February 26, 2007	Monday	Safar 8, 1428

NOW that the central bank is expected to issue three to four licences for setting up of microfinance banks in the private sector, a debate has started that interest rates linked to these banks should be reduced to check, to some extent, the widespread poverty in the country.

The State Bank is currently processing around 10 applications, but not more than four new microfinance banks would be allowed to operate in the near future.

Some people have advised the government to follow the Indian example and reduce the prevailing (20 to 30 per cent) interest rate for extending small loans to the poor and deserving households in both urban and rural areas. The Indian cabinet has approved the idea and the issue is now in the parliament which is expected to approve it.

"In fact, they (Indians) have capped the interest rates attached to microfinancing and this could be followed here as well," said an official. However, he said Pakistan's first macrofinance institution – the Khushhali Bank – was charging the lowest mark- up which was maximum 20 per cent and in some cases less than that as compared to the mark-up of such other banks operating in the country.

The question generally asked is: “Has small loaning played any role in reducing poverty?” Many people believe it is still increasing despite the government's claim of 10 per cent reduction. The World Bank says that only five per cent reduction in poverty has been witnessed.

A senior official of the finance ministry believes that a lot more has to be done to cut poverty across the country and that it can be done through microfinancing. He stressed that outreach to the poor should be increased substantially to obtain better results.

Microcredit continues to receive global attention as being an effective tool for containing poverty. The award of Nobel Peace Prize to Professor Younus and the Grameen Bank of Bangladesh has brought about a realisation that there can be no peace without elimination of abject poverty. This has provided increasing impetus to the effort of the world community for the development and expansion of microcredit.

Khushhali Bank President Ghalib Nishtar maintains that his organisation is playing an important role in mitigating the sufferings of the poor. "I do not claim that all is well but can tell you that we have disbursed over Rs10 billion among the poor and needy people as microcredit across the country during the last few years".

He said there were 150 outlets in 88 districts of the country which were providing small loans to the poor and now this bank would be operating in Fata. In fact, he said, micro-credit facility was already available to the people of the Khyber and the Kurram agencies, and it would be extended to the poor in Mehmand, Bajour and Orakzai agencies in Fata this year.

He said the Khushhali Bank had disbursed Rs2 billion in 2005, Rs3 billion in 2006 and would disburse about Rs5 billion in 2007. "We are operating a sustainable model for removing poverty," he said adding that the Asian Development Bank (ADB) had provided $150 million to the Khushhali Bank. This bank was also utilising $320 million offered by the ADB to Pakistan.

Responding to a question, Mr Nishtar said the Khushhali Bank was planning to provide small loans through postal system and leasing companies to enhance small credit outreach to the maximum number of people.

Beside the Khushhali Bank, currently there are five microcredit banks. These are Aga Khan Microfinance Bank, Pak-Oman Microfinance Bank, Tameer Microfinance Bank, Rozgar Microfinance Bank and Network Microfinance Bank. "But certainly there exists increased possibilities for more micro-finance banks here," he said.

Generally it is said that there is sufficient evidence to show that microfinance works and the challenge is to build a financial system, which caters to the needs of the majority of the population and provides equal opportunities in terms of access to an array of affordable financial services.

But the important task is to secure global commitment to developing such a system where people, irrespective of their economic threshold, have access to services they require to make the best possible use of their potential. In this context, a number of measures are required to underscore the effectiveness of these initiatives.

When questioned, Mr Nishtar said that first there was a need to enhance awareness about microfinance and its potential and the conditions in which it could flourish. Second, it was imperative to fill information gaps: for instance, which segments of the population have access to financial services, and what services in particular, their cost- effectiveness and impact, and if there were impediments to access.

In the context of Pakistan, Mr Nishtar said, the microfinance should be maintained as a financial sector — which is a commercially viable proposition -— and not viewed as an act of charity.