Role of Micro Finance in Poverty Alleviation

CHAPTER – 1
INTRODUCTION

1.1 POVERTY: AN OVERVIEW

The most learned perspective equates poverty with the inability to

participate in society with dignity. According to classical economist Adam
smith poverty is a lack of those necessities that the custom of the country
renders it indecent for creditable people, even of the lowest order, to be
without.

According to the Nobel laureate Amartya Sen the poor cannot participate
adequately in communal activities or be free of public shame from failure to
satisfy conventions.

There has always been a distinction in the publics mind between the deserving
poor, those unable to work due to age, disability or sickness and the
undeserving poor, able-bodied individuals without employment. These
attitudes establish conflicting objective for most social support programs. To
provide the resources for decent standard for those truly in need while
minimizing the opportunities for those who should be self-reliant.

The great depression shaped attitudes towards the poor unemployment was no
longer exclusion agrarian economy. Unemployment could affect any one. Also
safety value that operated during previous downturns were absent during the
recession. Less unemployment could return to the family farm, or more to
unsettled areas.

The acceptance of public responsibility for social support opened the doors for
a variety of programs in the decades of the 1940s to 1970s unemployment
insurance heralded some societal acceptance of the responsibility for
unemployment. Unemployment insurance was created at the national level in
Canada in 1940 in response to recognition of the need for temporary support
for those who had lost a position.

1
As well economic condition affected income inequality, during the 1980 and
1990s the inequality in market income grew substantially. For much of this
period increased social spending offset this trend so that relative poverty,
measured using income, which included such government transfer, as
unemployment insurance and social assistance did not appreciably increase.

In the history of alleviating poverty, there was more of a focus on a direct

credit approach to eliminate poverty. Poverty was mainly viewed as
consequences of the poor not earning enough money and therefore not being
able to acquire enough food or assets to reach an acceptable standard of living.
Alleviation strategies focused on creating jobs, developing skills, and included
Islamic mode of alleviating poverty such as Zakat. Sadqat etc, which all focus
on redistributing income from the wealthy to the poor. As part of this view, the
role of finance was mainly limited to providing loans. It was assumed that
borrowing households would be able to increase their production levels. As a
result, the poor would benefit from increased consumption, while society
benefited from the increased production generated by the loans. Apart from
these tools more informal lending was also in practice in Pakistan, which
included personal loans from families, friends or others. The informal lending
also included the popular “committee” schemes practiced by the poor men and
women to increased their savings and there by improving the family’s
domestic income.

1.1.1 POVERTY IN PAKISTAN: AN OVERVIEW

About two-third of Pakistan’s population and almost 80 percent of the

country’s poor live in rural areas. According to the 1998 census, 89.3 million
people lived in rural areas of Pakistan in that year. Household incomes are
lower and poverty rates are higher in rural areas than in urban areas. Average
per capita expenditure of rural households in 2004-2005 were 31 percent
lower than those of urban households (Rs. 1259/month and Rs. 1818/month
respectively). The poverty rate in rural areas is estimated at 34.0 percent,
about 15 percent points higher than the 19.1 rate in urban areas (World Bank
2006).

2
Rural poverty in Pakistan, which declined sharply in the 1980s, remained
stubbornly higher in the 1990s in the 1980s agricultural GDP growth averaged
3.9 percent per year, contributing to s steady decline in rural poverty from 49.3
percent in 1984-1985 to 36.9 percent in 1990-91 in spite of even faster growth
in agricultural real GDP in the 1990(4.6 percent), however rural poverty did
not decline further. Rather, the percentage of people living inn poverty
remained essentially unchanged between 1990-90 (36.9 percent) and 1998-99
(35.9 percent) several factors help explain rural poverty statistics in 1990.

Since 1998-99 real households incomes, income-based poverty indicators and

agriculture output in Pakistan have fluctuated sharply, with only gradual
improvement over the medium term. Recent households survey results
indicate sharp reduction in rural poverty in Pakistan over the 2001-2002 to
2004-2005 period. Long-term trends are less encouraging through as these
suggest no major change in real expenditure of the poorest 40 percent of
households between 1998-1999 and 2004-2005.

Preliminary analysis of the 2004-2005 Pakistan social and living standards

measurement survey (PSLM) data indicates that both rural and urban poverty
have decline since 2001-2002 planning commission estimates based on
poverty line of Rs. 723.4 in 2001-2002 suggest that national poverty fell by
10.6 percent from 34.5 to 23.9 percent between 2001-2002 and 2004-2005.
Their estimates of rural poverty show a decline of 11.2 percent in the same
period, from 39.3 period to 28.1 percent, World Bank estimates for the same
period show smaller decline in poverty from 34.4 to 29.2 (5.2% points) at the
national level and from 39.1 to 34.0 (5.1% points) for rural households.

Poverty lines, a living standard that social norms would find unacceptable. As
such it is clearly a line that changes over time and place. Poverty is of two
types, one is absolute poverty and the other one is relative poverty. In absolute
poverty, the people who have too little source of income to fulfill the basic
needs of life. They live in a so miserable condition that they hardly afford
meal once at a day. They have lack of shelter, clothing, health care and other
facilitates to live. A defined poverty as lack of minimum food and shelter
necessary for maintaining life, which sociologists call absolute poverty. In

3
relative poverty, those people who earn less than the other average person in
their societies has even if they can afford the necessities of life. In this
category people are termed poor who fulfill 50% of their need by their earning
but for the rest they go on receiving from relatives and official colleagues etc.

Pakistan Poverty Reduction Strategy Paper (PRSP), which has written in 2003,
recognizes the importance of reducing rural poverty as part of the country’s
over all poverty reduction efforts. The PRSP gives a key role to the rural
sector in accelerating growth and reducing rural poverty, placing major
emphasis on employment generating in agriculture and other sector.

Pakistan’s rural and small-town non-farm sector, however, faces numerous

constraints, particularly concerning access to credit and inadequate
infrastructure. As in other South Asi an countries, the non-farm sector in
Pakistan’s rural villages and small towns primarily consists of family based
micro-enterprises. Averaging only about two workers per enterprise.
According to a 2005 survey, more than 30 percent of these enterprises rated
access to finance as the most important overall constraint to the operation and
growth of their business. Poor road infrastructure raises transport costs and
reduces profitability. Lack of accesses to reliable electricity (half of village
enterprises reported power outages of 20 days or more in a typical month)
limits production or necessitates private investment in generators.

1.1.2 Poverty in NWFP

The NWFP is well endowed with natural resources and is home to

citizens known for their hard work, sense of honor and dignity, and yet along
with Baloschistan the NWFP is the poorest province of Pakistan. Poverty is
extensive, and is compounded by frequent natural disaster and health problems
and there are few jobs with little wages.

The challenge for the NWFP is to break out of these circumstances and to
embark on a sustained improvement in the life of its citizens. The challenge
has been created by the province’s GDP consistently growing more slowly
than that required reducing the incidence of poverty. Between 1990/91 and
2004/05, the NWFP’s real GDP is estimated to have grown at an annual rate

4
of about 4.5 percent a year. Given an average population growth of 2.8 percent
a year, per capita incomes increased by just 1.5 percent annually.

The poverty headcount for the NWFP increased between 1990/91 and
2001/02. In 1990/91 an estimated 37 percent of the population belonged to
households that were below the poverty line, in 2001/02 the figure was
virtually the same, at 35 percent. However because the population had
increased insubstantially, the actual numbers of the poor were higher in the
latter year. While urban poverty declined marginally (by about 2 percentage
points), rural poverty registered a sharp increased (of almost percentage
points), significantly widening the rural-urban gap over the decade. Both rural
and urban poverty appear to have declined during the first part of the decade,
and risen during the later part. The increased in poverty that occurred between
1993/94 and 1998/99 continued until 201/2002. The main constraint on
reducing poverty in the NWFP in the years up to 2001/02 was lack of
economic growth, in both rural and urban areas.

1.2 AN OVERVIEW OF MICRO FINANCE

Micro finance arose in the 1980s as a response to doubts and research

findings about US state delivery of subsidized credit to poor farmers. In the
1970s US government agencies were the predominant methods of providing
productive credit to those with no previous access to credit facilities people
who had been forced to pay usurious interest rates or were subject to rent
seeking behavior. Governments and international donors assumed that the
poor required cheap credit and saw this as a way of promoting agricultural
production by small landholders. In addition to providing subsidized
agricultural credit, donors set up credit unions inspired by the Raiffeisen
model developed in Germany in 1864. The focus of these cooperative
financial institutions was mostly on savings mobilization in rural areas in an
attempt to teach the poor farmers how to save.

5
Beginning in the mid-1980s, the subsidized, targeted credit model supported
by may donors was the object of steady criticism, because most programs
accumulated large loan losses and required frequent recapitalizaion to
continue operating. It became more and more evident that market-based
solutions were required. This led to a new approach that considered micro
finance as an integral part of the overall financial system. Emphasis shifted
from the rapid disbursement of subsidized loans to target populations toward
the building up of local, sustainable institutions to serve the poor.

At the same time, local NGOs began to look for a more long-term approach
than the unsustainable income generation approaches to community
development. In Asia Dr. Muhammad Younas of Bangladesh led the way with
a pilot group-lending scheme for landless people. This later became the
Grameen Bank, which now serve more than 2.4 million clients (94 percent of
them women) and is a model for many countries. In Latin America ACCION
international supported the development of solidarity group lending to urban
vendors, Changes were also occurring in the formal financial sector. Bank
Rakyat Indonesia, a state owned, rural bank, moved away from providing
subsidized credit and took an institutional approach that operated on market
principles. In particular, Bank Rakyat Indonesia developed a transparent set of
incentives for its borrowers (small farmers) and staff, rewarding on time lain
repayment and relying on voluntary saving mobilization as source of funds.

Since the 1980s the field of micro finance has grown substantially. Donors
actively support and encourage micro finance activities, focusing on MFIs that
are committed to achieving substantial outreach and financial sustainability.
Today the focus is on providing financial services only, whereas the 1970s and
much of the 1980s were characterized by and integrated package of credit and
training which required subsidies. Most recently, micro finance NGOs have
begun transforming in to formal financial institutions that recognize the need
to provide savings service to their clients and to access market funding
sources, rather than rely on donor’s funds.

6
1.2.1 Micro Finance – A Possible Way Out
The micro finance instruments are the rays of hope for the poorest
people of the world. Micro finance is more than micro credit, so both are the
financial needs of low-income households savings and micro insurance,
transfer payments and now pensions all fall under the micro finance. The
micro finance industry is maturing and it is beginning to more from a donor-
defined sector to one more driven by the market. Micro-finance, according to
Otero (1999, p.8) is “the provision of financial services to low-income poor
and very poor self-employed people”. These financial services according to
Ledgerwood (1999) generally include savings and credit but can also include
other financial services such as insurance and

Payment services. Schreiner and Colombet (2001, p.339) define micro-finance

as “the attempt to improve access to small deposits and small loans for poor
households neglected by banks.” Therefore, micro-finance involves the
provision of financial services such as savings, loans and insurance to poor
people living in both urban and rural settings who are unable to obtain such
services from the formal financial sector.

Micro-credit is the extension of very small loans (micro loan) to the

unemployment, the poor entrepreneurs and to other living in poverty who are
not considered bankable. These individuals lack collateral; steadily
employment and a verifiable credit history therefore cannot meet even the
most minimal qualification to gain access to traditional credit. Micro credit is
the part of micro finance, which is the provision of a wider range of financial
services to the very poor. These services are now the main tool through which
governments and institutions channels funds with the hope of eradication
poverty. According to the micro credit summit campaign report 2006 states
that “micro credit is one of the most powerful tool to address global poverty.
Micro finance is expanding beyond its roots in savings and business lending
and now offers other forms of financial services, including most notably
insurance and housing micro finance. In many ways micro finance offer the
promise that it could eventually evolve into a specialized form of banking

7
catering t economically active poor people who currently happen to be
unbanked.

Micro finance institutions have sprung up in all areas of the globe, to

substitute for usurious interest rated charged by informal moneylenders. By
exploiting new institutional forms and contractual structures, these institutions
have reduced the risk and costs associated with granting uncollateralized
loans. The promise of micro finance prompted world leaders in 1997 to pledge
that 10 million of the world’s poorest families would be provided credit for
self-employment or other financial services by 2005. It was estimated that
over US $ 21.6 billion would be needed over a decade to fulfill this goal, $8
billion slated to come from loans at market rates from private markets.
Regrettably, the private sector has been less than keen to invest a significant
amount into supporting the proliferation of MFIs.

The micro credit summit campaign announced that 30.8 millions poor
households around the world now have access to micro credit, and that under
covered increased by 40% over the past years. This means that now there are
opportunities to bring about a substantial reduction in poverty in developing
countries and also for the poor in the developed countries.

Micro finance is not a cure for the elimination of world poverty, as not all poor
households can make good use of it. Those without an able-bodied member to
engage in income generating activities cannot be helped out of poverty by a
loan. Many other poor households do not have either the entrepreneurial
ability and or the self-discipline required to make good use of micro credit.
But experience from all around the world now shows that substantial numbers
of poor men and women provided with access to micro finance services are
using the opportunity to reduce their poverty. The micro credit programs have
become very popular as a tool to reduce poverty in many countries of the
world following the success of Grameen Bank of Bangladesh. Providing the
poor access to financial services is one of the main ways to help increases their
incomes and productivity. In many countries however, traditional financial
institutions have failed to provide this service. Micro credit programs have
been designed to fill this gap. Their purpose is to help the poor become self-

8
 employed. Many of these programs provide credit using social mechanism
such as group based lending. With increasing assistance from the World Bank
and other donor’s, micro finance is emerging as a device for reducing poverty
and improving poor’s access to financial services in low-income countries.

MICRO CREDIT

Active Growth Potential

Penetration
Province District Borrowers (Dec. 2006 to Micro-finance
Rate (%)
(31-Dec) Dec. 2007) Market (2007)
A Net % B (A/B)*100
1 Gawadar 1,692 1,234 269.4 55,537 3%
2 Balochistan Sibi 2,319 897 63.1 48,944 5%
3 Jafarabad 2,265 256 12.7 121,911 2%
1 Mardan 33,464 13,314 66.1 354,911 9%
2 N.W.F.P Peshawar 12,521 9,290 287.5 451,548 3%
3 Swabi 12,817 8,948 231.3 230,073 6%
1 Lahore 169,332 54,656 47.7 872,760 19%
2 Punjab Faisalabad 88,413 52,385 145.4 1,096,924 8%
3 Multan 48,507 37,235 330.3 689,339 7%
1 Karachi 60,789 28,179 86.4 1,329,990 5%
2 Sindh Jamshoro 32,736 27,201 491.4
3 Hyderabad 32,612 19,659 151.8 517,652 6%
1 Muzaffarabad 7,084 6,819 2573.2
2 AJK Kotli 4,282 1,696 65.5 ----- -----
3 Poonch 1,759 1,265 256.1
1 Ghanche 2,421 1,671 222.8
2 FANA Skardu 4,241 1,550 57.6 ----- -----
3 Ghizer 4,328 1,005 30.2
1 FATA Khyber 670 --- --- ----- -----
2 Kurram 652
1 ICT Islamabad 3,539 890 33.6 74,750 5%
Source: MicroWATCH issue 6: Annual (2007). A quarterly
update on micro-finance outreach in Pakistan.

9
In recent years Micro Business Finance (MBF) is becoming really popular
with the donors. Donor’s range from country’s Government to international
donors. Recent government of Pakistan is really looking to implement
seriously an effective policy concerning the micro finance. It is because of the
multiple benefits that the micro finance can bring. It spurs growth and
economic development in a country. This is brought about through easing
liquidity constraints, starting up of new production, introduction of new
technology and entrepreneurs assuming greater production risk. Human capital
development is enhanced in a country and average household income and
production are increased.

Since the 1980 the field of micro finance has grown substantially in Pakistan.
Donors actively support enough micro finance activities, focusing on MFIs
that are committed to achieving substantial outreach and financial
sustainability.

1.3 RESEARCH METHODOLOGY

I have used the ways to gather primary and secondary information/data

to complete my research.

1.3.1 Primary Data Collection

1.3.1.1 Executive Interview

I contacted to the Miss. Uzma Nazli District Coordinator, Mr. Arif
Credit Officer and Mr. Ghufran civil Engineer who are currently
working with SRSP for the betterment of rural people through the
uplift of small businesses.

1.3.1.2 Surveys and Interviews/Questionnaires:

In surveyed and interviews many entrepreneurs from small business
who have made recent funding from SRSP in recent years.

10
1.3.2 Secondary Data collection

1.3.2.1 Internet Survey

I used Internet as a source of collecting information for my research. I
searched a variety of websites both for local and foreign donor
agencies as well as Micro-finance institutions.

1.3.2.2 Books and Journals:

I have studied different books and journals related to my topic and to

get secondary data for the completion of research.

1.3.2.3 Micro-finance Evaluation Reports

I have studied and analyze many reports of Micro-finance and poverty,
like World Bank reports, Asian development Bank report, Pakistan
Poverty Alleviation Fund reports for different years etc.

11
CHAPTER – 2

LITERATURE REVIEW

The micro-finance revolution has changed attitudes towards helping

the poor in many countries and in some has provided substantial flows of
credit, often to very low-income groups or households, who would normally
be excluded by conventional financial institutions. Bangladesh is starkest
example of a very poor country, where currently roughly one quarter of rural
households are direct beneficiaries of these programs (Khandker 2003).

“Asia is the most developed continent in the world in terms of volume of MFI
(micro finance institution) activities”. This conclusion, drawn by Lapeneu and
Zeller (2001:27), is based on analysis of over 1,500 institutions from 85
developing countries. Comparing MFIs in Asia with those in Africa and Latin
America, the study found that in the 1990s Asia accounted for the majority of
MFIs, retained the highest volume of savings and credit, and served more
members than any other continent.

Asia is particularly well served by MFIs. The sheer number of members

served and the largest distribution of loans and mobilization of savings in
terms of GNP are found in Bangladesh, Indonesia, Thailand and Vietnam. In
contrast, these most populated countries in Asia, India and the Pacific Region
Countries, have very low outreach, despite a high Concentration of the regions
poor. Countries such as Afghanistan, Myanmar and Pakistan also have low
outreach due to a variety of factors.

The Policy Advisory Group of the Consultative Group to Assist the Poorest
(CGAP) has defined the poor as those living below the poverty line as
established by the government on their country, and the poorest as the bottom
fifty percent of that group of poor. The difficulty with poverty line defined of
the poor is that they rely on indices that appear to be easily measurable such as
income are food consumption measure.

In terms of understanding poverty a simple distinction can be drawn within the

group ‘the poor’ between the long-term or ‘chronic poor’ and those who

12
temporarily fall into poverty as a result of adverse shocks, the ‘transitory
poor’. Micro finance can relate to the chronic (non-destitute) poor and to the
transitory poor in different ways. The condition of poverty has been
interpreted conventionally as one of lack of access by poor households to the
assets necessary for a higher standard of income or welfare, whether assets are
thought of as human (access to education), natural (access to land), physical
(access to infrastructure), social (access to networks of obligations) or
financial (access to credit) (World Bank 2000:34).

One of the early and most widely cited of the poverty impact studies is Hulme
and Mosley (1996). This employed a control group approach looking at the
changes in income for households in villages with micro-finance programs and
changes for similar households in non-program areas. These micro finance
Programs in a number of countries are considered including the Grameen
Bank in Bangladesh and the Bank Rakyat Indonesia (BRI). In general a
positive impact is found on borrower incomes of the poor (1988-92) with an
average increase over the control groups ranging from 10-12% in Indonesia, to
around 30% in Bangladesh and India (Hulme and Mosley 1996, table 8.1).

The micro finance movements address a basic yet devastating glitch in the
formal banking system. Poor households cannot get capital from traditional
banks because they do not have collateral to secure loans and traditional banks
do not want to take one risks and cost of making small uncollateralized loans
without this capital impoverished people can not rise above subsistence.(micro
finance misses its marks: by Aneel Kernani; 2007)

The world Bank estimates that there are new more than 7000 micro finance
institutions, serving some 16 millions poor people in developing countries.
CGAP experts estimates that 500 millions households benefits from that small
loans. Cambodia and Kenya were put forward as example. Asia and Pacific
region represent 83% of the opened accounts in developing countries, which is
equivalent to 17 accounts for 100 persons. In November 1997 more than 2000
delegates from 100 million of the world’s poorest families, with credit for self
employed and other financial and business services by the year 2005 support

13
for the these goals has come from prominent world leaders and major financial
institutions.

World wide 3133 micro credit institutions provided loans to 113.3 million
clients, finds the stated of the micro credit summit campaign report 2006. they
suggest that micro credit really must help the poor and may have make grand
claims to this effect, including Younas, who said “we will make Bangladesh
free from poverty by 2030”

Micro credit institutions report that their repayment rates are above the
commercial repayment rates. Today’s, there are mullions of poor people
around the would who turn to be entrepreneurs through the micro credit sector
The UN Millennium project identifies micro credit as “ one of the
development strategies … that should be implemented and supported to attain
the bold ambition of reducing world poverty by half.” A powerful
endorsement of the importance of the micro finance has come from the United
Nations with the designation of 2005 as the international Year of micro
credit. . (Workshop on “micro credit financing and poverty alleviation on OIC
Member States” 9-11 June 2007, Istanbul, Turkey).

Looking only at famous success stories it would be easy to conclude that

micro finance is magic solution. However, riot all micro finance schemes are
successful, some lose their capital while failing to make a different for the
poor clients. Experience elsewhere does suggest that successful micro finance
schemes may have different design and different institutional bases and may
target different levels of poor peoples.

14
CHAPTER – 3

SARHAD RURAL SUPPORT PROGMARMME

The history of SRSP is from the success of RSP model in Northern

Areas, Aga Khan Rural Support Programme (AKRSP). Government officials
showed interest to replicate the same model in other parts of the country. So in
1989, Security Exchange Commission of Pakistan (SECP) created SRSP,
licensed under section 42 of company’s ordinance 1984. It is non-profit and
non-political organization with its Head Office in Peshawar. SRSP has a
participatory approach through designing, implementation, and identification
of beneficial projects to the community.

3.1 PHILOSOPHY OF SRSP

SRSP is non-governmental organization aimed to alleviate poverty
from NWFP through the formation and strengthening of self-help village
Organizations.

3.2 THE PHYSICAL LANDSCAPE OF SARHAD RURAL

SUPPORT PROGRAMME (SRSP)
“SRSP works in 11 districts of NWFP that range from the lowest
planes of Karak District in the South-NWFP to as high as 3,658 of Chitral
District in the north NWFP. These 11 districts are spread over on an area of
35,437 square kilometers. The eleven districts have a combined population of
8.575 million. There are 446 union councils in the 11 districts”.

The September 11 event has created problems for the Programme because the
funding organizations are now reluctant to donate. Political problems in
Afghanistan have also adverse effects on SRSP. The business of social
mobilization, is a direct consequence of external and internal situation in
SRSP programme areas, presents a different physical and social landscape and
therefore, is imbued with challenges contrary to those faced by down- country
similar programme.

15
3.3 THE ORGANIZATION
SRSP was established in 1989 as a Private (guarantee) Limited
Company under Article 42 of the Company’s Ordinance 1984. It has six
programme Regions located in South and North of NWFP there are in seven
regions.

1. Charsadda
2. Kohat
3. Mansehra
4. Abbottabad
5. Peshawar
6. Chitral
7. Nowshera

3.4 PROGRAMME COMPONENTS

SRSP follows the strategy to harness the potential of the rural
community and to respond to their needs in an effective manner. The regional
teams help in the preparation of village micro-plans consisting of detailed
feasibility of various activities, expected beneficiaries, resource requirements,
training needs, implementation and maintenance arrangements, repayment
schedules in case of credit and project cost-benefit analysis with an emphasis
on the envisaged impact on the poverty situation, especially of the poorest of
the poor. All the development inputs received by the community or women’s
organizations are need & opportunity driven. The villagers express their needs
& opportunity in dialogues and in the form of resolutions passed during
general body meetings. The Programme Components of SRSP are:

3.5 SOCIAL MOBILIZATION

Social mobilization is based on the assumption that people especially
the poor, landless and the asset less are willing to do many things themselves
to help improve their situation and the community as whole is interested in
helping the poor to attain their potential. SRSP does the following things for
social mobilization.

16
 Organizing people.

 Putting on the track of development after social organization.

 Bringing attitudinal changes in people for social organization on

continuous bases.

 Motivating people for accepting social organization process.

 Activating people for taking steps in a certain direction.

 Continuous development process to achieve certain goals.

 Create public opinion on a specific point.

 Identification of problems and systematically planning for them.

 Facilitating people for sustainable development through collective

efforts.

3.6 PRODUCTIVE INVESTMENTS (PIS)

SRSP takes the following steps in the productive investment sector.

 Allocate separate PIs to women organizations.

 In case of commonly identified PI for a village by Men/Women

Community organizations (M/WCO), the field staff to insure
meaningful participation of women in decision making for PI need
identification.

 Initiate proper gender screening of PI proposals to ensure equity of

impact.

 Explore new nature of PIs to adequately address women’s needs and

make investments in social sector where community maintains the
facility.

 Impart proper operation and maintenance of training to all PI

management committee members including women before PI
initiation.

17
3.7 CREDIT AND ENTERPRISE DEVELOPMENT
The Credit and Enterprise Development component of SRSP aims to
correct the traditional neglect of rural poor by institutional credit sources by
providing them with easy access to credit. The Credit program of SRSP
facilitates generation of local pool of savings for further utilization of W/MCO
members. In order to increase income of rural people, this section offers not
only loans but also training in enterprise development to start small businesses
in their villages.

The community and women organizations can avail of credit for livestock,
micro-enterprise and agriculture from three credit windows, i.e. short, medium
and long term. The tenure for loan repayment ranges from six to thirty months,
depending on the purpose of the credit. However, the W/MCO has final
discretion on this matter.

To reach out its target population, SRSP has made a special provision of credit
line for all community members. Collateral free loans up to Rs. 25,000 with 20
percent service charge per annum are offered to individuals, since January
1999. However, loans required for improved breed of buffaloes for milking
purposes, the upper credit ceiling per member is RS 30,000 at the rate of 20
percent service charge per annum. 2 percent of the recovered service charges
of all loans are paid to the community activist for their services in loan
processing and recoveries. Service charge of all loans is reimbursed to the
community activist for their role in loan disbursements and recoveries.

Moreover, SRSP helps the creditors in the following ways.

 Training in skills improvement

 Training for best production

 Facilitating in Product Modification and new creation

 Market linkages

 Publicity of products at national and international level.

This section not only offers loans but also training to the poor- those who live
their live under the poverty line- in order to make them able to run their small

18
enterprises properly. Loans and trainings are offered to farmers to increase
farm output and to develop micro enterprises in order to reduce the
dependence on the traditional and exploitative sources of financing.

3.8 OBJECTIVES
The objectives of CED are:

 Increase the access of the poor to credit for productive purposes.

 Ensure that the local pool of capital generated by the CO/WO is able to
meet the credit needs of its members in the future by leveraging against
funds from institutional credit sources.

 For the marketing of the community’s products and services

3.9 SOCIAL ORGANIZATION SECTOR

It is the process of organizing people to form their associations and
help themselves. The social organization is an important sector of SRSP
through which it achieves its goals. It is the most targeted sector in which and
for which the whole activities are running. Moreover SO is:

 Collective management of resources.

 Process towards self-reliance.

 Preparing people for accepting the responsibility of their own and

community development.

 A tool of development.

 Uniting people for social organization used by outside actors for

guiding the people towards sustainable development.

 Demonstrated way of bringing people to the same platform.

 Integrating disintegrated people by using a central idea.

 Organizing people for making them least dependent on others.

Identifying the flaws in the existing management systems and to make them
viable and sustainable for addressing community needs.

19
3.10 MICRO-FINANCE DEVELOPMENT FOR RURAL
COMMUNITIES

SRSP from its experience and understanding of the target group

understands that poverty reduction can only be possible if it is addressed with
a multidimensional poverty reduction strategy. This may be in the form of
imparting skill enhancement training with low cost training programs,
providing financial support in the form of loans, improving physical
infrastructure by not only constructing farm to market roads but also fulfilling
the direct need of rural water supply and proper sanitation. Moreover,
providing assistance in developing social infrastructure is also necessary to
address the issue of poverty, especially in rural areas. This may be by creating
awareness on rural health, education, and family planning through social
mobilization. SRSP thus employs an approach where MCO/WCO is identified
as vehicles for building the self help capacity and potential of the
communities. These organizations are also the vehicles to identify and
undertake a variety of diverse developmental projects related to, for instances,
micro-finance, infrastructure development, natural resource management,
enterprise promotion and social development. SRSP has its micro-finance
operations spread currently in 60 union councils of the 7 districts of NWFP.
Rural populations in Northwest Frontier Province (NWFP) are mainly
engaged in small-scale agriculture or agriculture-related activities and are
generally poorer than their urban counterparts.

Social mobilization over the last decade has unleashed potential of the people
in many areas and one of the areas is the development of entrepreneurship.
The programme is focused on capacity building, which results in the creation
of skilled workers. A comprehensive enterprise development programme
ensures that three interconnected objectives can be achieved.

Firstly, capacity for business development advisory services is strengthened at

the district level. Secondly there is an increase awareness about and
acceptance of entrepreneurship available at the district level. Thirdly increased
income and other benefits for those directly or indirectly associated with
empowerment development three donors starting with RSPN and later
followed by CIDA and GEP are supporting this strategy for achieving the
20
three objectives the project aims at enhancing incomes of small
farmers/producers through enterprise related interventions. As opposed to
credit it assumes that it is lack of technical acumen, limited knowledge f
markets, marketing, effective costing, ineffective business dealing, and little or
no linkages that are constraints for increasing income. Through the project,
both male and female activists with equal percentage of participation,
entrepreneurs and producers are approached. The total cost of Rs 2 million
was generously given by RSPN. The other two donors UK-DFID and CIDA
are supporting the programme in Abbottabad, Peshawar and Mansehra district
respectively. The recently held activist mela in Haripur was a boost to the one-
year intensive and interactive training programme. According to preliminary
estimates, Rs 700000 export demands have been placed with various local
producers and entrepreneurs who participated in the festival.

The projects largely involve practical capacity building according to locally

available potential for micro enterprise. The programme is cascading in nature
initially enterprise activists are selected and are run through a systematic
training. The training enables them to properly identify potential
entrepreneurs, and in turn undergo a systematic training and exposure
processes. The trained entrepreneurs then select the final tier of the
programme, called the produces. Within two years in each district 12
enterprise activists would assist 144 entrepreneurs who would assist
approximately 700-1400 producers. The programme production processes and
effective linkage to markets and sources of raw material. In two years 48
activist 576 entrepreneurs and 3000-6000 producers are expected to be
empowered in the four districts.

21
22
CHAPTER – 4

TABULATION AND IMPACT ANALYSIS

OF MICRO FINANCE

A survey was conducted in order to find the trends among the

borrowers from different aspects in relevance to the micro finance industry.
The respondents are the clients of Sarhad Rural Support Programme (SRSP)
Peshawar. A total of 40 clients were interviewed to set of questions. The
results of the survey are presented in this chapter.

4.1 AGE OF BORROWERS

Age Number of Percentage

Group Respondents (%)
25-30 3 7.5
30-35 15 37.5
35-40 18 45
4 & above 4 10
Total 40 100

25-30
30-35
36-40
4 & above

As illustrated in the above table and pie chart, the majority of the borrowers of
micro finance are from the age of 35-40 (45%), making 75% of the total
respondents. Whereas, just 7.5 from the age of 25-30 and 10% from the age of
40 and above.

23
4.2 PURPOSE OF GETTING LOAN

Purpose of Number of Percentage

Getting Loan Respondents (%)
Starting a new business 26 65

Stability of existing business 5 12.5

(lacking working capital)
Expansion of existing business 9 22.5
Total 40 100

Starting a new
business
Stability of existing
business

Expansion of existing
business

In this table, majority of the respondent (65%) borrowed for starting of a new
business, 22.5 % out of total observation got the loan for the expansion of
existing business and 12.5 % got loan for the stability of existing business.

24
4.3 IMPACT OF LOAN ON EDUCATION

Impact of loan on the respondent’s Number of Percentage

children education Respondents (%)
Good effect after getting loan 36 90
No effect 4 10
Total 40 100

Good effect after getting loan

1
2

Above table shows that loan greater effect the 90% respondent’s children
education, 10% respondents either they are unmarried or they don’t have
children.

25
4.4 IMPACT OF LOAN ON GETTING HEALTH FACILITIES

Impact of loan on getting health Number of Percentage

facilities Respondents (%)
Good effect after getting loan 32 80
No effect / Same as before 8 20
Total 40 100

Good effect after getting loan

1
2

80% of the total observations have good impact of loan on the health services
of borrowers, now they can take facilities of private doctors and hospitals,
remaining 20 % respondents they don’t have the ability to acquire private
facilities.

26
4.5 IMPACT OF LOAN ON HOUSEHOLD’S EXPENDITURE/
SOCIAL LIVES

Impact of loan on the Households Number of Percentage

expenditure/Social lives Respondents (%)
Expenditure of households increased
after getting loan. 31 77.5
No increase in expenditure 9 22.5
Total 40 100

Expenditure of households increased after getting loan.

1
2

After getting loan 77.5% of total observation expenditure of households

increased and 22.5 % of households either same as before credit deteriorated.

27
CHAPTER – 5

FINDINGS AND RECOMMENDATION

5.1 FINDINGS

Micro-finance is still in the initial stages of development in Pakistan,

so a lot has to be done to improve its reach to the target groups and to improve
the benefits that it can bring with its proper implementation. However, the
people to whom this facility has reached; are getting the fruits. Although, the
survey was conducted on a very small scale, it does give an insight into the
trends of borrowing, economic activities, level of borrowers’ satisfaction and
benefits obtained from the micro-finance facility among the borrowers. The
major findings are illustrated as under:

5.1.1 MICRO-FINANCE CLIENTS’ DEMOGRAPHICS

A large percentage of the borrowers are from the age groups 35-40
(45%), and 30-35 (37.5%). This shows that the micro-finance services are
going in the right direction to help them who help their families, because these
age groups can be marked as having higher responsibilities to support their
families. As the survey is on micro-finance, and in the inflationary era, it is
difficult for a single person earning to make the both ends meet, so if the other
family member also gets involved in some economic activity, it can make the
life easier. E.g in the survey I observe that, those members of the family who
are either kids or for other reasons not earning was in major cases (75%). This
means that even a smaller increase in the income of borrowers could have a
more useful impact on them.

5.1.2 PURPOSE BEHIND GETTING LOAN

For 22.5%, the purpose of getting loan was the expansion of already
existing business, and for 12.5% it was the stability of existing business,
which is good from the lenders point-of-view and for the stability of MFIs.
This is because the MFIs are in their initial stages and they do not have staff or
other facilities to promote the non-working poor to start their businesses. So to
ensure the return of their loan disbursements, they need to support the

28
individuals who have business-knowledge at this stage of micro-finance
industry. However, even at this stage 65% loans were disbursed for starting
new businesses.

5.1.3 GENERAL TRENDS AMONG MICRO-FINANCE

BORROWERS OF SRSP DEMANDS & EFFORTS OF
BORROWERS TO REPAY

The positive trend observed during visits with the MF staff to the field
was that the clients wanted to repay. The reason being that they understood the
usefulness of these loans and wanted to pay back to get the 2 nd loan amount.
With the aim to utilize it properly this time if it had not been the case
previously. All the respondents found about the SRSP micro-finance facility
from one another; either neighbors, friends or relatives. As these people found
the facility useful, so they also informed others about it.

5.1.4 PROBLEMS ASSOCIATED WITH SRSP’S MICRO-FINANCE

SERVICES

 Insufficient Micro-finance Staff

It was found that the MF staff is not enough to carry out both recovery
(which involves field visits) and disbursements (or other office works)
together.
 Problems Associated to Group-lending

The SRSP started lending to ‘group borrowers’ keeping in view the

benefits of cross guarantees, members of one group living in close
vicinities (so easy access for the SRSP staff), and members being from
similar class or profession along with other factors. But, the experience
was not as good as expected.
The major problems were that some of the group leaders received
commissions from other group members in the name of the SRSP
without the knowledge of SRSP staff (thus limiting the extent of
benefit that those members could have otherwise received from the
borrowing). Secondly, some of the group members who were regular at
repayment were denied access to 2 nd time loan because of their those

29
 group members who had yet to repay, so to reward the timely repaying
clients, the SRSP put them into ‘individual category’.

 Effect of Borrowing on Income and Savings

The clients for not keeping proper records of their earnings were
unable to give the exact figures as to increase in their income and
savings. However, there was definitely an increase in their incomes
and savings for those who fully invested their borrowings in their
business. The increased investments in business resulted in business
expansion and more income for them ranging from an increased
income from Rs.1, 000 - 4,000 in majority cases and even higher in
few cases.
5.1.5 UTILITIES OF INCREASED INCOME

The respondents provided the following utilities of the increased

income as a result of micro-finance borrowing:
a) Majority simply said that there is ease in bearing the day-to-day
expenditures as compared to before borrowing.
b) Some clients have managed to send their children to private schools
considering it a better source of education. Some clients have also
arranged tuition for their children from the increased income.
c) Some borrowers have managed to buy such appliances as refrigerator, air-
conditioner, and other luxury things that they earlier could not afford.
d) Some borrowers can hire private doctor and hospital facilities.

5.2 RECOMMENDATIONS
The presence of demand for micro-finance services in the country and
the very inadequate supply of such facilities, it is needed to give a boost to this
sector through the joint efforts of government and private sector. Since, the
primary survey is based on SRSP, most of the following recommendations are
based on the findings obtained from this survey:

30
 Calculated Selection of Target Clients

First of all, the MFIs, although are aimed at improving the lives of the
poor, cannot lent loans to every poor; it has to keep in mind the
repayment factor which is must for its own sustainability and to better
serve the people it is serving.

 Factors Ensuring High Repayment Rates

Especially those MFIs that are in the early developmental stages
should ensure their long-term sustainability. This is possible only if the
repayment rate is good. To improve repayment rate, the MFIs must
find the appropriate clients. This means, that it should be ensured
before disbursement that the client has a genuine business and the
client is capable to run it from all aspects such as the business know-
how to his and the support of his family in running that business.

 More Weight-age to Business Knowledge & Experience than the

Business Condition

The business know-how of the client is more important than the

present condition of the business. Even if a business if not doing well,
the businesswoman can be lent the loan if there is a potential for the
business to earn profits for the client on the investment of more money
in it.
 Appropriate Loan Amount
The loan amount should not be very small so that investing that in the
business has no significant impact on its earnings. But, at the same
time, it should not be those big amounts that result in higher
installment amount making it difficult for the borrower to repay on
schedule. So, the amount should be lent on the basis of the nature of
the business and the potential for growth in it.

 Availability of Required Micro-finance Staff

There should be adequate number of staff for carrying out the micro-
finance activities. It is also recommended that there is separate office

31
 and field staff with closes coordination on the progress of the clients.
This will lessen the staff burden and improve the repayment rate.

 Right Judgment of Required Flexibility in Repayment from

Clients

Since the micro-finance borrowers belong to very poor segment of the

society, they may face problems at times in paying their installments,
so a little flexibility in that is good. But, it has also been recorded that
some clients are able to pay in time when they fear the supervision and
strictness from the lenders. So, the flexibility is a matter of judgment
and should vary from case to case.

 Need for Realization of Right Loan-utilization among Clients

The clients should be guided as to the proper utilization of the
borrowed money. They should be made to realize the fact that if these
borrowings are invested in the business, it will not only expand their
business, but also increase their income and make them able to pay
installments in time— thus opening the doors for future borrowings
from the same institutions.

 Provision of Training to Micro-finance Clients

Apart from this guidance, if the clients could be trained in their
business fields, this will also bring improved results. At least, if they
are trained in record keeping, it’ll help the policy-makers to gauge the
impact in exact figures.

 Appropriate Number of Members in a Group

For lending in-groups, the ideal number of members in a group ranges
from 4-8. A higher number makes the access and supervision difficult,
and it also increases the chances of clashes within the group.

 Reduction in Chances of Group Problems

After the group is formed, a meeting should be arranged with all the
members before loan disbursement, and they should be informed of all

32
 the costs (interest) associated, so that they are not looted by the group
leaders or anyone in the name of commission etc.

 Increased & Authentic Knowledge of SRSP Micro-finance Facility

to the Poor
The SRSP staff should go to the doorsteps of the poor to inform them
of the micro-finance facility in order to increase the reach of this
effective tool.

 Increased Reach of Micro-finance Services

More MFIs are needed to be launched or the branches of existing MFIs
are opened in areas (villages) which lack access to this facility.

 Simple & Easier Procedures for Micro-finance Borrowing

The lending procedures should be kept easier and simple for the poor
people, so that access is not denied to the potential clients due to strict
and difficult policies.

 Targeting Poor with the Aim to Transfer Benefits to the Larger

Part of the Society
Although loan should be disbursed to poor even if that does not
increase the number of workers. But special attention should be given
to the businesses with a potential to generate employment. thus one
loan disbursed will have many beneficiaries— the loan borrower, the
personnel employed as a result of business expansion, and the
dependents of the newly employed personnel to name a few.

 Efforts for Ensuring Control over Loan by Borrowers

The micro-finance lender should ensure that the client has a complete
control over the loan amount, and it is not snatched from him for
purposes other than for which the loan had been borrowed.

33
 BIBLIOGRAPHY
1. World Bank (1997), Chile: Poverty and Income Distribution in a High-
Growth Economy, 1987-95 (Washington DC: World Bank).

2. Leibenstein, H. (1968), “Entrepreneurship and Development,”

American Economic Review, Vol. 58: 72-83.

3. Abiad, V. G. 1995. Grassroots Financial Systems Development in

Vietnam. APRACA-GTZ Publication: 1996/1.

4. Gramham A. N., Wright. 1999. Vulnerability, risks, assets and

empowerment: The impact of micro finance on poverty alleviation.

5. Ha, Ph. M Vu Lua. 2000. Rural Credit System Development.

6. Marduerite S. Robinson. 2001. The Micro finance Revolution-

Sustainable Finance for the Poor.

7. UNDP. 2003. Mekong Delta Participatory Poverty Assessment.

8. Shon R. Hiatt and Warner P. Woodworth a Cornell University, 386

Ives Hall, Ithaca, NY 14853, United States.

9. Article of micro finance and poverty alleviation: UN collaboration

with China experiments.

10. Official website of Grameen Bank: www.grameen-info.org.

11. Micro finance misses its mark; By Aneel Karnani, Stanford Social
Innovation Review, Summer 2007.
12 Sarhad Rural Support Programme. SRSP Organization Profile,
Peshawar.

13 t://www.developmentgateway.org/node/403452.
14 United nation development program report on rural support program
network may 2002.

15 History of Micro Finance; An eyewitness account. By Morton H.

Miller.

16 Poverty a short history; Tristat Resources.

17 Pakistan Poverty Alleviation Fund (PPAF) Report 2005.

34
18 Unitus Microfinance Case Studies.

ANNEXURES

Institute of Management of Sciences (IM|Sciences), Peshawar.

RESEARCH TOPIC
THE ROLE OF MICRO FINANCE IN POVERTY ALLEVIATION:
A CASE STUDY OF SRSP

This Questionnaire is conducted to know the impact of micro finance on

the households and the whole society.

Age: Gender:

1. What is your Name?

2. From where you belong?

3. What is the nature of your business?

4. From which organization have you taken credit?

5. For what purpose you have taken credit?

6. How many times you have taken credit?

7. What was the size of your business before credit?

 10,000 
 30,000 
 50,000 
 10,0000 or more 

8. What was the expenditure of your household before credit?

9. Were your children going to school before taking credit

a) Yes  b) No 

10. Where from were you taking health services before credit?

11. What were your assets before credit?

35
12. What is the size of your business after credit?
 30,000 
 50,000 
 90,000 
 150,000 or more 

13. What is the expenditure of your household after credit?

14. Are your children going to school after taking credit.

a) Yes  b) No 

15. Where from were you taking health services after credit?

16. What is your asset after credit?

17. How are the services of SRSP?

18. Are you satisfied with the services of this organization?

19. How can the organization make these services more beneficial for you?

20. What is the impact of this loan on your life?

36
37