The Mission of Microfinance: Views from the leading Micro Financial Institutions in Pakistan

Hadia Hina

School of Management

The University of Leicester University Road, Leicester LE1 7RH Email: hh109@le.ac.uk

Abstract

In a context of increased commercialization of microfinance, the paper draws on interviews and

financial data to explore this phenomenon in the two regions of Pakistan where most of the

microfinance provider operate. In contrast to many claims that commercialized and ‘financially-

sustainable’ microfinance programmes can achieve a greater scale than subsidized programmes

and that such programmes are more effective in alleviating poverty, I found that

commercialization’s impact is much more complex. The trend towards commercialization has

indeed resulted in considerable changes to microfinance in Pakistan which include growing

average loan size, more tight regulations, higher cost, individual lending and less female

borrowers. In addition to that, one step has been taken to cater the different need of the

microfinance market which is categorization of the microfinance sector. This does have some

positive benefits in that growing small firms are possibly better served. However, it is not

offering hope for the many more, and poorer, people who are increasingly being excluded from

these schemes. I also find that banks are only offering their services in the geographical areas in

which not-for-profit NGOs are already operating. In other words, they are failing to explore new

markets in which there is untapped demand for banking service. This paper has tried to explore

the question of mission drift of microfinance and discussed some of the leading microfinance

NGOs and banks practitioners views on commercialization of microfinance and mission drift.

Introduction

In recent years, microfinance has become established as a primary policy for combating poverty

in developing economies. The rapid development of microfinance has benefited many poor

people, through giving them small loans, on low interest rates. The high repayment levels,

compared to those on commercial banks’ loans, has changed views on the viability of lending to

the poor; as consequence a range of bodies have become interested in the sector, including NGOs

attempting to facilitate development, purpose-created microfinance institutions, and commercial

banks extending their activities. More broadly, investment banks have become involved in the

collateralization, securitization and sale of microfinance debt on international markets.

Meanwhile, international institutions such as the World Bank have propagated a particular vision

of microfinance development ‘the commercialization of microfinance’.

However, with the creeping commercialization of the microfinance sector most discussion now

rotates around profitability, ‘sustainability’ and risk minimization. It is being increasingly

forcefully argued that commercialization allows greater opportunity for MFIs to fulfil their social

objectives which increase access to a range of demand driven microfinance products and services

to the poor (Charitonenko, 2003). The onset of commercialization of microfinance has created

two camps that represent broadly two different approaches to microfinance: Welfarist and

Institutionalist. Those in favour – Institutionalists – argue that microfinance must operate on a

commercial (profitable) footing as subsidized lending is not sustainable, funding restrictions

limit potential and an absence of market discipline means increased costs. Commercialization,

they claim, offers a win-win position in increasing outreach and sustainability while delivering

social benefits. Welfarists oppose commercialization because they believe it results in

institutions drifting away from their original mission of poverty alleviation.

This paper is based on a study exploring perspectives on the commercialization of Microfinance

in Pakistan. The MF sector in Pakistan is now shifting towards more commercialized institutions.

Most of the non-profit organizations are transforming into regulated and profit-driven

institutions. So, for the purpose of research Pakistan was chosen because firstly, there is

increasing trend of transformation of non-profit organizations into for-profit institutions and

many new micro-financial banks coming into the field as regulated financial institutions.

Secondly, the subjects of research are relatively accessible. The study includes a quantitative

analysis of 23 of the leading microfinance institutions, examining issues of cost, portfolio at risk,

profitability and outreach (and particularly the depth of outreach) bolstered with a qualitative

examination of the policies and practices of different institutions through interviews with MFI

personnel (CEOs and staff) and ‘clients’, i.e. borrowers.

The commercialization of microfinance is a new paradigm in the microfinance sector and is the

focus of this paper. The paper consists of two parts. The first part discusses commercialization

and its pros and cons. In the second part, I will discuss my empirical findings from Pakistan. I

will talk here about the way procedures are changing and whom institutions are now targeting as

they develop into more commercialized micro-financial institutions. Drawing on interviews with

CEOs and higher management personnel from over half of the leading Micro-financial

institutions in Pakistan, I will examine their views regarding the commercialization of

microfinance and, more broadly, microfinance’s ‘mission’.

Expansion of Microfinance and its Consequences

The rapid development of microfinance benefited many poor people, giving them small loans on

low interest rates. However, it gradually became clear that it was not possible for MFIs to offer

loan at low prices and also remain financially sustainable due to the high delivery cost involved.

In order to keep interest rates low, the majority of institutions were heavily dependent on donor

subsidy and survival was very difficult without constant grants or subsidies. So, when “In the

mid-1980s, donors and governments realized that efficient public interventions in microfinance

might help to improve social welfare” (Navajas and Schreiner, 1998:1) there was an inevitable

question as to how this might be funded. In large part, it was deemed necessary to apply market-

based interest rates, earn higher profits and move effort towards commercialization of MFIs in

order to achieve financial sustainability, ensure large scale outreach and make them efficient

without donor or government subsidy. This has led to many changes: several microfinance

organizations have become regulated as financial institutions and a number of commercial banks

have started operating in the microfinance sector, seeing it as a possible profitable investment.

Traditionally, banks were reluctant to provide this kind of loan because of the perceived greater

risk and high transaction costs involved but microfinance institutions demonstrated both that it

was possible to do so efficiently and effectively. As a result, a market which was previously been

neglected has become an attractive investment option, served by many key figures in

international finance.

A ‘New Road’ Commercialization of Microfinance

The ‘New Wave’ microfinance model – which promoted a ‘businesslike’ approach – was firmly

established by the early 1990s (Bateman, 2010: 14). The shift influenced the Microfinance sector

significantly and most discussion now rotates around profitability, ‘sustainability’ and risk

minimization. The entry of ‘conventional’ finance and its various modus operandi into this

domain we could dub ‘commercialization’. Commercialization of microfinance refers to the

‘movement of microfinance out of the heavily donor dependent arena of subsidized operations

into one in which microfinance institutions manage on a business basis’ as part of the regulated

financial system (Christen and Drake, 2002:4).

Bank Rakayat Indonesia was one of the very first institutions that moved in this new direction,

adopting a ‘financial system approach’ (Bateman, 2010). In 1984, the end result was the

establishment of Unit-Desa (BRI-UD) which was wholly profit-oriented organization and was

designed to offer ‘Kupedes’ microloans which were based on the market interest rate (Ibid). This

institution rapidly grew and by the end of 2004 it had 30 million savers and 3.1 million

borrowers (Robinson, 2001). A drastic shift came in the microfinance paradigm during the early

1990s when PRODEM, the leading microfinance NGO in Bolivia, transformed into a regulated

financial bank (BancoSol) in order to move its funding base into financial markets (Christen and

Drake, 2002). BancoSol’s remarkable success prompted donors and investors to change their

approach towards the sustainability1 of MFIs. Cost control, operational efficiency and

commercialism, ‘market’ or ‘businesslike’ approaches have all been promoted, and the emphasis

is now on providing ‘demand-driven’ financial services to the poor (Charitonenko, 2003).

                                                            1 Sustainability refers to covering their full operational, financial and administrative cost and also provide surplus amount called profit in order to finance their daily operations and development of future plans without long lasting financial support on government subsidies or donor funds (Conning, 1999). Secondly, MFIs have to meet their financing requirements through funds generated from internal operations (charging high interest rate and larger loan size which reduce transaction costs) and other commercial sources like commercial loans and deposits from the public (CGAP, 1997). In the literature the terms ‘sustainability’ and ‘self sufficiency’ are used interchangeably (Brau and Woller, 2004).

The remarkable growth of this industry has captured the attention of various practitioners,

academics, economist and latterly intermediaries and investors of institutional finance. For

investors “one obvious attraction was its safety, reduced volatility, and high returns compared to

other sectors” (Bateman, 2010: 21).

The entry of conventional finance into microfinance has developed two strands of thought:

welfarist and institutionalist (Woller, Dunford and Woodworth, 1999). Those in favour –

Institutionalists – argue that microfinance must operate on a commercial (profitable) footing: as

subsidized lending is not sustainable, funding restrictions limit potential and an absence of

market discipline means increased costs. Commercialization offers a win-win position in

increasing outreach and sustainability while delivering social benefits. For example, the

Consultative Group to Assist the Poor2, states that “microfinance will only realise its potential if

it is integrated into a country’s mainstream financial system” (CGAP, 2004a: 1). A key principle

behind commercialization is that “poor households demand access to credit, not ‘cheap’ credit”

(Morduch, 2000: 617). Therefore, Micro-Finance Institutions (MFIs) can charge high interest

rates without losing outreach. Supporters of commercialism regard a business-oriented approach

as necessary step in order to provide high ‘quality’ financial services to the poor. This group

believes that the success of microfinance, both in terms of poverty reduction, through reaching a

maximum number of poor households, and in terms of its sustainability, depends on its ability to

adopt principles of commercialization in all its operations (Robinson, 2001 and 2002).

Moreover, institutionalists note that funding agencies have limited resources compared to the

potential demand from poor households. In order to encourage a greater inflow of financial

resources, the sector has to attract private capital. This, in turn, requires that the sector can show

a reasonably high return on investment, covering both operational and financial costs.

A competing welfarist approach argues that the introduction of the profit motive into

microfinance necessarily distorts the actual mission of microfinance institutions — namely

reducing poverty — and potentially ‘degrades an organization’s commitment to the very poor,

who will be crowded out by less poor clients’ (Christen and Drake, 2002:2). Welfarists believe

that many of the poor households who participate in microfinance programmes are not capable of

bearing the burden of commercial loans which carry market interest rates — especially since

                                                            2 CGAP is an institution physically placed within a World Bank but with ‘multi‐stakeholder structure’. CGAP work is to manage international donor policy towards microfinance (Bateman, 2010: 16) 

market rates for the target sector can be excruciatingly high. Thus, it is not possible to achieve

two opposing objectives simultaneously. First, ensuring profitability on the part of MFIs through

charging an interest rate which could cover all operational and financial cost and provide profits

as well and, second, ensuring poverty reduction. As a result, the profit motive will take priority

over the service motive if profitability is emphasized more than the outreach and poverty

eradication on the part of microfinance institutions (Woller et al, 1999). According to welfarists,

subsidies and donor funding are the only way to accomplish the poverty-reduction objective

(Ledgerwood, 1999). The debate is ongoing, although with the power of the World Bank and

micro financial institutions, commercialisation is increasingly visible in practice.

Microfinance in Pakistan

Pakistan has a potentially huge microfinance market, as an estimated 27.4 million people are

poor and most of them live below the poverty line (Khalid, 2011). According to the World Bank

a person is considered as poor if his or her income level falls below some minimum level

necessary to meet basic needs and this minimum level is usually called the "poverty line". World

Bank has changed this minimum level from $1.08 to $1.25 and people who lives on less than

$1.25 a day is considered as an extreme poor (World Bank Report, 2010).

Being the world’s sixth most populous country (the population stood at almost 157 million in

2009) poverty alleviation and providing access to basic services remains one of the country

biggest challenge, particularly in the rural areas where poverty is more severe. Although the

poverty level has been brought down with increased spending on the social sector (Montoya and

Haq, 2008) demand is still very high and microfinance services have not covered most of the

country. According to Khalid (2011) there were 2 million active borrowers and penetration rate

was 7.5 percent at the end of 2010. In addition to that, 40% are excluded from any form (either

formal or informal financial sources) of financial services and only 14% people are financially

served by the formal financial system and rest of them by informal (Nenova, Niang & Ahmad,

2009).

Microfinance initiatives began in Pakistan after practitioners became aware of the effectiveness

of similar initiatives in reducing poverty in neighbouring Bangladesh. We can trace their history

back to the early 1980s with the launching of the Orangi Pilot Project (OPP) in the urban slums

of Karachi (Qayyum and Ahmad, 2006). Other NGOs and MFIs soon followed. Now there are

more than 40 MFIs, of varying sizes and legal structures, serving the Pakistan’s ‘economically

active poor’, in very diverse geographical and social settings. They include commercial financial

institutions, NGOs, microfinance banks and rural support programmes (Pakistan Microfinance

Network, 2005). We can divide these MFIs into five major groups.

1. Microfinance Banks (MFBs) are licensed and prudentially regulated by the state bank of

Pakistan (SBP) to exclusively provide services to microfinance sector.

2. Microfinance institutions (MFIs) are NGOs that provide specialized microfinance services

only.

3. Rural Support Programmes (RSPs), which run microfinance operations as part of their

integrated rural development programmes (Pakistan Microfinance Network, 2005; Pakistan

Microfinance Network, 2006; MIFA, 2008).

4. Non-governmental organizations (NGOs), which provide microfinance service in addition to

other services provided to the poor.

5. ‘Others’ is a miscellaneous category that includes institutions, such as leasing companies and

commercial banks, that provide microfinance services as an additional activity beyond their core

business.

These MFIs were heavily dependent on the subsidies from the international donor agencies and

the government before the advent of commercialization; but as such institutions become more

commercialized most of the non-profit organizations are becoming profit driven institutions,

regulated by the State Bank and the market, rather than a set of loose ordinances. The mission of

many microfinance providers – particularly microfinance banks – has changed towards

sustainability and profitability rather than poverty alleviation.

Much devolution has occurred and Pakistan’s government also has taken several steps. These

include the establishment of the Pakistan Microfinance Network (PMN),3 the Pakistan Poverty

Alleviation Fund (PPAF)4 and the opening of a microfinance unit by the State Bank of Pakistan

                                                            3 Pakistan Microfinance Network (PMN)3 a well organized national association for microfinance providers (CGAP, 2007). 4 Pakistan Poverty Alleviation Fund (PPAF) which is an apex funding organization for microfinance and the opening of microfinance unit by the State bank of Pakistan (SBP) (CGAP, 2007).

(SBP) (CGAP, 2007). Further growth has been enabled by the constitution of Microfinance

Ordinance in 2001. It specifies the purpose, capital requirement, ownership structure, term and

conditions and procedures for the establishment, disclosure and winding up for MFIs (Oxford

Policy Management, 2006). Overall it was a major milestone in the microfinance sector in

Pakistan. Both government and international donors considers MF one of the priority areas in the

economic development strategy for Pakistan.

Transformations of Microfinance in Pakistan

Microfinance institutions (MFIs) typically transform from a non-governmental organization

(NGO) to a bank to reach significant scale and financial sustainability. Transformation is a

process in which an NGO converts into a formalised or regulated financial institution (this

process typically allows them to offer additional micro services beyond offering only

microcredit).

With commercialization, the microfinance sector in Pakistan has changed considerably. We can

see many transformations in terms of outreach, criteria of lending, procedures, target market and

more importantly the mission of microfinance. The Pakistan Microfinance Network (PMN)5 has

played an important role in categorizing the micro-finance sector.

Categorisation of the Microfinance Sector

In order to fulfil different needs of different clientele of microfinance sector Pakistan

Microfinance Network divided the microfinance sector into six different layers, according to its

target borrowers or ‘market’ (Figure 1.1).

                                                            5 Pakistan Microfinance Network (PMN)5 is a network of organizations engaged in microfinance and a well organized national association for microfinance providers (CGAP, 2007).

Figure 1.1: Poverty Pyramid Source: (Pakistan Microfinance Review, 2010:9)

It is suggested that the Extremely Poor and Chronic Poor will be served by safety net

programmes. These groups are excluded from microcredit programme in Pakistan. Policy

makers suggest that safety net programmes should be there to fulfil the needs of this class. The

academic literature also suggests that when loans are provided to the extremely poor then they

may not be able to use it effectively because of lack of self-employment opportunities (Hulme

and Mosley, 1996) and that is why these extremely poor remain outside of the conventional

microfinance programmes (Zaman cited in CGAP, 2001). Moreover, it can put them in over

indebtedness. The ‘extremely poor’ represents those individuals who suffer from several

dimension of poverty. These individuals suffer from food deficiencies, unable to fulfil the basic

needs of all family members, or they are unable to give basic education to their children and, in

the case of no work, make one of the family members beg to support the family. These

conditions can only be alleviated by government and other donor subsidies/grants that provide

food, employment and other basic requirement (Robinson, 2001).

Yet another category of poor who experience intense poverty is the ‘chronic poor’.6 It consists of

people who experience poverty for long periods of time or throughout their lives. These are the

individuals or households which consist of “over half” of the poor, a varied group who

commonly lives in remote rural areas, suffer from disabilities, lack social networks and/or

                                                            6 A number of terms have entered the development dictionary to identify those who experience poverty most intensely – ultra poor, extreme poor, hardcore poor, destitute, poorest of the poor, and declining poor (CPRC, 2005)

experience social discrimination in its many and diverse forms (Hulme, 2003: 399). The chronic

poor are also often not catered for by microfinance credit services and it has been argued that this

class should be served by safety net programmes where they can get basic requirement such as

food (CGAP, 2001). Similarly, the pyramid (See Figure 1.1) is also showing the same thing that

safety net programmes are the solution for chronic poor and extreme poor. However, those in

some of the upper categories such as ‘transitory poor’ and ‘transitory vulnerable’ are part of

micro credit as well as microfinance programmes. Transitory or ‘transient poverty’ can be

defined as the temporary state of poverty which last for short period of time (Jalan and Ravallion

(2000) but they are highly vulnerable people who can slip into the chronic or extreme poor

category with a slight adverse shock in their life, such as marriage of a daughter (the expense of

providing a dowry) or the death of a sole earner (Remenyi, 1991).7 Microfinance services can

helps these groups of people to overcome poverty.

The uppermost layer in the pyramid is the non-poor which is excluded from all microfinance and

microcredit activities. Thus, the pyramid (Figure 1.1) is showing the clear distinction of role of

microfinance banks and micro financial institutions in Pakistan. Microfinance banks will give

services to the poor who are ‘economically active poor’ and NGOs will serve the poorest of the

poor or chronic poor whose needs are different. Economically active poor’ refers to those who

have some form of work and do not suffer severe food shortage (Robinson, 2001).

As different microfinance providers are working in Pakistan, from regulated and commercial

institutions like banks to less regulated, non-profit organizations, the Pakistan Microfinance

Network argue that they will serve different categories of poor. However, in practice micro

financial institutions in Pakistan, whether NGOs or banks, are showing a different picture. Some

microfinance banks (who were previously working not as a purely commercial bank but have

now moved towards commercial banking) are serving the transitory poor but in the main new

banks are serving the transitory non-poor and particularly micro entrepreneurs. Banks and NGOs

both are giving services to the people what we can called as ‘economically active poor’. Very

few leading NGOs are running safety net programmes. They are giving awareness and doing

work such as enabling the social mobilization of clients. However, the training needs of clients

are still not catered by many of these NGOs.

                                                            7 Remenyi (1991) pyramid classify transitory poor and transitory vulnerable as laboring and Self-employed poor.

This categorization is reflected in the interview data. The CEO and founder of one of the leading

MFIs that has been in operation since 2003 explained about the categorization of MF sector. She

explained that microfinance should provide different financial services to those which the bank

can do efficiently. It is not the banks’ role to provide services to the chronic and extremely poor

people. For this group, there should be safety net programmes which should be run by the NGOs.

She was very clear about this issue. In an interview, she focused again and again on the point that

everyone should realize their own role. Banks should know what is their role and NGOs too:

When the MF bank gives the services to the safety net program people then he

put them on over indebtedness and hit them… NGO plus point is that they are

giving MF services… (NGO) will do the work of safety net programmes. Bank

will not give the training to the micro women or micro entrepreneur. Bank will

not give the market awareness, so this will be the NGO who give it. Here is the

role of NGO and this is very clear. Kindly don’t expect from MF Bank that they

will give the services to people below the poverty line. They will not and if they

will then they will do wrong. NGO role is very clear. NGO who is not clear at its

role then they are doing wrong in this sector (Interview with the author, March

2009).

This categorization of the sector is a major development in the microfinance sector in Pakistan.

However, this fragmentation of the clients is clearly indicating attention towards the mission drift

of microfinance because with segmentation of clients banks will exclude very poor people and

they will focus more on the ‘rich’ poor. Of course, focusing on more rich poor will result in

increased entrepreneurship which is also potentially good for economic growth and employment

creation. On the other hand, it will create a new funding gap for the poorer people where

demand is higher.

More Tight Regulations

To govern the activities of microfinance banks operations Pakistan has a separate legal

framework and these microfinance banks are regulated and licensed by State Bank of Pakistan

(SBP, 2004). According to the State Bank of Pakistan (2004) growth and sustainability are the

two guiding objective for the development of microfinance sector. To operate the microfinance

bank (MFB) there is certain minimum capital requirement and no MFB shall commence business

as a MFB unless it meet the minimum capital requirement8(ibid).

In addition, as there are certain requirements to become a MFB, there are more regulations to be

a micro client. The procedures have changed and become more strict for the microfinance clients

when they apply loan in MFB as compared to NGO. This has been explained by the Regional

Business Manager of one of the top three microfinance banks, with experience in MF and an

NGO. He clarified the differences between microfinance banking and an NGO.

When we were lending then [when I was in an NGO], CNIC (Computerised National

Identity Card) was not compulsory. We just seen that four or five people has given

guarantee of a woman and we had to make sure that this woman is living in this village or

in this street. If she shown us her wedding snaps then that proof were enough but here we

have more strict criteria. In a bank we must have to see CNIC and it should not be old

NIC (Manual National Identity Card). (Interview with author, Jan, 2010)

Additionally, when we move from NGOs to a banking sector then the costs of a bank are higher

which makes the loan more costly as compared to an NGO. He also shared his experience

regarding cost that “the cost of three or four branches of an NGO (where he was working

previously) is equal to only rent of this branch (his present bank branch)”. So, not only the

regulation has been tighter for the micro financial institutions but also it is more costly as well.

The cost is also increased for the borrower in terms of higher interest rates and many other

charges such as more processing fee and penalty charges which was not before in NGOs. The

consequences of higher cost and more regulations will restrict clients ability to take loans and

those that do, run the risk of over-indebtedness.

Growing Average Loan Size

This division of clients and with increasing commercialization has resulted a key difference in

loan size of microfinance banks and NGOs. The segmentation is also happening in the

                                                            8 Minimum capital Requirement for microfinance banks are i. Nationwide MFBs: minimum paid-up capital of Rs.1

billion; ii. Province wide MFBs: minimum paid-up capital of Rs.500 million; iii. Region wide MFBs: minimum

paid-up capital of Rs. 400 million; iv. District wide MFBs: minimum paid-up capital of Rs.300 million (SBP, 2004).

microfinance institutions loan size. NGOs are serving the clients of PKR.12,000 or PKR.15,000

loan sizes and banks loan size is double or sometimes triple than this amount. According to the

SBP prudential regulations banks can give maximum amount of PKR 150,000 and borrowers’

annual income conditions which was PKR 150,000 also have been increased to PKR 300,000

(USD 1,764–3,529) for general loans (SBP, 2011; Khalid, 2010). Table 1.1 below shows the

average loan size (ALS) of the four microfinance banks and four top MFIs in terms of active

borrower.

Name Institution Average Loan Size (PKR)

KHUSHHALI BANK Bank 11, 020

FMFB Bank 13,906

TAMEER MFB Bank 21,789

KASHF BANK Bank 29,885

KASHF FOUNDATION MFI 11,110

ASASAH MFI 9,596

DAMEN MFI 9,412

ASA Pakistan MFI 6,580

Table 1.1: Average Loan Size of Microfinance Providers Source: Data from Mix market of 2009 except Kashf Foundation (KF). KF data showing of 2008 due to unavailability of 2009 data.

The average loan size of Khushhali bank and FMFB almost half of that of Tameer bank and

Kashf bank, although Khushhali bank and FMFB have more than 10 years and eight years

experience respectively in microfinance sector. Tameer9 bank and Kashf bank10 have less

experience. One of the primary reasons Khushhali bank ALS is low because it was not working

on a commercial basis before 2009. Four MFIs (Specialised NGOs) in table 1.1 have ALS less

than PKR 10,000 except Kashf foundation but that MFI ALS is still less than that of the banks.

Loan size is one of the major indicators which measure the depth of outreach, where smaller loan

size corresponds to greater depth. The changes in loan size also have important repercussions for

entrepreneurship. Entrepreneurs are claimed to be not only “important for economic growth but

also for social equity, as it improves the distribution of income and wealth, improves access to

economic opportunities and upward social mobility, and helps to establish the foundation of a                                                             9 Tameer bank got licensed in 2005 and having nationwide branches. 10 Kashf bank got licensed in 2008 and also serving countrywide.

market economy” (Chen cited in Rosengard, 2000: 28). The higher loan size means microfinance

banks have shifted to a more profitable market where people have the ability to repay. These

loans will go to the more established entrepreneur who may still play an important role in the

development of economy. But higher loan size means approaching fewer poor clients and this

leads to the drifting of any microfinance mission related to poverty alleviation and the upward

social mobility of the poorer groups of society.

A New Target Market: Similar Products but in a Different Way.

One of the reasons cited for the move towards commercialization approach is product

diversification, and in particular deposit mobilization. People who favor the more businesslike

approach consider that commercialization of an MFI increases its ability to offer a broad range of

financial services.

We can see to whom banks and NGOs are targeting In Pakistan by looking at the products and

services they are providing. Microfinance banks products are nearly similar to products of the

NGOs but these products are designed in a way which caters to the needs of micro entrepreneurs

but not the less financially able people who have greatest need of these kind of services. If we

take as an example one product – the ‘emergency loan’ of the third leading microfinance bank in

terms of active borrowers in Pakistan and compare to it to that of a leading NGO, we see a clear

difference. The microfinance bank advertises this ‘emergency loan’ as ‘Cash in your hands in

two hours’ but they don’t mention that they are taking ‘gold’ as collateral from the clients. A

person can take this loan if he/she has gold, otherwise they cannot. A poor person is

automatically excluded from this product because a poor man/women doesn’t hold gold. In

addition to that, a typical person from a middle class family also could not bear this and may

well fall into over-indebtedness. I interviewed one of the clients of this leading bank during my

field visit of one of the branch, who lived in a combine family system and had four children. She

had taken a loan on the birth of forth child to pay for a caesarean and gave her gold to the bank.

When I asked her how much loan you have taken and why you are here now? She replied:

“I have taken Rs.32,000 loan amount and they have taken 40 grams Gold from me as a

guarantee. Today I came to discus about my loan. Actually I have not paid some of the

instalments and now one and half month is over. They are taking extra charges per

day. I have to pay Rs. 38,000 for Rs. 32,000” (Interview with the author, March 2009)

From this quote we can clearly see that although the client was from a middle class family she

was unable to pay that amount. She was worried for her gold because she had not the money to

pay that loan. Moreover, she had to pay Rs. 200 per day as a penalty charges for delay. By

contrast, the NGO who offers the same product does not take any gold or anything as guarantee.

Practitioners Views on Commercialization of Microfinance

In order to see the realities of the field, I interviewed not only practitioners of but also clients of

microfinance providers both microfinance banks and NGOs. This section will discuss

practitioners views on commercialization, exploring how they perceive commercialization

particularly with respect to mission drift. The majority of the leading institutions’ heads in

Pakistan see commercialization positively. When a question has been asked from a founder and

CEO of a leading MFIs (an NGO) and institution having more than 300,000 borrowers and

mostly female that how she see commercialization of microfinance then she replied that “I see it

as the economic mainstreaming of clients” (Interview with the author, March 2009). According

to her, commercialization plus point is that it relates to financial inclusion and an institution can

provide additional services like deposits. However she was also concerned about the mission

drift and said that “there could be increase in loan sizes and to a certain extent mission drift may

happen especially in the early part of the institutions life cycle”.

Another view which is given by CEO of a NGO and she explained why she favors

commercialized approach, she said

“In my point of view commercialization is when you make your services on

business model approach. If you give commercial point and make your

organization on system not person-based organization … If I am here or not or if I

go somewhere else then this institution will exist and grow on its vision and

process, it will not be stop. Now I am completely in favor of this kind of

commercialization” (Interview with the author, March 2009).

She was very clear about the vision and mission of her NGO and she was concerned

about the stability of the institution. She shared the experiences of other NGOs who were

on person-based approach where, after the death of CEO or founder, that NGOs

disappeared. This is another positive point of view of commercialization.

In addition to that, when the question has been raised of commercialization from the leading

microfinance bank Regional Area Manager then he said

If you want to ensure that financial services are available to the poor at his

doorstep and it will continue forever then you must have to move to

commercialization because no donor can give you subsidised funding or grants

over 20 or 40 years. Commercialization is important for sustainability of the

institutions and also for the poor to get continuous financial services (Interview

with the author, Feb 2009).

This is the argument on which the notion of commercialization is based and that is sustainability

of the institution. Sustainability of the institution is necessary as well not only for the institution

but also for the borrower. However, the fear is that banks can lose the original mission of

microfinance in order to focus more on sustainability of institution.

Mission Drift in Pakistan

After the emergence of the microfinance revolution, there has been a new debate that either

increased commercialization mission of microfinance will change or institutions can achieve

objective, poverty alleviation and sustainability of the institutions, both at the same time. We can

see different opinions in the literature from different academics, practitioners and policymakers.

To achieve the financial objective, there is risk that institutions can lose their social objective and

they will be focus more on profitability at the expense of outreach to the very poor who need

these services. However, Christen and Drake (2002) and Rhyne (1998) argued that more

commercialized institutions are better at serving very poor people because their profit motive

makes them more efficient. Some other supporters of the commercialized approach think that

economical viability is very important for the microenterprise programmes (Wenner, 1996). So,

overall we can say that the mission of microfinance has been changed from poverty alleviation to

sustainability and profitability of institutions.

A major concern of many people in the microfinance industry is whether the mission will drift or

an institutions can easily achieve the double bottom line objective. When the question of mission

drift has been asked of the newly established bank CFO then he said

“We are giving that economic opportunity to the poor sector. MF should be

transparent rather than sitting with older definition that it is ‘Poverty Alleviation’

or not” (Interview with the author, March 2009).

The majority of the people working in the microfinance banking sector in Pakistan consider that

the important functions of microfinance are financial access, providing financial services to the

people who are not banked and people who need these kinds of services. The banks’ mission is

now to reach to unbanked people and to achieve sustainability rather than poverty alleviation.

Poverty reduction, woman empowerment and capacity building are terms we can see in the

mission statement of NGOs and MFIs but these have been dropped from those of banks.

An interesting views has been made by Head of Microfinance practices by a leading consultancy

firm about the mission of micro financial institutions and he argued that

“What is mission? Have you asked from these institutions what your institution mission is?”

Yes. So many times. Banks says that our first mission is to achieve profitability and then poverty

alleviation. We want to achieve double bottom line.

What is double bottom line? Do they know or just heard about the word ‘double bottom line’

Banks say that we achieve both objectives at the same time.

Say to banks that you are not achieving any objective. Neither you are profitable and sustainable

and nor you are giving services to micro finance client. What services they want, you don’t give

those services.

It is true that most of the micro financial institutions in Pakistan, and particularly banks. are

neither sustainable and nor profitable. Even though banks focus on these objectives rather than a

social mission.

Scale of operations

Institutionalists believe that scale of operations can be met only through self sufficient

institutions and government or donor funded institutions cannot meet the demand of

microfinance operation (Robinsons, 2001). However, the situation is different in Pakistan.

Despite increased commercialization, both MFBs and NGOs are working in a very limited area

in Pakistan and the sector penetration is very low. The Head of Microfinance Practices in a very

reputable microfinance consultancy firm explained very briefly about commercialization and

Pakistan microfinance sector scale. He said,

In my point of view commercialization is that where an institution has much

earning to earn profit. From that they can expand their area of operation or become

sustainable and that’s why NGOs has been asked to become Microfinance

Banks…but no MF bank is sustainable. Sustainable is far away from them, they are

losing their and their investor money like hell. No one is profitable. MFB are even

worse than NGOs. NGOs were giving micro credit only and were performing in

limited area and MFB are doing the same. They are giving NGO type services with

the only addition of acceptance of deposits…so I don’t think it is

commercialization…since last 8 years in Pakistan after the emergence of this, I

would say commercialization is badly failed (Interview with the author, March

2009).

Many institutions are working in the same area. This we can clearly see in the map of Pakistan.

Distribution of Active Borrowers

Figure 1.2: Map of Pakistan Source: (Khalid, 2011: 2)

The majority of the microfinance providers operate in the Punjab and Sindh (Red, orange parts in

map) and these two provinces are undoubtedly the hub of microfinance activities. The other two

provinces, Khyber Pakhtunkhwa and Balochistan (parts in grey and light yellow), are both still

suffering from lack of microfinance operations. Furthermore, microfinance providers expansion

focus is on the urban population rather than in the rural areas, despite the latter making up nearly

two thirds of the population, with limited opportunities, and business primarily consisting of

livestock and agriculture (CGAP, 2007; Akhtar, 2007). Most microfinance does not work in rural

areas or if so, only in areas where the microfinance market is already developed.

In addition, among more than 40 MFIs in Pakistan, very few captured the market in term of

outreach and working on a sustainable basis. In terms of total active borrowers only four major

players, Khushhali bank, National Rural Support Program (NRSP), Kashf foundation, and First

Micro Finance Bank (FMFB) together cover the 70% of the microfinance market share (Khalid,

2010). The upshot is that MF providers are serving in few, mainly urban areas and much of the

microfinance market is still untapped.

Gender Empowerment – The Mission of Microfinance

Mission drift occurs when average loan size increases. However, loan size is not the only

indicator to measures the depth of outreach. Depth of outreach also includes lending to more

women, through group loans and lending in more rural communities (Bhatt & Tang, 2001).

Therefore, a shift from group lending to individual lending, less woman borrowers and higher

loan size may all bring about mission drift. Research has shown that women normally contribute

a higher percentage of their earnings to the household than men (Frank, 2008). Furthermore,

“women tend to prioritize their children’s needs—spending a greater percentage of disposable

income on the children’s education, clothing and healthcare—than do men, thus catalyzing

greater intergenerational benefits” (ibid: 12). There are different gender-based impact studies

which has shown a positive impact of the credit programmes on women’s lives (Hashemi et al,

1996 and Pitt and Khandker, 1995). Hashemi et al (1996) found that giving loans to female

clients made them empowered and enhanced the overall contribution to family income.

Commercialization has resulted in the focus of MFIs, particularly microfinance banks, has been

moved from group lending to individual lending and also they are not lending to more women

borrowers. During an interview with one of the personnel staff of a leading NGO who give more

than 95% loan to female and she explained we prefer female clients. She said,

We believe in gender empowerment and our model is a gender model. By taking

financial decisions, women will become empower. Through this way, we feel

women are more responsible with the money. They tend to invest more on their

houses & household and it makes more sense to invest more in women than men.

Women are more deprived and their access to financial services are worst than

men, even though low income men don’t enjoy superior access to financial

services and women access are more limited. Therefore, we prefer women

(Interview with the author, March 2009).

We can see the distribution of female clients to male clients in the table below. Microfinance

banks have less female borrower as compared to the percentage of MFIs (Specialised NFOs).

The leading MFIs in term of number of active borrower are based on 100% female clients except

one i.e. ASA. ASA Pakistan also prefer female clients as it number of clients are still higher than

the microfinance banks.

Name Institution Percentage of Women Borrower

KHUSHHALI BANK Bank 24.94%

FMFB Bank 34.51

TAMEER MFB Bank 39.74

KASHF BANK Bank 2.56

KASHF FOUNDATION MFI 100.00

ASASAH MFI 100.00

DAMEN MFI 100.00

ASA Pakistan MFI 62.61

Table 1.2: Percentage of Female Borrowers of Microfinance Providers. Source: Data from Mix market of 2010 except MFIs. MFIs data has taken of 2009 due to unavailability of 2010 data.

Microcredit programs started in Bangladesh and these programs were largely focus on women in

order to empower this less privileged class. Similar replication had been carried out in Pakistan

and we have number of examples of NGOs in Pakistan which has adopted the same methodology

– gives loan to women and empower them. However, with the advent of commercialization and

the arrival of commercialised microfinance banks the focus has been changed to individual

lending as well as more male clients. This approach is one way that we can see institutions

drifting from the original goals.

Conclusion

The impact of commercialization is much more complex than originally thought. We see

academic claims for commercialization that suggest that financially sustainable programmes can

achieve a greater scale than subsidized program, that these programmes are more effective in

alleviating poverty and subsidized credit often goes to wrong recipients (Morduch cited in

Hulme and Arun, 2009, Baumann, 2004). However, the evidence in the case of Pakistan shows

something different as it reveals that microfinance banks serve a different market through higher

loan size. The shift has not only been incurred in terms of growing loan size but also the focus

has been changed from the group lending to individual lending and more to male clients rather

than the female clients which were originally targeted. Moreover, more strict criteria for taking

loans and more cost for the clients has been made it difficult for them to borrow and has

increased the financial burden on them.

One further major change we can see is a more structured categorization of the sector. Both

banks and NGOs are playing important roles in the microfinance market. Banks, in particular,

have adopted a clear strategic model, segmenting the market and clearly identifying the areas

within which they should operate, and can operate profitably. Arguably, this does have positive

benefits in that growing small firms are possibly better served and this may help develop some

entrepreneurship and create employment in the economy. However, it is not offering hope for the

many more, and poorer, people who are increasingly being excluded from these schemes. In

other words, as one funding gap is reduced, another more pernicious one is opened in its place,

impacting worse on those most in need.

In addition, the banks are only offering their services in the same geographical areas where

NGOs are already operating. They do not attempt to explore the new and untapped markets

where there is untapped demand for banking service. This re-opens the twin questions of

effectiveness (of meeting microfinance’s goals) and efficiency (delivering services within a

market mechanism). It seems clear that in embracing the new goal of sustainability, banks are

failing to offer meaningful micro financial services – instead retreating into offering variations

on their existing products in already established markets. It is arguable that the strategic culture

of the banks precludes them from seeing what microfinance is, and what it can offer, since it is

so far from their traditional models.

The NGOs, in this new commercial world, have been left in an unenviable position. The banks

have claimed that they are better placed to serve the less poor, relegating the NGOs to only serve

the more desperate. Their work in establishing awareness and markets is rewarded by banks

moving in to their territory and clients with apparently little interest in serving those clients in the

way that the NGOs had attempted to. Overall, then, the picture from Pakistan is that increased

commercialization has come with higher loan sizes, limited geographical availability, more

regulations and costly loans, less variety of products and shifted focus away from women

borrowers. These changes open up the question of whether it now makes sense to speak of a

mission of microfinance.

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