1. University of Management and Technology Poverty Alleviation & Micro Finance Institutions Performance and Future Challenges Faheem ul Islam Lahore University of Management Sciences (LUMS)

2. University of Management and Technology Human Development Three core values of human development –Sustenance: The ability to meet basic needs Include food, shelter, health and protection –Self-Esteem: To be a person A sense of worth and self-respect –Freedom from servitude: To be able to choose Is the concept of human freedom

3. University of Management and Technology Development Development is both a physical reality and a state of mind – three objectives of development are –To increase the availability and widen the distribution of basic life-sustaining goods such as food, shelter, and protection –To raise levels of living, including, in addition to higher incomes, the provision of more jobs, better education, and greater attention to cultural and humanistic values –To expand the range of economic and social choices available to individuals by freeing them from servitude and dependence not only in relation to other people and nation- state but also to the forces of ignorance and human misery

4. University of Management and Technology POVERTY Is pronounced deprivation in human well-being/development, and comprises many dimensions. It includes low incomes and the inability to acquire the basic goods and services necessary for survival with dignity.

5. University of Management and Technology Concept of Poverty Poverty is an ethical concept, not a statistical one. Inherent in the term “poverty”, when applied to human beings, is the notion of a life situation that should not exist. It is not only lack of roti, kapra aur makan—food, cloth and shelter. It is lack of “capability”—capability to overcome violence, hunger, ignorance, illness, physical hardship, injustice and voicelessness. The World Bank has argued that poverty often lies in the absence of opportunity, empowerment and security, and not just the absence of food on the table.

6. University of Management and Technology Reducing Poverty Sustaining a declining poverty trend in societies requires a concerted effort to improve the capabilities of the poor and vulnerable. It also requires well-designed programs that help to mitigate the vulnerabilities induced by economic downturns or natural disasters.

7. University of Management and Technology Poverty Profile of Pakistan

8. University of Management and Technology Pakistan Economic Survey 2009-10 Accelerating economic growth is necessary but not sufficient to bring down poverty levels. As past experience in the case of Pakistan and other countries has repeatedly suggested, periods of high growth that have occurred at the expense of macroeconomic stability do not tend to produce the desired outcomes with regards to poverty reduction in a sustainable manner. The challenge is, as always, how to make growth more inclusive by spreading its benefits to large segments of the population. The allocation of more resources for the provision of basic services such as education, health sanitation, and housing particularly for those belonging to lower income groups, and targeted programs for the benefit of the poor in the broader framework of social protection, remain critical drivers of long run reductions in poverty.

9. University of Management and Technology Income Inequality Income distribution in Pakistan has worsened during the period 1988-2010. National inequality estimates in terms of Gini coefficient show an increase of about 20% or 7 percentage points from 0.35 in 1987-88 to 0.42 in 2009-2010. The provincial Gini coefficients are the highest for Punjab, followed by Sindh, NWFP and Baluchistan. The empirical assessment of relationship between inequality and economic growth reveals that average growth worsens income distribution and is unlikely to aid in reducing poverty without explicit income distribution policies.

10. University of Management and Technology Inequality – Increasing Economic Growth Powerful evidence of the fact that the nature of growth in Pakistan is “inequality-increasing” is supported by the fact that an increase in per capita income also raises inequality with one percent increase in per capita income raising inequality by 0.081 percent. Inequality in income and assets is also a significant factor behind crime, social unrest and violent conflict.

11. University of Management and Technology The inability to access appropriate financial services — is a social problem attracting greater attention recently. For many low-income households, financial exclusion compounds their poverty.

12. University of Management and Technology Financial Penetration in Pakistan

13. University of Management and Technology Barriers to Access for Low-Income Population Availability of financial service is a necessary, but not a sufficient condition for use. Even in presence of financial service providers, barriers such as high costs, information asymmetries, regulatory requirements or low financial literacy may result in low access

14. University of Management and Technology Differentiating Between Access and Use

15. University of Management and Technology Defining Microfinance Microfinance is the provision of financial services to low- income clients or solidarity lending groups including consumers and the self-employed, who traditionally lack access to banking and related services. More broadly, it is a movement whose object is "a world in which as many poor and near-poor households as possible have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance, and fund transfers. Those who promote microfinance generally believe that such access will help poor people out of poverty.

16. University of Management and Technology Origins of Microfinance Providers in Pakistan

17. University of Management and Technology MicroWatch Jan – Dec 2010 According to PMN total market of microfinance in Pakistan is around 27 million. The sector closed the year 2010 serving approximately 2 million active borrowers with an outstanding loan portfolio of PKR 25.5 billion and nearly 3.3 million active savers with collective savings of PKR 11.9 billion. BREAKDOWN OF ACTIVE BORROWERS –MFB – 23% –MFI – 25% –RSP – 42% –Others – 9%

18. University of Management and Technology Microfinance outreach in Pakistan expanded 27 times from approximately 76,000 active borrowers at yearend 2000 to around 2 million active borrowers in 2011. However in the same period real average outstanding loan balance declined by more than 25%.

19. University of Management and Technology Bloomberg & Wall Street Journal Microfinance, which focuses on loans in poor areas largely shut out from traditional banking services, gained prominence globally when Muhammad Yunus won the Nobel Peace Prize in 2006 for his role in founding Bangladesh’s Grameen Bank. Yet the past two years have been marked by surging defaults in some countries. Microfinance markets in Nicaragua, Morocco and Pakistan have seen default levels climb to more than 10 percent, the threshold that marks a “serious repayment crisis,” according to a February report from Washington, D.C.-based policy and research firm Consultative Group to Assist the Poor. Delinquencies in Bosnia and Herzegovina stayed below that level only because of “aggressive loan write-offs,” the report said.

20. University of Management and Technology Main Causes of Borrower Dropout

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22. Sub Causes Under Organization Design and Policy

23. University of Management and Technology Loan Product Design Loan Size Loan Length Repayment Schedule Cost of Loan Loan Design Compatibility with Local Culture / Religious Taboos

24. University of Management and Technology Future Challenges

25. University of Management and Technology Deteriorating Macroeconomic Situation High inflation (especially increase in food prices), high indirect taxes, reduction in subsidies on fuel and food, reduced government spending on social services – will increase poverty and income inequality. Natural disasters, perpetual conflicts, law-and- order issues further aggravate situation

26. University of Management and Technology Rising Food Inflation Food inflation has major impact on poverty. Share of food expenditure to total expenditure is between 50% to 70% for poor (Asian Development Bank). To the extent that some households produce (and consume) their own food, they will tend to be relatively shielded from increases in food prices.

27. University of Management and Technology Microfinance Growth in the Macroeconomic Context (2005-2010)

28. University of Management and Technology Declining Real Purchasing Power of an Average First Loan Cycle Credit from an MFP

29. University of Management and Technology Average Change in the Purchasing Power (at 2006 Prices) of the Fourth Cycle Loan Compared with the First Cycle

30. University of Management and Technology Thank You