RIGHT from late eighties initiatives have been taken by some NGOs and commercial banks to provide micro loans to poor who generally do not have access to conventional banking channels. But due to high transaction cost involved in the process, commercial banks were reluctant to expand their outreach.

In fact banks failed to inject concept of good governance in this particular discipline of their operations, which needs focus on challenges like whether their micro finance business preserves its vision of economic empowerment of poor and how do they balance their growth target, risk involved and profitability of the operation and how to hold management accountable without undermining its independence.

Hence sustainability of the micro credit programme both at institutional and NGO level remained doubtful and as such outreach of the programme remained restricted to small fraction of poor population. However , in 2001, government’s took initiative to start regulated banking for the poor and formalising the infrastructure for generating the funds and delivery of required banking services, Micro Finance Ordinance was promulgated in 2001.

So far six micro finance banks have gone into operation, out of which only three have potentials for country wide outreach. Despite advent of these micro finance banks and presence of more than 20 NGO-based MFIs, hardly 0.3 per cent of country’s impoverished population could be benefited.

Without realising the actual need, fixing a target of providing access to micro credit to one million people through public sector initiatives is not in line with strategy set for achieving Millennium Development Goal (MDG) of halving poverty by year 2015. There is need to expand outreach of MFIs and MFBs of both public and private sector to cover 50 per cent of poor families by 2015. The compulsion associated with the programme like delivery of service at door step of targeted population, particularly in far flung and rural areas and nature of product to be designed for such borrowers, which involves a very small loan size, tiny but frequent repayments and rapid loan roll-overs flounders the concept of cost effective delivery mechanism, needed for sustainability of the organisation itself.

No doubt some of the newly established banks are striving to put in place cost effective delivery mechanism to target population in far-flung areas through setting up on line satellite units instead of full fledged branches in such areas providing linkage between clients and nearest branch of the bank. The first micro finance bank, having sustainable operations in private sector has the largest number of satellite units / points of link (19) and has expanded its outreach to almost 40 districts in a period of three and half years.

The total number of active beneficiaries through micro financing hardly exceed 0.9 million, according to available statistics. The number of beneficiaries from micro financing banks could have been much larger, but since sustainability objective over-rides the social objectives, the board of directors of these MFBs and NGO-based MFIs tend to be persuaded by one objective or the other, but they seldom are able to reach a balanced position regarding achievement of social objective and profitability or more appropriately sustainability objective.

However to follow best practices for economic empowerment of poor through facilitating accessibility to credit overall composition of the board should be able to strike balance between these two perspectives by reviewing management’s business plan in the light of institutional expansion of micro financing programme, which is directly linked with MFB’s/MFI’s policy regarding targeting various segments of population, gender sensitive approach and prudent lending based on cash flows and mechanism of group lending etc.

Majority of MFBs and MFIs concentrate on lending to female borrowers as they are economically less independent than men and benefit of their economic empowerment reach to children and other dependant family members and above all due to the fact that they are prompt in repayment.

Some of the MFIs confine their services only to rural poor communities, where traditions of overall communal interest are still upheld. Accordingly group lending or lending on the basis of group/communal guarantee is done more effectively and loan recovery process is also facilitated automatically due to peer pressure.

Lending to male youth population between the age group of 18 – 25 is generally found more vulnerable to risk as such they are being neglected by majority of micro finance institutions. Majority of borrowers from this segment fail to utilise the funds effectively on projects for which they borrow, hence number of defaulters has always been found quite high in this category. However this segment being largest component of workforce needs greater emphasis. For this particular category of clients delivery of credit may be linked with skill development training arranged from concerned MFI/MFB through funding from Donor Agencies who have funding programmes for capacity building of both financing agency and borrowers in almost all the developing countries including Pakistan to promote micro financing initiatives.

Targeting specific sectors of the population has not only social but also economic implications. Different groups may be found variably efficient in utilisation of the funds and making their projects viable. Similarly repayment pattern of different groups also vary. Hence to expand outreach and achieve set goal of economic empowerment of poor, being the very essence of vision of each micro finance institution, it is essential that sectoral allocations of credit be made keeping in view particular needs, capability to run a business and degree of financial deprivation of each segment of population.

Banks ought to view financing the poor not as a loss proposition but as an additional opportunity for profitable investment. MFBs and MFIs need to inculcate a developmental outlook and giving an innovative and need based approach while catering to banking needs of poor. Managerial advice and access to business network if provided to poor clients can make the difference between success and failure of the micro finance programme for the poor.

Branch network and location of each branch of a bank also matter in determining outreach of banking services to the poor. In urban areas branches need to be located in low/lower middle income population areas having potentials of micro businesses. As stated above, from viability point of view instead of setting up a fully fledged branch in sparsely populated rural and urban areas, clients from such areas can be accessed through satellite units, and through agency arrangements with post offices and banks having presence in almost all rural areas both for credit disbursement and repayment of loans.

Deposit taking is also an integral part of micro financing, but in Pakistan presently with the exception of First Micro Finance Bank no other MFB or MFI have stipulated and specific policy and system in place for mobilising savings of poor as such some of them have already started facing liquidity problem. In order to popularise banking services among poor, they need to be given access to all basic banking services like deposit taking in profitable saving schemes and remittance facilities etc.

In order to ensure sustainability of the entity and fast growth and expansion of services, it is essential that micro finance institutions and banks operating instead of focussing on micro loans must start offering all banking services falling within the orbit of Micro financing Ordinance 2001 to all and also introduce support services like life insurance and also insurance coverage against accidental deaths of the clients at a nominal/subsidised premium rates negotiated with insurance companies. This apart from being beneficial for the client or his or her family members would provide financial cover to concerned financial institution also regarding loans disbursed to poor in case of death of the client.

Further, in order to widen the scope of operation on sustainable grounds, apart from extending business loans, MFBs need to go for consumer financing through launching housing improvement financing scheme and also financing for higher education etc on pay as you earn basis for clients whose businesses show good cash flow position. It is obvious that some of the consumptive expenditure may have built in investment properties.

Keeping in view cash conversion cycle of each line of micro business varying repayment plans can be offered to attract maximum number of clients. Clients doing grocery business and involved in poultry and dairy farming, welcome repayment in weekly instalments. Similarly those dealing in livestock favour quarterly or half yearly repayment plan.

High transaction cost is yet another cause of reluctance on the part of MFIs / MFBs for speedy expansion of their operations. Banks’ conventional procedure of determining credit worthiness of a client with a tiny loan requirement involves lot of cost. In this regard the State Bank of Pakistan’s Credit Investigation Bureau can maintain computerised record of all micro loans of MFIs / MFBs by making it mandatory for them to put in place on line system to keep the record up-to-date at the State Bank of Pakistan.

However, it is imperative on the part of SBP that unlike conventional commercial banks this service be provided free of cost to micro finance sector. Further, as stated earlier, micro finance institutions by forging links with post offices, commercial banks having wide net work in rural areas and credible NGOs can reduce transaction cost involved in delivery of credit to poor communities at their door step. Use of social collateral through group mechanism and clustering if undertaken widely can substantially reduce transaction cost.

For achieving desired expansion level all MFBs must endeavour to build up a sustainable funding base on the basis of strong performance and business plan, which encompasses capitalisation, institutional development and increasing capacity to mobilise commercial funds from depositors and the financial system. They also need to develop a institutional culture and service delivery system that ensures sustainable service to a significant and growing number of poor in all gender and age groups.

Micro finance institutions also need to have sound organisational structure, freedom from political interference, competent work force obtained through continuous training process and a strong ‘vision’, which inculcates sense of purpose and ownership among people in the organisation and clients as well.

The writer is the founder-president of the First Women Bank