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Microfinancing: A Catalyst for Scaling-up Economy

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Microfinancing: A Catalyst for Scaling-up Economy

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Microfinancing is a type of banking service provided to unemployed or low-income individuals or groups who otherwise would have no other access to financial services. The objective is uplifting the economic activity at the lowest strata of the population. The generation of economic activity would alleviate poverty through the creation of income and employment opportunities.

Microfinancing is a type of banking service provided to unemployed or low-income individuals or groups who otherwise would have no other access to financial services. The objective is uplifting the economic activity at the lowest strata of the population. The generation of economic activity would alleviate poverty through the creation of income and employment opportunities.

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Microfinancing: A Catalyst for Scaling-up Economy

  1. 1. (1/8)
  2. 2. (2/8) A Catalyst for Scaling-up Economy Introduction The term microfinancing refers to the financial products and services that are developed for those talented people and individuals who can contribute to the economic activity at a small level. Normally, banks and financial institutions provide funds to businesses that have reached a certain level of business activity and have a startup capital beyond a certain amount. They don't provide funds to very small-scale businesses. Thus, many business ideas that require small money are not realized. To cover up this deficiency, some specialized financial institutions or banks are there that provide funds for such people who can run a business at a very small scale. These banks are owned by both government and private people. There can be public-private partnerships and joint ventures in this business. The money is given to everyone who is short of funds and has workable and creative business ideas. Microfinance Working There are specific areas in the country where special skills are found in individuals and have a scope for small industries. These banks reach out to those areas and provide the funds to induce them to use their skills in a business. This is how other people related to them benefit from their business activity and economic activity accelerates. Those micro-businesses turn to bigger businesses after a few years and a healthy business eco-system comes into existence. Successful people turn to businessmen and help other people to follow their examples. These banks also go to the areas where no skills are found. They start educating those people and convert their knowledge into business skills through regular training before starting the microfinance programs out there. Further, some microloans are given for meeting household needs like house building or for the wedding arrangements or to meet other needs. Common examples of micro-enterprises, inter alia, include basket-making, sewing, street-vending, making handicrafts, fish farming, raising poultry, small weaving machines (khaddis or handlooms), and opening small grocery shops, etc.
  3. 3. (3/8) Business Planning, Managing and Controlling How a microfinance institution carries out the planning process greatly affects the quality of the plan? Incorporating the perspectives of key stakeholders—such as the institution’s board, staff, and clients—helps ensure that the business plan identifies the key issues that must be addressed to achieve broad outreach and profitability. Involving those responsible for implementing the plan helps ensure broad endorsement, essential for successful implementation. The process of developing a business plan, especially creating detailed financial projections, helps an institution to understand the factors that are key in determining its success. These include, for example, the elements that must be considered in designing financial products that both meet clients’ needs and lead to profitability, such as the size and term of loans and the effective interest rate. The business plan, and the financial projections that are an integral part of it, become operating tools for the institution’s managers. By comparing actual performance with the projected results (performing variance analysis), managers can monitor the institution’s progress toward the goals outlined in the plan. A balanced scorecard technique may be used for the evaluation of strategic targets. The name “balanced scorecard” comes from the idea of looking at strategic measures in addition to traditional financial measures to get a more “balanced” view of the performance. In addition to serving its primary purpose as a management tool, a clear plan with well-thought- out financial projections strengthens a microfinance institution’s negotiating position with donors, commercial banks, and other funders. The business plan can also be used to provide information to other external audiences, such as shareholders, clients, and regulatory authorities. Key elements of strategic planning may include the following: 1. Communicating the mission and goals 2. Defining markets and clients 3. Analyzing the environment for the operations 4. Performing an institutional assessment 5. Developing a strategy for expansion that focuses on maximizing outreach and profitability Key components of the operational planning may include the following: 1. Outlining financial products and services 2. Specifying marketing channels 3. Mapping out institutional (program and administrative) resources and expenses, including areas needing development 4. Devising a financing strategy 5. Analyzing and reviewing the financial projections and indicators Critical Success Factors include the following: 1. A well-thought-out mission and a separate plan for each area or location of the working 2. Professional staff to execute the plans and strategies effectively 3. Proper education and skills development of the people along with giving credits 4. Making outreach to all people in the area under the working 5. Diverse credit schemes as different people have different needs 6. Operational self-sufficiency of MFIs encourages uninterrupted operations
  4. 4. (4/8) 7. Decentralized operations, it would help out to meet the expectations of the people locally without waiting for approvals from head office 8. Monitoring of operations regularly 9. Simple and easy documentation 10. Flexible terms and conditions 11. Monitoring productivity of the borrowers and educating them to improve it that will improve the productivity of microloans automatically 12. Monitoring and controlling the cost of operations The Structure of Microloans The terms and conditions of micro-credits or micro-loans are soft and are not structured like those of commercial banks. Microfinancing has a welfare aspect also as it helps people alleviate poverty. The procedures for extending the microcredit are simple and easy. The paperwork is also not that much detailed. Most of the times, there is no collateral required for such loans. Key Characteristics of Microloans  Fast track approval and quick disbursement  No collateral required  Terms and conditions are flexible  Easy and simple documentation The Benefits of Microfinancing Following are the benefits: 1. Accelerates the economy of the country 2. Reaches out to the deprived segments of the society 3. Have access to the farthest areas of the country 4. Boosts confidence of the people who can do some business 5. Empower the impoverished people 6. Improving economic equality 7. Scaling-up economy drives economic expansion and growth 8. Poverty alleviation through increasing employment and income opportunities 9. Creating an enterprising class in the society from a grass-root level Brief History of Microfinance Sector in Pakistan The micro-finance model is highly popular in developing countries such as Bangladesh, Sri Lanka, India and Pakistan. The microfinance sector in Pakistan consists of regulated and self- regulated organizations, depending on the kind of organization they are such as MFIs, NGOs or banks. The Microfinance Ordinance 2001 was adopted for the regulation of the microfinance sector in Pakistan. The GoP and the SBP are working to develop the microfinance sector. After the issuance of the Prudential Regulations in October 2002, all licensed MFIs and banks are now under the same regulatory framework and thus have a levelled playing field for all of them.
  5. 5. (5/8) In Pakistan, micro-finance was only available to agriculture until the 1960s through finance societies. Microfinancing was carried out by the Pakistan Agricultural Development Bank (PADB) in the 1970s, however, it also concentrated microfinance on the agricultural sector only. Over the years, many NGOs have multiplied in this sector. The Agha Khan Rural Support Program (AGRSP) started operations in Khyber Pakhtunkhwa in 1982. The AGRSP spread into other parts of the country. The success of AGRSP led to the working many microfinance programs throughout of Pakistan such as Sarhad Rural Support Program (SRSP), Punjab Rural Support Program (PRSP) and National Rural Support Program (NRSP) in the 1990s. Many poverty reduction programs were launched afterwards as well. The Kashf Foundation was founded in 1996. In 1998, this precursor of the Pakistan Microfinance Network (PMN) began to play a role in representing emerging Micro Finance Providers (MFPs). Further developments followed in 2000 when the Pakistan Poverty Alleviation Fund (PPAF) provided its first loan to MFIs, and SBP opened a microfinance unit. PPAF is working across 130 districts in the country with 130 partner organizations. PPAF is supporting communities to access improved infrastructure, energy, health, education, livelihoods, finance, and develop resilience to disasters. PPAF aims to ensure that their core values of social inclusion, participation, accountability, transparency and stewardship are built into all processes and programs. PPAF has invested in developing the capacities of our 130 implementing partners (civil society organizations), around 120,000 organized community groups, 440,000 community credit groups, 11,800 village organizations, and over 800 union council level federations to date. In 2001, the GoP contributed to the establishment of a large retail institution, the Khushhali Bank, that is dedicated to serving the poor. Nowadays, microfinance in Pakistan is provided by numerous institutions such as Khyber Bank, Khushali Bank, Kashf Microfinance Bank, etc. The Microfinance Sector in Pakistan The microfinance industry in Pakistan has more than 40 accredited institutions/banks operating in 130 districts. The GoP has set up a monitoring and funding body that is known as the Pakistan Microfinance Investment Company in May 2015, that provides oversight to the operations of the micro-credit institutions/banks and also provides funds to such institutions/banks and individuals. Challenges and Opportunities to Microfinance Sector in Pakistan A. Challenges  Low education, lack of skills and opportunities  Perception about the risk of failures  Political inclinations of the borrowers as most organizations are government- owned and people in the government keep on changing  Lack of awareness about the opportunities  People are scared of detailed procedures and excessive controls  There may be people who think that the terms and conditions are tough  Low competition among the microfinancing institutions and banks  Some people find it tough as microloans may be gender-biased as in some areas micro-credits are given to women only and in the other areas are given to men only.
  6. 6. (6/8) B. Opportunities  Economic development and growth  Utilization of resources  Poverty alleviation  Development of entrepreneurial skills  Balancing economic inequalities  Improving living standard through the increase in income and employment opportunities  Skills development through education and training of the individuals who wish to borrow Financial Inclusion The financial inclusion refers to the inclusive economic growth that is distributed fairly across all sections of the society and creates equal opportunities for all. Financial inclusion plays a key role in developing a strong and efficient financial infrastructure, which facilitates the growth of an economy. To achieve inclusive growth, the marginalized sections of the society must be brought into the mainstream by extending financial products and services to their doorstep. This end is achieved by the microfinancing arrangements. It is believed that there is a strong relationship between banking penetration and economic growth. Access to micro-loans or micro-credits opens doors for families, allowing them to smooth out inequalities of income and invest in their future through education and health. Further, access to credit enables businesses to expand, creating jobs and reducing inequality. Financial inclusion is the bridge between economic opportunity and outcome. According to a study done by Douglas and Chien, the World Bank staff, who worked on financial inclusion, have highlighted the following ways to overcome the challenges to financial inclusion. The following initiatives were highlighted by them: 1. Foster a diversity of financial institutions (develop banks for different purposes) 2. Facilitate the use of innovative technologies and entry of technology-driven, non- traditional institutions; 3. Expand agent-based banking and other cost-effective delivery channels 4. Invest in supervision and leverage technology to optimize limited resources 5. Implement risk-based, tiered AML/CFT requirements 6. Encourage the development of low-cost, innovative financial products 7. Strengthen financial infrastructure 8. Protect consumers by establishing rules for disclosure, fair treatment, and recourse Public-Private Partnership (PPP) in Microfinancing Public entities have financial resources and administration networks that can be utilized for the development of microfinancing institution through the utilization of the skills of private-sector entrepreneurs. Private sector institutions have appropriate skills but may lack the financial base that would be required in a given area. Here PPP can promote the cause of microfinancing.
  7. 7. (7/8) The partnership between an agency of the government and the private sector entity or entities for the delivery of goods or services to the public for the benefit and welfare of the public like creating employment opportunities, development of infrastructure and utilization of resources. The areas of public policy in which PPPs are implemented include a wide range of social services, such as public transportation networks, public health services, environmental and waste-disposal services, etc. How PPPs can support the cause of microfinancing?  Financial inclusion and economic growth  Socio-economic development  High job creation  Development of infrastructure The standard of living of the people is directly dependent on their income levels. When their income levels will increase, the standard of living will surely increase. The job creation will boost economy and utilization of resources will cause the growth of businesses. The factors necessary for the success of a PPP for microfinancing include:  Defining well the objectives of the partnership  Chalking out the motivations underpinning the implementation of the partnership  Determining the expected outcome of each type of partners  Writing partnership agreements  Exchanging information on the achieving of the objectives  Assessing the effectiveness of the partnership Recommendations  Improve the environment for microfinancing operations by increasing the number of banks and institutions, bigger competition, better services and products  Broaden the base of the borrowers by giving credit to maximum people  Diversify the categories of the loans  Reach out to all areas of the country  MFIs and microfinance banks must provide the education and training programs to borrowers for the more productive use of the funds  There should be effective monitoring of the fund providers for the efficient use of funds by government agencies  The performance of the funds must be checked and monitored by MFIs and banks  Regulatory glitches must be removed  It must be ensured funds are given to all deserved people without any discrimination  The institutions which are directly and indirectly involved in microfinance have to give social awareness and responsibility to the public by conducting seminars and advertisement on Radio, TVs and social media
  8. 8. (8/8) Key to Abbreviations Used # Abbreviations Description 1 AGRSP Agha Khan Rural Support Program 2 AML Anti-Money Laundering 3 CFTs Combating the Financing of Terrorism 4 GoP The Government of Pakistan 5 MFIs Microfinance Institutions 6 MFPs Microfinance Providers 7 NGOs Non-Governmental Organizations 8 NRSP National Rural Support Program 9 PPAF Pakistan Poverty Alleviation Fund 10 PMN Pakistan Microfinance Network 11 PPP Public-Private Partnership 12 PRSP Pakistan Rural Support Program 13 SBP State Bank of Pakistan 14 SRSP Sarhad Rural Support Program 15 TV Television

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