Micro credit is based on the interest rate. High transaction cost is the major economic problem of Pakistan. This cost leads to the higher interest rate which reduces its sustainability and thus narrow downs its original scope.
The revolutionary idea and vision of Muhammad Yunus was a ray of hope in the lives of downtrodden people. The main idea of micro financing was that: No one sleeps hungry, No one will die due to the lack of health faculties and No one attempts the suicide due to the poverty. This idea gained so much importance in Bangladesh and other countries of Asia besides of Pakistan. Unfortunately in Pakistan microfinance couldn’t do well to alleviate poverty instead, it has become the good business for making money for all the microfinance institutions. A recent research shows that living standard of the microfinance beneficiaries is below average which clearly shows low income and education level of the borrowers. They lacked basic facilities like food, nutrition and healthcare. Most of the families depend upon a single person’s income, which is not enough to achieve better living conditions.
Micro credit is based on the interest rate. High transaction cost is the major economic problem of Pakistan. This cost leads to the higher interest rate which reduces the sustainability and thus narrow downs its original scope. India has 25 million clients and Bangladesh has 30 million clients of microfinance. But Pakistan has only 2 million clients due to the high interest rate. Although, 61.5 percent of respondents of microfinance institution are found satisfied after receiving loans, yet they live below the poverty line. The main factor that has crippled them is the higher mark up rate. Majority of the people are not happy with the higher interest rate that dents their income. In their view, the Microfinance Institutions must reduce their mark up rates as to a level where they could have made their business economically viable. The microfinance institutions get loans from commercial banks at 14 percent mark-up and extend it to borrowers at 20 percent.
The microfinance institutions get loans from commercial banks at 14 percent mark-up and extend it to borrowers at 20 percent. As such, institution earns six percent profit on each loan.
As such, institution earns six percent profit on each loan. Majority of the people are illiterate. They cannot make comparison of the interest rate with Commercial Bank and Microfinance Institution that is why these Microfinance Institutions charge the higher interest rate. The consistency in the mark up rate is very important for the business growth but unfortunately because of the government’s heavy borrowing from the commercial banks has substantially pushed up the interest rate. As a result, the commercial banks have no funds for the small businessmen and what to talk about the micro credit facility. The State Bank of Pakistan, being regulatory authority, should play its key role in monitoring the microfinance institutions’ performance and take steps which could ensure cheaper loans for the small businessmen and the poor people.
The question is Microfinance Institution gives the loan to the women for starting the business and the participation in the economic activities. But the women do the menial jobs as maids and house cleaners. So where goes the loan? Obviously they misuse it. Only 25.4% women are self employed otherwise their husbands misuse the loan. Despite the fact the Microfinance institution have the knowledge of that misappropriation, yet they do not take any action against them. Some respondents use the amount of loan for the renovation of their houses and to fulfil the personal needs. That practice leads to the failure of microfinance programme in Pakistan. The institutions are not playing any significant role in the expansion of business, as the loan amounts are too small to start a new business. However, irrespective of all negative aspects of the micro financing, such institutions are still popular among the poor class because they provide them loan when they are in need to meet some other expenditures and their relatives and friends refuse to help them. Secondly, the procedure does not require lengthy documentation like the commercial banks and people feel it convenient to approach the microfinance institutions.
The question is Microfinance Institution gives the loan to the women for starting the business and the participation in the economic activities. But the women do the menial jobs as maids and house cleaners. So where goes the loan? Obviously they misuse it.
For instance, Government of Pakistan has started Benzir Income Support Programme and Waseela Haq Programme which has not yielded any result and the Government of Pakistan has failed to get the result it expected. Similarly the Government of Punjab had spent billions of rupees on Sasti Roti Programme which has completely failed causing a great loss to the national exchequer. Another reason of failure of microfinance in Pakistan is the corruption. Now take the case of recent floods in Pakistan, which is very important case of microfinancing in the country. The flood affected persons had been issued Watan Cards which entitled them to get 20,000 rupees as the first installment. These loans are given for the construction of the houses and purchase of livestock and other necessities of life. There are some NGOs like Pukkar which are working for the flood affected people, they have spent billions of rupees but the result of all these efforts is nil because of the corruption and mental approach of the people.
By: Samra Kahlid
Jahangir's World Times First Comprehensive Magazine for students/teachers of competitive exams and general readers as well.
