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Empirical application

April 22, 2012

With nearly 20 years of experience in social work, community development, integrated rural development and capacity building for government, non-governmental and international organisations, Humaira Hashmi provides an explanatory account of empirical application of microfinance and how it is changing the rural society in Pakistan.

What group of people have benefited from microfinance in Pakistan? Micro credit services have been introduced in the rural regions with higher levels of income disparity between classes and prevalence of destitution, which is aggravated by inaccessibility of loan services. In these regions, there is a lack of proper counsel for resource management and loan services. We cater to their needs by providing for livestock, agriculture, and enterprise and farming equipment. By doing so, people have far greater means of sustenance as they can deploy different capabilities available at their disposal.

This enables them to not only maximise their output and productivity, but it also entails other benefits, among them being greater income and a source of sustenance. It has also empowered women who account for 50 per cent of our beneficiaries. Such demographics would otherwise receive no other source of financial debt as they do not possess capital for collateral purposes.

Is microfinance profitable enough to be integrated into the mainstream banking, or is it more feasible for it to remain at a more non-profit organisational level? In Pakistan, micro credit services have been introduced by non-profit seeking organisations and programmes such as Sindh Rural Support Programme (SRSP). Typically, donor organisations, government and the banks have provided micro financial institutions with loans at a lower interest rate, which we then provide to qualifying rural communities and individuals.

We, as analysts, charge a fee for our services but our income is not commission based as it is in other financial institutions. Organisations, who seek to maximise profit from capital and lending may not be interested in microfinance as it exists, because the returns are lower while risks are incalculable and substantially higher, unless a rural and communal support infrastructure accommodates execution of financial services. Profit generating firms may find more profitable ventures elsewhere.

How do microfinance analysts assess the risk of borrowers and ensure enough recoveries so that lenders are paid back? Risk is an important factor to consider, especially since we do not hold any collateral. Risk, however, is usually the same for most loans. Our recovery rates were well beyond reasonable, amounting to a staggering 98 per cent, and we usually face risk of default resulting from natural disasters, as opposed to poor planning and execution of the microfinance model.

How receptive are the feudal lords, politicians and communal leaders to the introduction of microfinance in rural areas? Initially, most micro financial loans were made through recommendations by feudal lords who used nepotism as basis for discrimination in granting loans, instead of poverty. These loans, as such, had little recovery rates with no noticeable sign of development or social benefits. To mitigate this scenario, we then started to build networks by mobilising community members, which allowed us to have an infrastructure to withstand the influence of feudal lords. They are not too welcoming of our work, especially since it has provided communities with awareness of their rights and responsibilities, as well as the ability to carry out better agricultural practices. Nonetheless, to ensure goodwill, we often invite feudal lords and politicians to inaugurations and celebrations of successes of microfinance.

Do micro financial analysts count any values while shortlisting potential borrowers? We promote values of humanism and poverty alleviation in our framework. We typically divide potential borrowers into five different categories, based on their socioeconomic status, and then we prioritise people who come from poorer backgrounds. We also prioritise women and others, against whom the current macro socio-economic structure discriminates. By doing so, we are altering the power dynamics in the rural communities and empowering those who previously had no power. — Sachal Abbassi