Working of micro finance institutions
Micro finance sector in Pakistan has recorded substantial growth over the last few years as a result of a conducive policy environment and active support by the government. However, latest balance sheets of most of the financial institutions engaged in this business suggest that this sector is not as profitable as normal banking business which has been yielding high dividends for the equity holders in the recent years.
In fact, some of the micro finance banks are reported to have incurred losses due to high administrative costs. According to a State Bank review on "Financial Position of Micro Finance Banks - 2006" issued on 25th July, 2007, most of these banks posted losses during 2006 as their interest and non-interest income was lower than their administrative costs.
The Network Micro Finance Bank incurred a loss of Rs 7.3 million as its administrative expenses stood at Rs 25 million, while its interest and non-interest income amounted to Rs 17 million and Rs 5 million respectively. The Pak-Oman Micro Finance Bank, Rozgar Micro Finance Bank and Tameer Micro Finance Bank also posted losses of Rs 11.2 million, Rs 7.9 million and Rs 50.1 million respectively for similar reasons.
On the other hand, Khushali Bank and The First Micro Finance Bank earned profits of Rs 23 million and Rs 19.4 million respectively, though their administrative costs were also quite high in relation to their overall financial activities and coverage.
The losses or low profitability of the existing micro finance banks in Pakistan suggests that their equity holders could have second thoughts and the potential new entrants would be less enthusiastic to enter the field. Such a behaviour could, therefore, be a blow for the government plans to use this kind of financing for poverty reduction and employment creation in the country.
It may be recalled that micro finance had emerged as a great social innovation in the 1970s to offer financial services to the working poor, especially those who were previously considered unbankable because of absence of collateral.
The beauty of the concept was that, once given the opportunity, not only clients of MFIs would expand their businesses and incomes but their high repayment rates would demonstrate the success of this model and strengthen the belief that the poor were also capable of transforming their own lives, if they had a chance.
Grameen Bank of Bangladesh established by Professor Yunus was regarded as such a huge success story that authorities of almost all developing countries, including Pakistan, wanted to follow his footsteps.
However, as the experience of Pakistan indicates, it is hard to replicate the characteristics of an institution in two different countries in its entirety. It is highly difficult, if not impossible, to find the level of commitment to a worthy cause as shown by Yunus and his team.
It was not the incentives or persuasion by the central bank or the government of Bangladesh which induced Professor Yunus to move in a certain direction, but it was the pain and hunger writ large on the faces of the very poor which swung him into action.
Moreover, the cultural norms in the rural areas of Bangladesh are quite different from Pakistan's. Whereas in rural Bangladesh, default in payment is almost considered a sin, in Pakistan repayment on time is seen as an indicator that the borrower is weak and uninfluential. In the kind of environment prevailing in Pakistan, high default rates also undermined the viability of micro finance institutions.
The experience of past schemes like yellow cabs, green tractors and other small loans are not very heart a warming. We don't want to discourage the establishment of micro finance institutions in the country, but would only like to say that businessmen venturing into the field need to be fully dedicated to the cause and be prepared for a lower return on their equity.
The very viability of micro finance institutions may be a question mark if administrative costs are not reduced to the minimum. Professor Yunus on his recent visit to Pakistan had advised Pakistani banks not to run micro finance banks like corporate banks and not to treat them as another money making avenue.
We can only wish that some entities in Pakistan would follow his vision and take up the challenge to expand the network of micro finance institutions earnestly and improve the lives of millions of people living below the poverty line through his novel scheme.
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