The idea of microcredit as a ‘magical solution to poverty’ got momentum after the United Nations declared 2005 as the year of microfinance, and particularly when the Nobel Peace Prize was jointly awarded to Dr Muhammad Yunus and his Grameen Bank. Microfinance institutions innately started with double bottom line objectives — this is, they sought financial sustainability while reaching out to the poorest of the poor and targeting women clients. Later on, the provision of credit to poor women realised as a tool of extreme poverty alleviation and eventually economic empowerment of women.
Since 1980s, Pakistan, too, has recognised the importance of microfinance as a strong tool for socioeconomic uplift of poor and financially marginalised segments. Although it has been a while since the country initiated these efforts, the desired outcome has yet to be achieved. Under the Microfinance Strategy of 2007, the State Bank of Pakistan had set a target to reach three million borrowers until the end of 2010. Further, the target was expected to expand to 10 million by the end of 2015. However, only five million poor had been reached till the end of 2016.
The microfinance industry in Pakistan is suffering from high operational cost. The average operating-cost-to-portfolio ratio is 22 percent. Operational costs are a major component for determining lending rate, and high operational costs overburden clients. Apart from inefficiency in covering targeted clients and reducing operational costs, the microfinance industry in Pakistan is also lagging behind international benchmarks in terms of operational self-sufficiency as well. The average operating self-sufficiency of Pakistani microfinance industry is 94 percent. The comparative figures globally for large and small MFIs are 118 percent and 109 percent, respectively.
The notion that access to financial resources ultimately leads to economic empowerment, as a philosophical underpinning, is the genesis of provision of financial facilities to the poor as a development tool. But does provision of microcredit really help with economic empowerment of the poor? Research studies show mix results, depending on dimensions and indicators of empowerment and investigation techniques. Nevertheless some of the studies report deteriorated economic and social effects on poor women. Though, if poverty is conceptualised as ‘lack of access to financial resources’, microcredit will appear to be a logical solution for poverty reduction. Nevertheless, there is no universal agreement among researchers and development agencies on microcredit as a ‘magical tool’ against poverty.
An over-emphasis on formalisation of micro-finance institutions can deviate us from the original goal of socioeconomic empowerment of the poor on sustainable basis
The idea of microcredit as a solution to poverty and economic empowerment seems attractive and imperative. However, cultural resistance, intrinsic characteristics of the poor and non-favourable neighborhood effect can reduce the usefulness of microcredit to achieve the end goals.
Poverty is not just a monetary phenomenon. Rather it is multi-dimensional. Targeting poverty via microcredit and other financial facilities may not amount to rigorous policy intervention to alleviate poverty effectively and to bring significant gender mainstreaming. The potential of microcredit as an effective poverty alleviation tool can be questioned in many ways. First, poverty restricts social, mental, economic and political choices of the poor. Conceptualising poverty as a monetary phenomenon undermines width and breadth of the issue, and supplies only restricted and uni-dimensional solutions.
Second, a singularly commercial solution to the problem of poverty through the provision of credit is illogical. It wouldn’t make much sense to help a person living below a minimum acceptable standard and deprived of fundamental economic rights with a commercial motive only.
Third, poverty is a consequence not a cause. People may face poverty but their reasons might be very different. Thus, it may be misleading to present microcredit as a solution of all kinds of poverty.
Fourth, scarcity of financial resources shapes mindsets. Those facing the scarcity problem become over conscious about fulfillment of existing needs, but mostly at the cost of future losses. This psychology results in excessive borrowing and non-productive use of credit which again seems to be a hurdle in alleviation of poverty and productive use of credit. Fifth, emphasis on formalisation of MFIs deviates these institutions from their original goal (socioeconomic empowerment of the poor on sustainable basis) — this is technically known as Mission Drift. This phenomenon has shifted MFIs’ attention from social to financial goals. This situation is obviously non-favourable for the poor. Sixth, higher interest charged to the poor is justified based on the concept of Poverty Penalty. In fact, profit motive and expensive financing architecture are the major reasons of high operating costs of MFIs — rather than financing the poor. This practice promotes MFIs as institutions at the cost of weakened personal economy of the poor.
Assessment of arguments and empirical literature reveals that poverty is neither unidirectional nor results from lacking access to financial resources only. Furthermore, various constraints (technical, social, economic and institutional) restrict microcredit’s ability as a successful tool against poverty and for women empowerment. This situation necessitates conceptualisation of poverty via wider socioeconomic, political and institutional scale and demands a comprehensive, cohesive, non-commercial package to effectively alleviate poverty and increase women empowerment.
The writer is serving as an Assistant Professor of Economics at the Institute of Management Sciences, Peshawar. He can be contacted on his official email: [email protected]
Published in Daily Times, June 21st, 2017.