It is not only lack of roti, kapra aur makan—food, cloth and
shelter.
• It is lack of “capability”—capability to overcome violence,
hunger, ignorance, illness, physical hardship, injustice and
voicelessness.
• The World Bank has argued that poverty often lies in the
absence of opportunity, empowerment and security, and
not just the absence of food on the table.
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Reducing Poverty
• Sustaining a declining poverty trend in
societies requires a concerted effort to improve
the capabilities of the poor and vulnerable.
• It also requires well-designed programs that
help to mitigate the vulnerabilities induced by
economic downturns or natural disasters.
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Poverty Profile of Pakistan
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Pakistan Economic Survey
2009-10
• Accelerating economic growth is necessary but not sufficient to bring down
poverty levels.
• As past experience in the case of Pakistan and other countries has
repeatedly suggested, periods of high growth that have occurred at the
expense of macroeconomic stability do not tend to produce the desired
outcomes with regards to poverty reduction in a sustainable manner.
• The challenge is, as always, how to make growth more inclusive by
spreading its benefits to large segments of the population.
• The allocation of more resources for the provision of basic services such as
education, health sanitation, and housing particularly for those belonging to
lower income groups, and targeted programs for the benefit of the poor in
the broader framework of social protection, remain critical drivers of long
run reductions in poverty.
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Income Inequality
• Income distribution in Pakistan has worsened during the
period 1988-2010.
• National inequality estimates in terms of Gini coefficient show
an increase of about 20% or 7 percentage points from 0.35 in
1987-88 to 0.42 in 2009-2010.
• The provincial Gini coefficients are the highest for Punjab,
followed by Sindh, NWFP and Baluchistan.
• The empirical assessment of relationship between inequality
and economic growth reveals that average growth worsens
income distribution and is unlikely to aid in reducing poverty
without explicit income distribution policies.
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Inequality – Increasing
Economic Growth
• Powerful evidence of the fact that the nature of
growth in Pakistan is “inequality-increasing” is
supported by the fact that an increase in per capita
income also raises inequality with one percent
increase in per capita income raising inequality by
0.081 percent.
• Inequality in income and assets is also a significant
factor behind crime, social unrest and violent conflict.
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The inability to access appropriate
financial services — is a social problem
attracting greater attention recently. For
many low-income households, financial
exclusion compounds their poverty.
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Financial Penetration in Pakistan
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Barriers to Access for
Low-Income Population
• Availability of financial service is a necessary,
but not a sufficient condition for use.
• Even in presence of financial service providers,
barriers such as high costs, information
asymmetries, regulatory requirements or low
financial literacy may result in low access
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Differentiating Between
Access and Use
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Defining Microfinance
• Microfinance is the provision of financial services to lowincome clients or solidarity lending groups including
consumers and the self-employed, who traditionally lack
access to banking and related services.
• More broadly, it is a movement whose object is "a world in
which as many poor and near-poor households as possible
have permanent access to an appropriate range of high quality
financial services, including not just credit but also savings,
insurance, and fund transfers.
• Those who promote microfinance generally believe that such
access will help poor people out of poverty.
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Origins of Microfinance
Providers in Pakistan
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MicroWatch Jan – Dec 2010
• According to PMN total market of microfinance in Pakistan is
around 27 million.
• The sector closed the year 2010 serving approximately 2
million active borrowers with an outstanding loan portfolio of
PKR 25.5 billion and nearly 3.3 million active savers with
collective savings of PKR 11.9 billion.
• BREAKDOWN OF ACTIVE BORROWERS
–
–
–
–
MFB – 23%
MFI – 25%
RSP – 42%
Others – 9%
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Microfinance outreach in Pakistan expanded
27 times from approximately 76,000 active
borrowers at yearend 2000 to around 2
million active borrowers in 2011.
However in the same period real average
outstanding loan balance declined by more
than 25%.
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Bloomberg & Wall Street Journal
• Microfinance, which focuses on loans in poor areas largely shut out
from traditional banking services, gained prominence globally when
Muhammad Yunus won the Nobel Peace Prize in 2006 for his role
in founding Bangladesh’s Grameen Bank. Yet the past two years
have been marked by surging defaults in some countries.
• Microfinance markets in Nicaragua, Morocco and Pakistan have
seen default levels climb to more than 10 percent, the threshold that
marks a “serious repayment crisis,” according to a February report
from Washington, D.C.-based policy and research firm Consultative
Group to Assist the Poor. Delinquencies in Bosnia and Herzegovina
stayed below that level only because of “aggressive loan write-offs,”
the report said.
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Main Causes of
Borrower Dropout
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Sub Causes Under Organization
Design and Policy
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Loan Product Design
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Loan Size
Loan Length
Repayment Schedule
Cost of Loan
Loan Design Compatibility with Local Culture
/ Religious Taboos
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Future Challenges
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Deteriorating Macroeconomic
Situation
• High inflation (especially increase in food
prices), high indirect taxes, reduction in
subsidies on fuel and food, reduced
government spending on social services – will
increase poverty and income inequality.
• Natural disasters, perpetual conflicts, law-andorder issues further aggravate situation
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Rising Food Inflation
• Food inflation has major impact on poverty.
• Share of food expenditure to total expenditure
is between 50% to 70% for poor (Asian
Development Bank).
• To the extent that some households produce
(and consume) their own food, they will tend
to be relatively shielded from increases in food
prices.
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Microfinance Growth in the
Macroeconomic Context (2005-2010)
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Declining Real Purchasing Power of an
Average First Loan Cycle Credit from an MFP
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Average Change in the Purchasing Power (at 2006
Prices) of the Fourth Cycle Loan Compared with the
First Cycle
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Thank You
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