The term Microfinance has recently began making its rounds in the mainstream in Pakistan. Ever since telecom services began offering loans and financing services (an odd combination in of itself) these last few years Microfinance has entered the mainstream. Though the idea of Microfinance is not exactly a fresh one, the use of these kinds of services is something that is not understood by the majority of people that know of the term.
Microfinance is aimed towards unemployed and impoverished sectors of the population that do not normally qualify for mainstream and higher level financing typically provided by the banking sector.
What exactly does the term “Microfinance” mean and what can it be used for? What are the origins of Microfinance and what does it entail for Pakistan in general and the common man in particular? To understand these things, it might be useful to look at where this term and phenomenon originated.
The History of Microfinance
The concept of Microcredit or Microfinance has been around since the 1700s.
More and more people were looking to set up their own operations as the biggest upwards mobility shift (in the economic term) happened and the middle-class reared its head on the largest scale in human history. This was caused by technological advancements and improvements in production lines at the tail end of the industrial revolution in Europe as the world slowly began to shift from the feudal system of the past.
The Irish Loan Fund, from 1720, introduced by Jon Swift was the first known “microfinance” system. This was started with the sole goal of improvement of the impoverished Irish citizenry. However, this idea as it is known today, as a system of improving living conditions of the populace was cemented by the Grameen Bank in Bangladesh.
The soul of Microfinance as a way to improve the lives of the poor included instructions and suggestions as to how these funds may be used instead of it just being a loan. Mohammad Yunus, the founder of the Bank, introduced the “16 Decisions” that proposed smaller cultural changes in the spending of money (switching from large dowries and short term low return investments to improving water quality and sanitation). This led to Yunus being awarded the Nobel Peace Prize in 2006.
Benefits of Microfinance
The purpose of providing Microfinance services is to enable the lower-middle and impoverished class to become self-sufficient. Instead of having to rely on poor working conditions and back-breaking labor, people can obtain funding to start their own businesses.
This is a grass-roots method of improving the economy as well as providing an avenue for class mobility in a country heavily stifled by a lack of economic development and regressive culture. They also provide an alternative to loan sharks with high interest rates.
Apart from setting up businesses, Microfinance schemes and tools provided by Microfinance Organizations (like entrepreneurial classes, classes on investment and educational material on the subject of business) can improve income generation in an area.
The Microfinance Business is growing in Pakistan and according to ACCA Global, 1.6$ Billion worth of loans were provided in 2017. This consisted mainly of women (more than half) and rural borrowers that would normally not have been able to secure funds like this in our traditionally patriarchal society.
Drawbacks of Microfinance
As a tool for social mobility and societal improvement, Microfinance has proven to be a useful tool. Unfortunately, however, most Microfinance businesses are not equipped with services to provide education for the illiterate and the poor to spend this money that they can so easily obtain.
The very nature of the loan means that there is a high cost and low return as well and this discourages most large sector providers for these services.
JazzCash, EasyPaisa, Banks, and other Apps are present to provide Microfinance services in the forms of loans but unfortunately these are advised as ways to acquire funds for the purpose of spending only. These loans are slowly being directed towards the rich so they can spend more instead of on the poor that can perhaps use these funds to drastically improve their lives if properly educated on how to do so. Thus the soul of Microfinance is not lost.
Conclusion
It is essential that Microfinance Services are regulated and stipulations are made for Microfinance providers to also suggest ways for the use of provided funds.
There needs to be a cultural shift in the way our country views consumerism. There need to be alternatives to the short low return bursts of spending that most of our middle and lower middle class keep falling to. Our country would be much better served with smaller dowries, smaller marriage functions, and larger investments in education and healthcare. Both on the Macro, and the Micro level.
