Increasing Micro finance Outreach

7/28/2019 Increasing Micro finance Outreach

1/8

Improving Outreach and Possible Solutions to Micro Enterprise FinancingBy: Sohailuddin Alavi

Preamble

This paper serves as the basis for initiating dialogue on concerns and possible remedies, particularlyimproving institutional outreach, for the lack of enterprise financing, specifically in the context of the StateBank of Pakistan (SBP)s strategic directions for the Year 2010. The author conducted Focus GroupDiscussions with key personnel from microfinance banks / specialized microfinance institutions, under theauspices of CIPE as a prelude to developing this paper.

Challenge StatementIn Pakistan, about one-third of the population is un-banked, or lacking access to finance, which ifappropriately tapped can offer tremendous opportunities to both banking institutions and businesses. As astep towards mainstreaming the un-banked, SBP has envisaged increasing the size of micro and smallenterprise (MSE) financing from one million borrowers to four million borrowers, and from Rs. one billion to

four billion by the year 2010. In this context, increasing institutional outreach and sinking micro financinginto the sector are considered pivotal strategies. Other areas of interest include regulatory regimes, productand process innovations, relationship management and monitoring, and market intelligence data.

BackgroundMSEs have been instrumental in fueling economic growth across the globe. These businesses are rightlyconsidered as the backbone for a countrys industrial base; as an effective instrument of dispersing equalemployment opportunities and gender mainstreaming; and as one of the tools to redress poverty, especiallyin the context of financial hardships. Financial institutions believe that this segment of the businesscommunity is the most viable for expanding banking opportunities, both from commercial as well ascorporate citizenship perspectives. This is due to the fact that there exist a huge number of potential

customers, while loan recovery rates are extremely high. However, it requires a focused approach bymicrofinance banks (MFBs) and other micro financing institutions.

About 50% of Pakistan's workforce is self employed, typically owning or operating micro and smallenterprises. This trend is likely to increase as corporate and industrial organizations continue to downsize,leaving former staff members with no option other than starting a business. Outsourcing is also on the risein corporate and industrial setups, creating more business opportunities for MSEs.

Though many micro and small entrepreneurs have demonstrated commitment and sound trade acumen,they tend to forego many opportunities to expand their businesses beyond the minimum level needed tosustain them and their families. Two major reasons are cited as lack of rational approach in managing the

enterprise: lack of access to financial resources and lack of access to conventional financial services.

The micro and small entrepreneurs can be clustered into different categories for the purpose of focusing ontheir diverse characteristics, needs, and expectations. Enterprises can also be categorized into groupsrepresenting different trades. This analysis provides a useful insight for identifying possible relationships.

a) Categories by Entrepreneurs

This paper was developed for CIPE Policy Roundtable on Microfinance (2007) 1


2/8

Prospering entrepreneurs with proven track record

Have overcome market forces and progressed reasonably well

Have built in fairly reasonable equity over time

Have taken advantage of market opportunities

Have the capacity to manage the enterprise, make use of the given and additional financial

resources productively, and contain risk within fairly bearable limits

Can meet financial obligations

Have passion, commitment, business discipline, and integrity

Mostly come from lower middle to lower strata of the society

Relationship with such entrepreneurs tends to be commercially viable and sustainable, while

from the entrepreneurs perspective the micro financial services are generally affordable atcompetitive prices

Potential entrepreneurs

Have the potential to succeed in business but have yet to prove abilities

Have ideas, passion, commitment, business discipline, and integrity Can take advantage of market opportunities

Have little or no equity

Have the capacity to manage the enterprise, make use of given and additional financial

resources productively, and to contain risk within fairly bearable limits

Have reasonably fair chances of sustaining and progressing in the business

Mostly come from lower middle to lower strata of the society

Relationship with such entrepreneurs is potentially viable and sustainable; however, fiscal

responsibility issues may arise. Hence relationship needs to be structured based on individualentrepreneurs requests and track record.

Poorest of the Poor

Have urgent need of survival (self and family)

Have little capacity and unlikely to succeed

Have little sense of direction

Have no resource base

Have urgent needs for consumption and enterprise financing

Represent household below the poverty line

Relationship may begin from a corporate citizenship perspective, but innovative microfinance

services can make the relationship commercially sustainable for both in the long run.

Hobbyists

Have fairly sustainable alternate source of income generation

Have no or little resource constraint

Have rather casual attitude towards managing the business

Use the enterprise for personal gratification or keeping oneself busy

Mostly come from high middle class to affluent strata of the society

Relationship most of the time is viable, with no accessibility / affordability issues at the

customers end.



3/8

Opportunists

Fairly affluent

Have fairly sustainable alternate source of income generation

Create dummy enterprises to obtain easy financing

Channel micro enterprise financing towards personal consumption

Mostly come from high middle to affluent strata of the society

Relationship is inherently riskier and unviable, unless specific risk management tools are used

in managing such relationships, if at all deemed fit.

b) Categories by Enterprises

Retail Outlets

By definition, these are shops owned and operated by a single person the entrepreneur (men

or women).

These shops generally sell consumer merchandise, or offer small scale manufacturing of

consumer / household goods. Their profit function is based on buying and selling differentials multiplied by inventory turnover.

Their financing requirements are generally for maintaining or creating an inventory and running

expenses (working capital).

Service Outlets

By definition, these are individuals with technical skills who provide services within the local

community artisans, technicians, utility service providers, transporters, etc. (men or women).

These entrepreneurs provide various consumer services primarily to households and

individuals.

Their profit function is based on the services revenue multiplied by the activity level. Their financing requirements are generally for the equipment and running expenses.

Vendors

By definition, these are individuals or a group with technical skills that provide services to

equipment (product) manufacturers, such as CMT units in the textile industry, accessoriesmanufactures, after-sales service providers, etc.

These entrepreneurs provide value-added services to the original equipment manufacturers.

Their profit function is based on the value addition margin multiplied by the activity level.

Their financing requirements are generally for raw materials, equipment, and working capital.

c) Microfinance Operations in Pakistan

Many organizations apart from MFBs are targeting microentrepreneurs in the informal sector,known as micro finance institutions (MFIs). Though their focus partially converges with that offinancial institutions, the unique positions and products of MFIs differ due to their approach. Theseorganizations offer micro financing as a social mandate, catering only to the poorest of the poor.Other financial institutions, however, operate from a much broader perspective and use a moresystematic approach, as they are in a position to offer a stream of financial services most neededby entrepreneurs. This co-existence of MFIs and MFBs is creating unique diversity, which shouldbe leveraged to broaden funding in both sectors.



4/8

At the end of 2006, nearly one million MSEs were active borrowers and savers in Pakistan.There was a drastic increase in active savers and borrowers during the last quarter of theyear, especially compared to the overall past trends. The data further reveals that impact ofdevelopment and growth in the urban areas has outpaced the expansion of the rural areas1.

According to SBP estimates, potential microfinance clientele in Pakistan includes 25 to 30million people. Coverage to date is only slightly above 1% of the total target population. Thepercentage of female clientele is negligible in the present clientele pool2.

Table - Outreach of Microfinance Banks

No. of Branches 253No. of Borrowers 266,720 (Jun 06) 997,778 (Dec 06)

(51,819 female)Advances / Financing in rupees 2.739 million (Jun 06) 10,742,710,407 (Dec 06)No. of Savers 1,659,051 (Dec 06)

Savings in rupees 2,610,318,109 (Dec 06)

Two divergent views prevail regarding microfinance. One popular view is that microfinance is forthe poorA, to redress all financial hardships, be it household or enterprise-based. For instance, Mr.Basheer A. Chawdry3 says, Microfinance should be viewed as a social business enterprise thatserves a cause, covers its costs and also earns a reasonable rate of return. Kanwal Saleem 4

quotes Faisal Bari, a renowned economist: Microfinance [serves] as financial services needs,including credit, savings, insurance, and payments transfers of the poor households and theirenterprises. Shabir H. Kazmi5 in his article stipulated, Nearly one third of total population ofPakistan lives below the poverty line. While one may give a number of reasons for the prevailingpoverty, many analysts say it is because of non-availability of finance to those who need it the

most. However, some programs in the past were focused on distributing zakatand kheratto thepoor without enabling the poor to develop their own income generating entities. The result is thatdespite distributing billions of rupees, the number of people living below the poverty line is on therise. To begin with one point has to be made clear: that the sole objective of microfinance is notpoverty alleviation but to create sustainable business entities. Therefore any lending [proposition]has to be reviewed in the backdrop of revenue generation and debt repayment ability of theborrower. The second objective is to improve the income generating capacity of the borrower.

Another view was expressed by Mr. Nadeem Hussain, president and CEO of Tameer MicrofinanceBank. More than three billion people in the world seek access to basic financial services essentialto managing their lives. Microfinance is an essential but not the only tool in the reduction of

poverty, said Mr. Hussain6

. Mr. Hussain further highlighted 4 CGAP principles aiming to helpgovernments and practitioners develop sustainable frameworks for microfinance.i) Financial systems built to serve the poor will only reach full potential if integrated into the

country's mainstream financial systemii) Microfinance can pay for itself and must if it is to reach a larger number of poor peopleiii) Poor people need a variety of financial services, not just micro-loansiv) The governments job is not to provide financial services for the poor, but to create an

enabling policy environment in which businesses can thrive.

In light of the above, one can conclude that microfinance is an emerging portfolio of financial



5/8

services aimed to help bring marginalized potential entrepreneurs into the mainstream of theeconomy through sustained enterprise development.

Putting it differently, microfinance aims at promoting micro business enterprises of all sorts.Poverty reduction, however, is another initiative, which needs two separate interventions:Supporting potential entrepreneurs to capitalize on their economic opportunities through financing

and infrastructure support; and, the other is to provide socio-financial support to those who lackpotentials to participate in economic activity themselves either permanently or temporarily.

d) Generic Framework for Building Sustainable Micro Finance Bank (MFB)

e) Proposed Coordination Structures

Along the value chain of a typical microfinance activity are microfinance banks, micro-enterpriseservice providers, non-governmental organizations, and international and government institutions.Coordination among these institutions is crucial to sustain entrepreneur and enterprisedevelopment. Hence, the following is a list of possible roles for discussion.

Institutions Roles and Responsibilities

Microfinance Banks (including MFIs) Financial experts.Provide range of micro-financial services tothe entrepreneur, focusing on their specificand diverse needs and expectations.

Community Based Organizations Links the entrepreneur and MFBs(including NGOs) Focus on social mobilization, customer

identification, relationship management, andrecovery of monies on behalf of MFBs /MFIs.


Generic Framework for BuildingSustainable Micro Finance Bank(MFB)

Performance

Indicators

Should be able tooffer full range of

financial services to

the micro enterprises

by precisely

satisfying their

financial needs and

exceeding their

expectations in a

profitable and

sustainable manner

Should be able to

adhere to its CSR

towards poorest of

the poor in a

generally acceptable

manner

Enabling

Indicators

MFBs should be able to develop their institutionalcapacity:

To identify viable micro and small enterprises and to

evaluate their potentials and risks, such asAbility to make effective use of the money (credit) in the

enterprise,Ability at present and/or in the due course of time to meet its

financial obligations in a befitting fashion, Requisite competence of the trade, and

Passion, commitment and discipline in enterprise.

To reach to the door step of micro and small

enterprises

To develop and deliver financial services at

competitive prices

To develop and sustain essentially profitable

relationships with all MSE customers

To manage their profit function efficacy at all times

To mobilize and deploy resources at optimal efficacy

Intervening

Indicators

Internal:Strategic focus

Systems approach

Process

management

Technology

Structures

People skills

External:

Regulatory and

policy alignment

Alliances and

linkages

Institutional

technical

support/assistance

Social mobilization


6/8

Micro-Enterprise Service Providers Enterprise and entrepreneur developmentexpertsIncubate enterprises, identify potentialentrepreneurs, develop their competencies,and provide business counseling.

International and Govt. Institutions Socioeconomic development catalysts.Create an enabling policy environment andprovide necessary economic assistance tothe system

Microfinance Prospects and Challenges

No business opportunity comes without challenges. Similarly, microfinance opportunities in the MSEsector face challenges manifested in the immediate environment and institutions capacity. Those whotackle the challenges rationally will take the lead in unleashing the right opportunities at the right time.

According to SBP data, 99% of the potential customers in the MSE sector are untapped. The MSEsector offers more sustainable growth potential and employment to marginalized populations, includingwomen and those with no or little formal training or education. Furthermore, a large number of potentialcustomers in the MSE sector are capable of using the credit responsibly and will offer fair returns tothe lenders as their share of profits. Last, recovery percentages in this sector have been encouraginglypositive to date.

As mentioned above, the challenges can be grouped as external or internal to the institution.Converting external challenges into enabling factors needs a joint effort of all the stakeholders, whileredressing the internal challenges entails broadening the institutions vision of its potential market toalso include, besides the poorest-of-the-poor, the entrepreneurs who may not qualify to be poorest-of-the-poor; business policy, processes, and product alignment; and capacity building.

External challenges as identified by the stakeholders in the two focus group discussions broadlyinclude: inadequate policy environment and market infrastructure; undocumented segment of theeconomy; higher enterprise vulnerability to socioeconomic contingencies, primarily due to lack of fiscalprotection available to the MSEs against cutthroat competition and potentially exploitative practices ofthe local conglomerates and international businesses; lack of access to technology; unavailability of

the full range of financial services to the sector; and the non-commercial attitude of entrepreneurstowards their businesses and especially towards loans.

Among the internal challenges the foremost is the inadequate flow of cheap funds to private sectorinstitutions; limited outreach; institutions general inability to assess and therefore mitigate the riskfactors of standard practices in finance and banking; lending orientation; incompatibility of conventionalbanking processes and products with microfinance needs; constraint to compete for quality humanresources within the overall financial services industry with scarce funds; minimal usage of technology,especially in the financial services delivery process and customer relationship management; and lackof effective alliances along the microfinance product development, delivery, and relationship



7/8

management value chains.

To conclude, microfinance programs in Pakistan have reached a point that warrants consolidation, ifoutreach is to be increased within a short period of time. Simultaneously, other problems need to beresolved to ensure the right impact of microfinance in various dimensions. Such challenges include:deepening the microfinance system into the MSE sector; creating an enabling environment both for the

enterprises and microfinance banks and institutions; developing home grown microfinance banks andinstitutions framework, processes, and products to achieve higher organizational and financialstability; and strengthening coordination (value chains) between various stakeholders for highersynergy for all.



8/8

References

(a) According to the Government of Pakistans definition, a person in the state of poverty (poor) lacks

access to material (land included), economical, social (education included), political, and cultural

resources, leading to lack of choices of services, depravation of basic rights and security,vulnerability, and the general feeling of powerlessness. The Swiss Agency for Development &

Cooperation considers poverty as a multidimensional problem, including deprivation of social

justice, political and economic empowerment, and the lack of equal opportunities (esp. economic

and employment) to which every human is entitled. Beyond income and basic services, individuals

and societies are also poor and tend to remain so unless they are empowered to participate in

making decisions that affect their lives.

1. Muntazir Haider; Microfinance Growth and Expansion. Pakistan Gulf Economist, May 21 27

2007

2. SBP's annual report for the year 2005-2006 vol. II, Banking sector Review up to June 2006 /Muntazir Haider; Microfinance Growth and Expansion, Pakistan & Gulf Economist.

3. Mr. Basheer A. Chowdry an exclusive interview to Pakistan & Gulf Economist.

4. Kanwal Saleem; Microfinance an effective tool to alleviate poverty, Pakistan and Gulf EconomistMay 21 - 27, 2007)

5. Shabbir H. Kazmi; Microfinance for poverty alleviation, Pakistan and Gulf Economist May 21 - 27,

2007)

6. Nadeem Hussain, President and CEO Tameer Micro Finance Bank; Micro financing: Empoweringthe un-banked, Pakistan and Gulf Economist May 21 - 27, 2007)


Documents

Increasing Micro finance Outreach