Role of micro credit in poverty alleviation

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Role of micro credit in poverty alleviation

  1. 1. ROLE OF MICRO CREDIT IN POVERTY ALLEVIATION By Amina Mushtaq A Thesis Submitted in Partial Fulfillment of the Requirements for the Degree of Master of Business Administration at National University of Modern Languages Islamabad- Pakistan 2008
  2. 2. Acknowledgement I gratefully acknowledge the contribution of my parents especially my father Dr. Mushtaq Ahmad and the residents of Muslim Colony, Dhok Kala Khan, Tehmaspabad and Shakrial who warmly provided me the opportunity to know about their lives. I am thankful to my supervisor Madam Fareeha for her constant encouragement and supervision. 2
  3. 3. Executive Summary The study tries to look at the impact of micro credit on the lives of the poor people. There are different views on micro credit as a powerful development tool regarding its success in developing the lives of the poor and some times these views are contradictory. However poverty is a global issue; it is a problem that even the wealthiest nation is facing. In this scenario country like Pakistan is facing a great challenge to alleviate or reduce poverty because poverty is becoming cause of many problems like suicides, illiteracy, unemployment, diseases like depression, stress etc. In order to control these diseases first we have to control poverty. At government level and also at international level many strategies are made every day to control poverty. But now Dr. Younis gave a formula of micro credit that successfully worked in Bangladesh and is now replicated all over the world and also in Pakistan so; the purpose of the study was to observe that what role micro credit plays in Pakistan in poverty alleviation. The study was conducted in four urban slum areas of Rawal pindi and Islamabad that are Muslim Colony, Dhok Kala Khan, Tehmaspabad and Shakrial. Those people are targeted who have taken micro credit so that the comparison of living standard before and after use of micro credit can be made and hence it can be seen that, if there is any improvement in their living standard after using micro credit or not. The study was based on questionnaires which were distributed after translating it into Urdu so that respondents can easily understand it and fill it accordingly. Sample for this survey was 200 with 50 respondents per area. The dependent variable taken in this study is poverty reduction where as independent variable is micro credit and moderating variable is political environment. Some of the factors that show poverty reduction are Training and education, clean water and hygienic environment, nutrition and adequate food, accommodation, income and savings. 3
  4. 4. Overall we can say that training and education, clean water and hygienic environment, nutrition and adequate food, accommodation, income and savings are important factors of poverty reduction. Because when a person has training and education he can improve his living standard, if a person has clean drinking water and adequate food he will be healthy and can earn in a better way for his family, if his accommodation is better and enough for family members and strong enough for natural disasters he can live in a better way. And obviously if his earning is good and enough for family he can also provide recreational activities to his children and can also afford uncertain expenses such as sudden guest etc and can also do savings for future, then all these things points towards a good life, a life with a good living standard and a life above poverty line. So; all above mentioned factors plays an important role in poverty reduction. From data analysis it is concluded that the micro credit program is effective in giving un employed people employment such as taxi driver, shop keeper etc and to meet short term needs such as return debt taken from some one else, paying fee, operation, treatment of disease etc. Mostly borrowers of Muslim colony, Dhok Kala Khan, Shakrial and Tehmaspabad have used micro credit to purchase taxi, sewing machine and opening small shop and improving accommodation. But micro credit system is not the perfect one; it is not a replacement for jobs that are not there and skills that do not exist. Important thing is to make them financially stable, to bring them out of the poverty line and to make them able to sustain their position and improve living condition instead of returning back to the poverty line. It can be done in this way that micro credit institutions can make contract with driving centers that can giving training to those people who don’t know driving on half rate, contracts with boutiques can be made, contracts with BATA and Unilever can be made. In those areas where BATA do not have outlet, a person can take micro credit purchase BATA shoes and can sell them in his area. Similar contract can be made with Unilever. 4
  5. 5. 5
  6. 6. TABLE OF CONTENTS List of tables………………………………………………………………. v Overview of the study……………………………………………………. vi Chapter 1 Research Objective………………………………………………. 2 Ethical Consideration……………………………………………. 3 Declaration……………………………………………………… 4 Motivation for the study…………………………………………. 5 Significance of the study………………………………................. 6 Purpose of the study……………………………………………… 7 Type of investigation…………………………………………….. 8 Extent of researcher interference with the study…………………. 9 Study setting……………………………………………………… 9 Unit of analysis…………………………………………………… 10 Type of research…………………………………………………. 10 Hall marks or eight main distinguishing characteristics of scientific study………………………………………………………………… 11 Hypothetico deductive method……………………………………… 14 Main definitions………………………………………...................... 16 Introduction…………………………………………….................... 23 Chapter 2 Literature Review....................................................... 29 Chapter 3 Survey design................................................................. 56 Selecting Location......................................................... 57 Data Collection Method................................................ 57 Limitations of the study…………………………….... 58 Theoretical Frame work................................................ 59 Problem Statement………………………………….. 59 Variables…………………………………………….. 59 Dependent Variable…………………………. 60 Independent Variable…………………………. 60 Moderating Variable…………………………… 60 Transmission mechanism of micro credit to poverty alleviation…………………………………………. 63 Hypothesis Development…………………………… 64 Hypothesis Statements……………………………… 65 Chapter 4 Statistical techniques Percentage…………………………………………….. 67 Frequency………………………………………………. 67 Mean……………………………………………………. 67 Standard deviation……………………………………… 68 Range………………………………………………….. 68 Data Analysis……………………………………………. 696
  7. 7. List of tables • Socio-demographic characteristics of respondents • Pattern of micro credit utilization • Associations • Socio-economic characteristics of respondents • Resource availability of the respondents • Loan repayment time • FADU’s assistance to farmers after Loan • Gender analysis of FADU beneficiaries 7
  8. 8. Chapter 1 8
  9. 9. This chapter provides the research objective, ethical consideration, declaration, motivation for the study, significance of the study, purpose of the study, type of investigation, extent of researcher interference with the study, study setting, unit of analysis, type of research, hall marks or eight main distinguishing characteristics of scientific study, hypothetico deductive method ,main definitions and introduction of the topic. Research Objective The main purpose of the study is to understand the success rate, and the social and economical change created by micro finance among the poor. I found that the issue may be approached from two different angles. Firstly from the clients’ perspective, that is how the poor people involved with micro credit judge the impact of it in their lives and what their understanding of development gained by it is. It can also be approached from the perspectives of the organizations working with micro credit, how they see the impact of micro credit on these people’s lives and how they look at their achievement. My objective here is to understand the situation of the client’s perspective, how they perceive micro credit and how micro credit is changing their lives. With this I also tried to observe the outreach, success and sustainability of micro credit program for the poor. I put my emphasis on this approach to know the situation from the perspective of the poor people because I think the solution should come from those people whose lives are to be changed. They are the one who can and should show how they want to change their lives and what problems should be solved in order to achieve development. 9
  10. 10. Ethical consideration The study was conducted by following the ethical principles of research. Name and identity of individuals has been concealed .All the comments and opinion expressed during the survey is quoted with permission. 10
  11. 11. Declaration I declare that “Role of micro credit in poverty alleviation” is my own work and all resources I have used have been indicated and acknowledged with complete references. 11
  12. 12. Motivation for the study Inequality is increasing around the world while the world appears to come closer due to phenomenon of globalization. Even the wealthiest nation has the largest gap between rich and poor. In such scenario countries like Pakistan is facing a great challenge in the form of poverty because by the time gap between rich and poor is increasing day by day. Majority of population of Pakistan is living at poverty line or below poverty line. According to a survey about five million households in the country are living below poverty line. This poverty is also becoming cause of many problems that are prevailing in our society such as crimes, suicides, illiteracy, unemployment and diseases like depression, anxiety, stress and many more. In order to control these problems, first poverty should be controlled. At government level, many strategies are made every day, world bank and International monetary fund is also working for this purpose but now Dr. Younis gave such a wonderful idea to alleviate poverty that really works in Bangladesh, and is now working all over the world i-e Micro Credit. So; I decided to study what is the Role of Micro Credit in Poverty Alleviation. 12
  13. 13. Significance of the study Study results would be useful • In policy formulation and decision making in respect of government micro credit. • To Government departments implementing micro credit programs. • Contribute to existing body of literature and form a basis for further research. 13
  14. 14. Purpose of the study Studies may be either exploratory in nature or descriptive, or may be conducted to test hypothesis. Exploratory study is that in which we attempt to explore new areas of organizational research. Descriptive study is that in which we try to describe certain characteristics of the phenomenon. Where as this study is conducted to test hypothesis. Where we examine whether or not the conjectured relationships have been substantiated and an answer to the research question has been obtained. 14
  15. 15. Type of Investigation There are three types of investigations • Casual • Correlation • Group references Casual Casual way is that in which researcher wants to delineate the cause of one or more problems. Correlation Correlation is that way in which researcher is interested in delineating the important variables associated with the problem. This study “Role of micro credit in poverty alleviation” is correlational study. Group References This method includes ranks smaller, greater. 15
  16. 16. Extent of Researcher interference with the study The extent of interference by the researcher with the normal flow of work at the workplace has a direct bearing on whether the study undertaken is casual or correlational. A correlational study is conducted in the natural environment of the work place with minimum interference by the researcher with the normal flow of work. Though there is some disruption to the normal flow of work in the system as the researcher administers questionnaires at the work place, the researcher’s interference in the routine functioning of the system is minimal as compared to that caused during causal studies. This study is correlational study because my interference in respondents’ routine life was less as I just asked them to fill questionnaire. Study setting Study setting can be contrived and non contrived. This study is non contrived. When research is conducted in natural environment where work proceeds normally it is non contrived setting. During this study my interference was less in respondent’s routine life. 16
  17. 17. Unit of analysis The unit of analysis refers to the level of aggregation of the data collected during the subsequent data analysis stage. As my problem statement is What impact micro credit has on poverty alleviation? So; I required data from those individuals who have experienced or experiencing micro credit. In this way it can be observed that what impact micro credit has on their living standard. What was their living standard before utilization of micro credit and after micro credit? So; here in this study unit of analysis is Individual. Type of Research Research can be undertaken for two different purposes. One is to solve a current problem, demanding a timely solution. For example, a particular product may not be selling well and the manager might want to find the reasons for this in order to take corrective action. Such research is called Applied Research. The other research that I conducted in this study is Basic research. It is to generate a body of knowledge by trying to comprehend how certain problems that occur in organizations can be solved. Later on the knowledge gained by the findings of basic research can be applied to solve problems. 17
  18. 18. Hall marks of scientific study This study is scientific study as it possess eight hallmarks or eight main distinguishing characteristics explained below 1) Purposiveness 2) Rigor 3) Testability 4) Replicability 5) Precision and confidence 6) Objectivity 7) Generalizabilty 8) Parsimony Purposiveness Purposiveness basically means that study should have definite aim and purpose. Here in this study purpose is to study the Role of micro credit in poverty alleviation. Rigor Rigor means that the study should have a good theoretical base and a sound methodological design. This study also has a sound theoretical frame work. Variables taken in this study are explained below 18
  19. 19. • The dependent variable in this study is Poverty reduction. • Independent variable in this case is Micro Credit. • The moderating variable has a contingent effect on the independent and dependent variables relationship. In this study environment is a Moderating Variable. Environment is taken in a sense that it covers Political environment, it means that what are the government strategies to reduce poverty and to improve living standard of its people. What are the banks policies to reduce poverty, what is the interest rate? What are the conditions on which bank is lending loan to people, are conditions acceptable by people, are conditions affordable by people? Testability Collected data is statistically analyzed by using percentage, frequency, range, mean and standard deviation. Hypothesis formed are then statistically tested to come to know whether hypothesis is accepted or rejected. Replicability Replicability means that research conducted on this topic with these variables should give same results again and again. In discussion part it is shown that results of this research is mostly same as research on this topic conducted in other areas having same variables, similar problems, similar culture and similar economic position such as Bangladesh and also in other parts of Pakistan such as in northern areas. If further research on this topic is conducted within Pakistan having same variables results would be similar. Precision and Confidence 19
  20. 20. Precision refers to the closeness of the findings to "reality" based on a sample. In other words, precision reflects the degree of accuracy or exactitude of the results on the basis of the sample. Confidence refers to the probability that our estimations are correct. Objectivity The conclusion drawn through the interpretation of the results of data analysis is objective. It is based on the facts of the findings derived from actual data and not on own subjective or emotional value. Generalizabilty The results of this study can be applied in any other area of Pakistan. The suggestions to make micro credit more effective can be applied not only in Pakistan but also abroad. Parsimony Results of this study are simply explained and there is no ambiguity or confusion in results. Simple language is used and results are explained clearly. 20
  21. 21. Hypothetico-deductive method Hypothetico-deductive method is used to study the Role of micro credit in poverty alleviation. This method has seven steps: 1) Observation 2) Preliminary information gathering 3) Theory formulation 4) Hypothesizing 5) Further scientific data collection 6) Data analysis 7) Deduction Observation Observation is the first step in which researcher observes the problem or issue. I observed the issue of Role of micro credit in poverty alleviation. Preliminary information gathering I used questionnaire to gather data from those people who have experienced micro credit or are experiencing micro credit and questions regarding their living standard before and after micro credit is asked so that an effective comparison can be made of their living standard before and after use of micro credit. 21
  22. 22. Theory formulation Theoretical frame work is then formulated in which dependent, independent and moderating variables are taken. Hypothesizing From the theorized network of associations among the variables certain hypothesis are formulated. Further scientific data collection In order to analyze Role of micro credit in poverty alleviation data of customers using micro credit is required but not only after use of micro credit, data before use of micro credit is also needed for making comparison. Data analysis Collected data is then analyzed using Statistical Package for Social Sciences (SPSS) and graphs are made on MS EXCEL. Statistical tools are applied using percentage, frequency, mean, range and standard deviation. Deduction Deduction is the process of arriving at conclusion by interpreting the meaning of the results of the data analysis. 22
  23. 23. Main definitions Microfinance Microfinance, according to Otero (1999, p.8) is “the provision of financial services to low income poor and very poor self-employed people”. These financial services according to Ledgerwood (1999) generally include savings and credit but can also include other financial services such as insurance and payment services. Schreiner and Colombet (2001, p.339) define microfinance as “the attempt to improve access to small deposits and small loans for poor households neglected by banks.” Therefore, microfinance involves the provision of financial services such as savings, loans and insurance to poor people living in both urban and rural settings who are unable to obtain such services from the formal financial sector. Micro finance and micro credit In the literature, the terms micro credit and microfinance are often used interchangeably, but it is important to highlight the difference between them because both terms are often confused. Sinha (1998, p.2) states “micro credit refers to small loans, whereas microfinance is appropriate where NGOs and MFIs supplement the loans with other financial services (savings, insurance, etc)”. Therefore micro credit is a component of microfinance in that it involves providing credit to the poor, but Micro finance also involves additional non-credit financial services such as savings, insurance, pensions and payment services (Okio credit, 2005). 23
  24. 24. The History of Microfinance Micro credit and microfinance are relatively new terms in the field of development, first coming to prominence in the 1970s, according to Robinson (2001) and Otero (1999). Prior to then, from the 1950s through to the 1970s, the provision of financial services by donors or governments was mainly in the form of subsidized rural credit programs. These often resulted in high loan defaults, high lose and an inability to reach poor rural households (Robinson, 2001). Robinson states that the 1980s represented a turning point in the history of microfinance in that MFIs such as Grameen Bank began to show that they can provide small loans and savings services profitably on a large scale. They received no continuing subsidies, were commercially funded and fully sustainable, and could attain wide outreach to clients (Robinson, 2001). It was also at this time that the term “micro credit” came to prominence in development (MIX3, 2005). The difference between micro credit and the subsidized rural credit programs of the 1950s and 1960s was that micro credit insisted on repayment, on charging interest rates that covered the cost of credit delivery and by focusing on clients who were dependent on the informal sector for credit (ibid.). It was now clear for the first time that micro credit could provide large-scale outreach profitably. The 1990s “saw accelerated growth in the number of microfinance institutions created and an increased emphasis on reaching scale” (Robinson, 2001, p.54). Dichter (1999, p.12) refers to the 1990s as “the microfinance decade”. Microfinance had now 24
  25. 25. turned into an industry according to Robinson (2001). Along with the growth in micro credit institutions, attention changed from just the provision of credit to the poor (micro credit), to the provision of other financial services such as savings and pensions (microfinance) when it became clear that the poor had a demand for these other services (MIX, 2005). The importance of microfinance in the field of development was reinforced with the launch of the Micro credit Summit in 1997. The Summit aims to reach 175 million of the world’s poorest families, especially the women of those families, with credit for the self-employed and other financial and business services, by the end of 2015 (Micro credit Summit, 2005). More recently, the UN, as previously stated, declared 2005 as the International Year of Micro credit. Poverty Poverty (also called penury) is deprivation of those things that determine the quality of life, including food, clothing, shelter and safe drinking water, but also "intangibles" such as the opportunity to learn and to enjoy the respect of fellow citizens. Ongoing debates over causes, effects and best ways to measure poverty, directly influence the design and implementation of poverty reduction programs and are therefore relevant to the fields of international development and public administration. Poverty as a social problem is a deeply embedded wound that permeates every dimension of culture and society. It includes sustained low levels of income for members of a community. It includes a lack of access to services like education, markets, health care, lack of decision making ability, and lack of communal facilities like water, sanitation, roads, transportation, and communications. Furthermore, it is a "poverty of spirit," that allows members of that community to believe in and share despair, hopelessness, apathy, and timidity. Poverty, especially the factors that contribute to it, is a social problem, and its solution is social. 25
  26. 26. Factors, Causes and History of poverty A "factor" and a "cause" are not quite the same thing. A "cause" can be seen as something that contributes to the origin of a problem like poverty, while a "factor" can be seen as something that contributes to its continuation after it already exists. Poverty on a world scale has many historical causes: slavery, war and conquest. There is an important difference between those causes and what we call factors that maintain conditions of poverty. The difference is in terms of what we, today, can do about them. We can not go back into history and change the past. Poverty exists. Poverty was caused. What we potentially can do something about are the factors that perpetuate poverty. It is well known that many nations of Europe, faced by devastating wars, such as World Wars I and II, were reduced to bare poverty, where people were reduced to living on handouts and charity, barely surviving. Within decades they had brought themselves up in terms of real domestic income, to become thriving and influential modern nations of prosperous people. We know also that many other nations have remained among the least developed of the planet, even though billions of dollars of so-called "aid" money was spent on them. Why? Because the factors of poverty were not attacked, only the symptoms were attacked .At the macro or national level, a low GDP (gross domestic product) is not the poverty itself; it is the symptom of poverty, as a social problem. The factors of poverty (as a social problem) that are listed here, ignorance, disease, apathy, dishonesty and dependency, are to be seen simply as conditions. No moral judgment is intended. They are not good or bad, they just are. If it is the decision of a group of people, as in a society or in a community, to reduce and remove poverty, 26
  27. 27. they will have to, without value judgment, observe and identify these factors, and take action to remove them as the way to eradicate poverty. The big five, in turn, contribute to secondary factors such as lack of markets, poor infrastructure, poor leadership, bad governance, under employment, lack of skills, absenteeism, lack of capital, and others. Each of these are social problems, each of them are caused by one or more of the big five, and each of them contribute to the perpetuation of poverty, and their eradication is necessary for the removal of poverty. The impact of microfinance on poverty There is a certain amount of debate about whether impact assessment of microfinance projects is necessary or not according to Simanowitz (2001b). The argument is that if the market can provide adequate proxies for impact, showing that clients are happy to pay for a service, assessments are a waste of resources (ibid.). However, this is too simplistic a rationale as market proxies mask the range of client responses and benefits to the MFI (ibid.) Therefore, impact assessment of microfinance interventions is necessary, not just to demonstrate to donors that their interventions are having a positive impact, but to allow for learning within MFIs so that they can improve their services and the impact of their projects (Simanowitz, 2001b, p.11). Poverty is more than just a lack of income. Wright (1999) highlights the shortcomings of focusing solely significant difference between increasing income and reducing poverty (1999). He argues that by increasing the income of the poor, MFIs are not necessarily reducing poverty. It depend what the poor do with this money, oftentimes it is gambled away or spent on alcohol (1999), so focusing solely on increasing incomes is not enough. The focus needs to be on helping the poor to “sustain a specified level of well-being” (Wright, 1999, p.40) by offering them a variety of financial services tailored to their needs so that their net wealth and income security can be improved. 27
  28. 28. Dichter (1999, p.26) states that microfinance is a tool for poverty reduction and while arguing that the record of MFIs in microfinance is “generally well below expectation” he does concede that some positive impacts do take place. From a study of a number of MFIs he states that findings show that consumption smoothing effects, signs of redistribution of wealth and influence within the household are the most common impact of MFI programs (ibid.). Hulme and Mosley (1996, p.109) in a comprehensive study on the use of microfinance to combat poverty, argue that well designed programs can improve the incomes of the poor and can move them out of poverty. They state that “there is clear evidence that the impact of a loan on a borrower’s income is related to the level of income” as those with higher incomes have a greater range of investment opportunities and so credit schemes are more likely to benefit the “middle and upper poor” (1996, pp109-112). However, they also show that when MFIs such as the Grameen Bank and BRAC provided credit to very poor households, those households were able to raise their incomes and their assets (1996, p.118). Mayoux (2001, p.52) states that while microfinance has much potential the main effects on poverty have been:  Credit making a significant contribution to increasing incomes of the better off poor, including women  Micro finance services contributing to the smoothing out of peaks and troughs in income and expenditure thereby enabling the poor to cope with unpredictable shocks and emergencies. Hulme and Mosley (1996) show that when loans are associated with an increase in assets, when borrowers are encouraged to invest in low risk income generating activities and when the very poor are encouraged to save; the vulnerability of the very poor is reduced and their poverty situation improves. Johnson and Rogaly (1997, p.12) also refer to examples whereby savings and credit schemes were able to meet the needs of the very poor. They state that microfinance specialists are beginning to view 28
  29. 29. improvements in economic security, rather than income promotion, as the first step in poverty reduction (ibid.) as this reduces beneficiaries’ overall vulnerability. Therefore, while much debate remains about the impact of microfinance projects on poverty, we have seen that when MFIs understand the needs of the poor and try to meet these needs, projects can have a positive impact on reducing the vulnerability, not just of the poor, but also of the poorest in society. Introduction Micro credit Programs extend small loans to very poor people for self employment projects that generate income for their survival, allowing them to care for themselves and their families. Developed over the past twenty years, micro credit is now considered as one of the most effective tools that we used to fight poverty. It is not charity, but investment, and to understand it we need to look at poverty in the world today.1 Poverty is a global issue. Despite changes in development paradigms in the last half of the 20th century, the promise to bring wellbeing to all human being remained unfulfilled. As it stands, more than 100 million children of primary school age have never stepped inside a class room, about 29000 children die each day from largely preventable malnutrition and disease and more than 1.2 billion people in the world are struggling to survive at the margin of human existence “on under a dollar a day”. Poverty is the problem for all the countries irrespective of their level of development. It can be observed in many forms. It has both income and non income dimensions. It may be a lack of income or resources, a lack of coping capacity, a lack of basic human capabilities, a lack of institutional defenses or in extreme cases a lack of all of these. In a wider sense, it may be a combination of economic, social and political deprivations. 2 29
  30. 30. 1 In consideration of poverty line, people in each country can broadly be divided into two categories namely poor and non poor. The non poor are living above and the poor are living below the poverty line. The poor may be divided into destitute (Bottom 10 percent below the poverty line), extreme poor (those in the bottom 10 to 50 percentile of households below the poverty line), and moderate poor (those top 50 percent of households living below the poverty line are moderate poor). A further category of vulnerable non poor may also be recognized who may slip into category of poor anytime.3 The tool that is being used today in order to alleviate poverty is micro finance. The main purpose of microfinance is to break the vicious circle of ‘low income low investment-low profit’ by inserting capital from outside into the economic life of poor people. According to Adam Smith “Money, says the proverb, makes money. When you have got a little, it is often easy to get more and the great difficulty is to get the little” (Adam Smith, 1937: 93).4 Microfinance provides “the little” money where even there is total absence of capital or profit as living is based on subsistence only. Thus microfinance seeks to improve the condition of the poor by raising income and profit, thereby making people free from poverty and improving living standard.5 2 1Quoted from ASSESSMENT OF THE ROLE OF MICROCREDIT IN THE DEVELOPMENT OF SOCIAL CAPITAL, A Field Study about Micro- credit Program Clients in Bangladesh. 2 Quoted from Micro credit and poverty Reduction H.I Latifee Grameen Trust 2 3 Quoted from Micro-credit and Poverty Reduction H. I. Latifee Grameen Trust 30
  31. 31. Its key feature is bringing the bank (money/capital) to the poor where traditional banking system does the opposite and involves a lot of bureaucratic complications and hidden costs like travel cost and sometimes bribing the bank officials. Local moneylenders charge a very high 10 to 20 percent per month, depending on the seasonal condition and region.6 First started as an experimental project by Dr. Muhammad Yunus in a village named Jobra, near Chittagong University (where he was a professor of economics), in the late 1970s, the idea now grown all over the world. The micro credit program was first initiated in 1976 with the promise of providing credit to poor people without collateral, alleviating poverty and unleashing human creativity and endeavor of poor people. Professor Yunus wanted to see poverty in the museum in future. In his speech at the micro-credit summit in Washington D.C. in 1997, he compared his dream to eradicate poverty completely from this world with the dream of people to fly 100 years ago. He mentioned that Wright brothers in 1903, in their first successful attempt, could stay in the air only 12 seconds and fly only 120 feet. But, only after 65 years of the first successful attempt of Wright brothers, people in this world are able to go to moon and can also successfully able to come back in this world. Professor Yunus compared his dream, complete eradication of poverty from this world, with the Wright brothers’ attempt to fly and the following success in flying and aviation. He mentioned that he would also be able to go to his moon, Poverty free world, in 55 years time through the micro credit program [Yunus, (1997)4].7 4 Quoted from A Social And Financial Assessment of Micro Finance for the extreme poor, A case study from Bangladesh 5 Quoted from A Social And Financial Assessment of Micro Finance for the extreme poor, A case study from Bangladesh 31
  32. 32. 3 In current overview it has been able to gain huge popularity, both in number of clients and organizations using microfinance, and in rate of loan return. Where the traditional banks did not considered the poor as loan worthy because of the uncertainty of their returning ability, Grameen Bank (the largest micro credit organization of Bangladesh and joint winner of the Nobel Peace Prize) has claimed around 99% returning rate. It is interesting to note that the main borrowers of this money are women and this is a policy decided by the Bank. Women are regarded as more trustworthy and able to deal with money more skillfully than men and this in turn has lead to their empowerment. The high rates of loan return have helped microfinance organizations like the Grameen Bank to become self-reliant (not depending on the donors any more) and bring a lot of people out from the national poverty level (Yunus, Nobel Lecture, 2006).8 In Pakistan poverty has many dimensions. The poor in Pakistan have not only low income but they also lack access to basic needs such as education, health, clean drinking water and proper sanitation. The latter undermines and limits their capabilities, limits their opportunities to secure employment, results in their social exclusion and exposes them to exogenous shocks. Then the vicious cycle of 3 A SOCIAL AND FINANCIAL ASSESSMENT OF MICROFINANCE FOR THE EXTREME POOR- A CASE STUDY FROM BANGLADESH 7 A SOCIAL AND FINANCIAL ASSESSMENT OF MICROFINANCE FOR THE EXTREME POOR- A CASE STUDY FROM BANGLADESH 8 A SOCIAL AND FINANCIAL ASSESSMENT OF MICROFINANCE FOR THE EXTREME POOR- A CASE STUDY FROM BANGLADESH 9 POVERTY ALLEVIATION THROUGH MICRO-CREDIT Zahid Shahab Ahmed (Pakistan) 32
  33. 33. poverty is accentuated when government structures exclude the most vulnerable from the decision making process.9 In an era where poverty and unemployment have been growing, globally and in Pakistan in particular, perhaps due to the policies and programs, which collectively define globalization, public and non-governmental processes have set upon themselves the task of reducing poverty and enhancing employment and the quality of life of the poor.10 Currently in Pakistan, a variety of institutions ranging from NGOs to private and government sponsored rural support programs are delivering microfinance services to the poor. Two Commercial banks i.e. First Women Bank and Bank of Khyber are also providing lines of credit for the microfinance sector.11 In Pakistan, the poor usually acquire loans from informal sources. Lack of income and resources force them to take loans to meet basic necessities of life and the hurdle of collateral leave them at the mercy of the informal avenues.12 It is recognized that people living in poverty are innately capable of working their way out of poverty with dignity, and can demonstrate creative potentials to improve their situation when an enabling environment and the right opportunity exists. It has been noted that in many countries of the world, micro-credit Programs, provide access to small capitals to people living in poverty (Ahmed, 2000).13 4 410 POVERTY ALLEVIATION THROUGH MICRO-CREDIT Zahid Shahab Ahmed (Pakistan) 11 Role of Micro credit in Poverty Alleviation First Quarterly Report for FY05 12 Role of micro credit in poverty alleviation first quarterly report for FY05 13 POVERTY ALLEVIATION THROUGH MICRO-CREDIT Zahid Shahab Ahmed (Pakistan) 33
  34. 34. Chapter 2 34
  35. 35. This chapter provides an overview of the theoretical background that provides the premise of the study. Concepts of poverty, micro credit, objectives of micro credit and impact of micro credit are discussed. Literature Review In Pakistan poverty has many dimensions. The poor in Pakistan have not only low income but they also lack access to basic needs such as education, health, clean drinking water and proper sanitation. The latter undermines and limits their capabilities and their opportunities to secure employment, results in their social exclusion and exposes them to exogenous shocks. Then the vicious cycle of poverty is accentuated when government structures exclude the most vulnerable from the decision making process. Poverty in Pakistan was reported at 31.8%, which comprises of 22.39% urban and 38.65% rural population in the country, which is based on average calories intake of 2350 calories per adult per day that was equal to Rs. 670 per month in 1998-99, and in 2000-01 moved up to Rs. 748 per month (Economic Survey 2002-03). The phenomenon of poverty was felt and observed more during the decade of 1990s, as the overall growth slowed down. While the slowed economic growth contributed to poverty, the “trickle down effect” once thought to improve living conditions, did not reach the lowest level owing largely to lack of accessibility of institutions, unjust and non-poor policies (Waheed, 2001). In an era where poverty and unemployment have been growing, globally and in Pakistan in particular, perhaps due to the policies and programs, which 35
  36. 36. collectively define globalization, public and non-governmental processes have set upon themselves the task of reducing poverty and enhancing employment and the quality of life of the poor (Zaidi, 2003). Micro credit is defined as a credit provided to ‘poor’ free of collateral (the only collateral is the “peer” collateral) through institutionalized mechanism. This credit is made available ‘as and when’ needed, at the doorstep of the client (Bajwa, 2001). The major objectives of micro credit schemes are: (1) to stop exploitation of the poor caused by expensive informal credit; (2) to provide small loans to poor people at relatively lower cost as compared to accessible informal loans; (3) to finance economically and socially viable projects those cannot be financed otherwise; (4) to empower women within households as decision makers and in society through active economic participation; (5) to create maximum employment opportunities; (6) to create self sufficient and self-employed people and the most importantly; and (7) to reduce poverty, accelerate growth and improve the living standards on sustainable basis. (First Quarterly Report for FY05 on Role of micro credit in poverty alleviation) Poverty has many faces, changing from place to place and across time, and has been described in many ways. Most often, poverty is a situation, people want to escape. So poverty is a call to action for the poor and the wealthy alike a call to change the world so that many more may have enough to eat, adequate shelter, access to education and health, protection from violence, and a voice in what happens in their communities. Poverty amid plenty is the world’s greatest challenge. And it has been recognized that successful development requires a comprehensive, multifaceted, and properly integrated mandate. The study accepts the now established view of poverty as encompassing not only low income and 36
  37. 37. consumption but also low achievement in social (education, health, nutrition), political (voice, empowerment), and other sectors of human development. (Faheem Jehangir Khan) The impact of micro credit on poverty alleviation is so far found to be controversial in the literature. Several studies have found that micro credit program has a positive impact on eradicating poverty (Hossain, 1988; Khandker, 1998; Wahid, 1993; Yaron, 1994) Khandker (2000) considers savings as an indicator and finds that this factor has an influence on eradicating poverty. He argues that credit programs do stimulate savings because micro credit borrowers make mandatory savings every week, which they are entitled to withdraw at the end of their membership. In addition, he finds micro credit program has a positive impact in generating not only voluntary savings but also additional savings among the borrowers. Apart from savings, it can be argued that there are other factors that may contribute towards eradication of such poverty. For example, income and accumulation of assets of the household may be considered as additional causal factors. It is likely that with the introduction of micro credit programs, borrowers may have better income, better savings and more assets. In this backdrop, it is necessary to analyze how these micro credit programs can influence income, savings and assets for the borrowers. As far as developing countries are concerned, Bangladesh may be considered as the pioneer that started this financial innovation that provides loans to the poor especially to women engaged in self-employment projects allowing them to generate income and in many cases, begin to build wealth and eliminate poverty (Hulme and Mosley 1996; Yunus 1983; World Bank 1994). World Bank (Micro credit Summit 1997) classified the micro credit program in Bangladesh as one of the most effective anti-poverty tools for the poorest. The 37
  38. 38. program extends small loans to unemployed poor people that are not bankable. These individuals lack collateral, stable employment and therefore cannot meet even the most minimum qualifications to gain access to formal credit. Several empirical studies support that credit market involvements improve both consumption and production of the poor via smoothing consumption and reducing constraints in production (Feder et al., 1988 and Foster, 1995). It is often argued that the formal financial sector and informal financial sector in developing countries have failed to serve the poorer section of the community. Collateral, credit rationing, preference for high income clients and large loans, and bureaucratic and lengthy procedures of providing loan in the formal sector keep poor people outside the boundary of the formal sector financial institutions in developing countries. On the other hand, the informal financial sector has also failed to help the poor. Monopolistic power, excessive higher interest rates, and exploitation through under valuation of collaterals and high interest rates have restricted the informal financial sector to providing credit to poor people for income generating and poverty alleviation purposes (Bhaduri (1983); Rao (1980); Bardhan (1980); Ghosh (1986); Ghat et. al. (1992). Removing gender inequity and empowering of the women has been a cherished goal of the NGOs and many other development organizations in Bangladesh. Microfinance has definitely created an impact on the women borrowers. A good number of studies have revealed the extent to which microfinance has contributed to women’s empowerment. Results of one study suggested that microfinance’s largest impact has been on the set of indicators relating to female control over assets and knowledge of social issues (Zaman, 1999: 1-13). The dynamics of social, economic, political, cultural and environmental forces contrive in a manner that it separates the rich from the poor, strong from the 38
  39. 39. weak, haves from the have-nots and favor those in a better position. The chemistry of sociology and the social factors like class, gender, ethnicity, caste, religion, age, etc., play an important role in determining the access to and control over resources for various groups of people in a given society. It is these relationships among people, their social structures and institutional settings, and their access to, and commands over resource base (physical, human, intellectual and social) and the policy framework that promote (or hinder) development. These factors are all the more relevant in the case of women who carry the double burden of gender and poverty (Subrahmanyam, 2000). However, some studies (Murdoch, 98; Amin, Rai and Topa, 2003) indicate that the micro credit has not been as successful for the extreme poor as it was for the other group of clients. Sometimes the blame goes towards the poor clients who do not consider themselves eligible or who remain in seclusion from the formal system and sometimes it goes to the organizations who do not consider them as prospective clients due to their vulnerable condition. It is acknowledged by researchers like D.S.K Rao (2004) and S. Ahmed (2004) that the approach towards this particular group should be different than towards others. This makes it is essential to have an in-depth understanding of micro credit and extreme poverty relation from a practical level in order to use it successfully for the extreme poor people. A World Bank study by Khandker (2005) shows that micro credit programs have greater impact on extreme poverty than on moderate poverty where he has defined the extreme poor as households with 20 decimals of land or less. Many advocates of micro credit, including Dr.Yunus, have strongly supported this and are very much hopeful in eradicating extreme poverty by micro credit. 39
  40. 40. About 1.3 billion extremely poor people struggle to live on less than $1 a day. They are trapped in poverty so severe, that they cannot adequately feed, clothe, or shelter themselves or their families. Steady jobs and income elude the very poor. To get by, many people have to create and run their own tiny businesses or small handicraft manufacturing in the unregulated, "informal" sector. They might sell produce at the market, or shine shoes, weave mats, or bake bread. Micro- enterprises may be small, but their cumulative impact is huge: depending on the country, micro-enterprises employ an estimated 30-80 percent of the working population (Charmes, 1992: pp 23-24). Some studies find micro credit a very successful and effective way of reaching development goals, while other acknowledge issues such as women lacking control over capital, creation of dependency for the loans and services, not reaching the poorest of the poor (Thente, 2003). Besides, rural political economy of Bangladesh consists of class relation expressed through patron client hierarchies, with poor landowner’s sharecroppers and landless labors being class clients tied individually to patrons who might be landowners, moneylenders and employers, usually in combination. (Wood; 1994: p486) The limitations of the formal financial sector and the informal financial sector in providing financial services, especially credit, encouraged the micro-credit program to evolve. The micro-credit program was initiated with the objective of providing poor people with credit without collateral. The harmony among group members, the strict discipline in providing credit and collecting repayments, and supervision of borrower’s activities in the micro-credit system replaced the provision of collateral, which is very important in receiving credit from the formal financial sector institutions. Professor Yunus called the process of substituting the 40
  41. 41. provision of collateral with group harmony and other aspects of micro-credit as ‘freeing of credit from the bondage of collateral’ [Yunus, (1997)]. Yunus idea of microfinance has been an inspiration for many countries and been adapted by many organizations in Bangladesh. In a Bangladeshi village there might be several different organizations offering loans to women. The Nobel Peace Prize made a great stir in Bangladesh and as it started to fade, criticism towards the system of microfinance started to be heard. Nijera Kori is a well- known NGO in Bangladesh that is critical towards the system of microfinance and declares that .We doesn’t do credit. (Kabeer, 2002a:2). Micro credit is an enabling, empowering, and bottoms-up tool to poverty alleviation that has provided considerable economic and non-economic externalities to low-income households in developing countries. But there has been a gradual apprehension that micro credit alone is not enough. Micro credit is not a replacement for jobs that are not there, markets that are inaccessible, or education and skills that do not exist. Micro credit is indeed an essential ingredient in the development process, but not the only ingredient. (Faheem Jehangir Khan) Credit creates opportunities for self-employment rather than waiting for employment to be created. It liberates both poor and women from the clutches of poverty. It brings the poor into the income stream. Given the access to credit under an appropriate institutional structure and arrangement, one can do whatever one does best and earn money for it. One can overcome poverty. One can become the architect of one's destiny and the agent of change not only for one's family but also for the society. (H. I. Latifee Grameen Trust) It is known that poor people live in a high risk and vulnerable conditions. Their ability to take advantage of opportunities that will lead to increase their income or 41
  42. 42. economic status, to protect themselves against risks of crises, and to cope with these when they occur is very important. Reduction of poverty is partly a process of increasing income and economic stability which enables fulfillment of basic needs and access to different kinds of services. This may also be understood in the form of developing a range of assets that will reduce the vulnerability of the poor to physical, economic and social shocks. These assets may be defined as financial (income size, regularity and security, savings, loans or gifts), human (skills and knowledge, ability to work, good health, self-esteem, bargaining power, autonomy and control over decisions), physical (housing, land, productive and nonproductive possessions etc.) and social (networks, group and centre membership, trust based relationship, freedom from violence and wider access to society and social institutions. (H. I. Latifee, Grameen Trust) There are several good reasons for giving loans exclusively to women. First of all, the Grameen Bank aims to provide loans for .the poorest of the poor. As women are among the most disadvantaged in Bangladeshi society, the poorest of the poor are often women. Secondly, loans given to women seem to bring more benefit to the family than loans given to men. Women tend to use the income generated by the loans to promote their children. Welfare rather than for radios, motorcycles, gambling and tobacco, which is often the case with loans given to men. Finally, women have proven better credit risks than men have. They are less mobile and socially more vulnerable than men, and therefore easier to apply pressure to. A married woman finds it difficult to leave home and defaulting on a loan could damage her reputation seriously in the village. Therefore, female borrowers go to great lengths to ensure repayment of the loans (Rahman 1999; 71-75). Today, the world faces the major challenge of reducing poverty. Of the world’s six billion people, 2.8 billion live on less than 2 dollar a day and 1.2 billion live on less than 1 dollar a day. Of these 1.2 billion, 500 million live in South Asia. 42
  43. 43. General Assembly of the United Nations has recognized the positive impact of micro credit in poverty reduction. Microfinance impact studies have demonstrated that: • . Micro finance helps poor households meet basic needs and protects them against risks. • . The use of financial services by low-income households leads to improvements in household economic welfare and enterprise stability and growth. • . By supporting women’s economic participation, microfinance empowers women, thereby promoting gender-equity and improving household well being. • . The level of impact relates to the length of time clients have had access to financial services. (First Quarterly Report for FY05 on Role of Micro credit in Poverty Alleviation) Microfinance, in simple terms, can be described as small loans offered to poor households to foster self-employment and income generations. The loans largely go to rural landless, disadvantaged women and marginal farmers who depend largely on selling their labor. The terminology of Micro credit has undergone a change in recent time. Practitioners in many countries call it microfinance for its wider dimension. Micro finance generally involves the following features: • Small loans, for both working capital and assets • Collateral free, substituted by group guarantees or compensatory savings • Access to repeat and larger loans • Intensive supervision and close monitoring • Secure savings products • Loan period generally for one year, may go up to 3 years • Options available for weekly/monthly installment payment 43
  44. 44. • Can combine social development with financial intermediation. (Fazle Hasan Abed, Founder Executive Director, BRAC) A sustainable micro credit system in the country is vital for the long term development of micro credit mechanism and to provide credit to the poverty hit poor people, especially women in Pakistan. (Roshaneh Zafar, Founder president of Kashf foundation) A hefty sum of one trillion rupees is required to eliminate poverty from the country. Ten million houses holds in Pakistan needed micro credit support and one trillion rupees are required to meet the credit requirements of the deserving people in the country who do not have access to small credit and living in extreme poverty conditions. Out of 10 million house holds at present only 7% of them have got micro credit. Charity and micro credit could not go together and a viable micro credit system is the only sustainable option to reduce poverty and to extend credit to the money less country men. (Roshaneh Zafar, Founder president of Kashf foundation) Micro credit banking should be kicked off on commercial basis. All the human beings, including the poorest, are endowed with endless potential and with the provision of financial support the poor people too can perform better and become respectable members of the society. (Roshaneh Zafar, Founder president of Kashf foundation) In the market for micro, finance has undergone a rapid shift in the country. There has been a marked increase in the number and the typology of players, particularly in terms of the entry of four new micro finance banks. However, despite this new development, scale continues to be a major challenge for the market. An analysis of the Punjab market has revealed that the total number of 44
  45. 45. potential house holds that can access micro finance is about 5.6 million, with 1.6 million in the urban areas and four million in the rural areas. At the same time, the overall market penetration in the Punjab is 12%, implying that 88% of the market is still untapped. (Roshaneh Zafar, Founder president of Kashf foundation) Micro finance has important economic and social value thus the institutionalization and development of SMEs and micro finance sector in Pakistan is an urgent need of the hour which can lead towards job creation, enhancement of competitiveness and exports while pushing the overall economic growth. Micro finance related financial services and access can make a stepping stone towards uplifting including the borrowers and beneficiaries middle and lower middle classes of the society for who accesses to institutional credit was very limited previously. However, in Pakistan, this economic phenomenon is at initial stage which needs to be implemented by extending their network following the socio-economic ground realities of our rural and urban society. (Erum Zaidi) Pakistan has to look at micro credit as it is successfully implemented in other parts of the world. It then has to create a regulatory environment that will support and promote micro credit operations. In many countries these operate outside the banking controls regime and are not restricted in setting up entities that enable successful operations. There are of course legal changes. In many cases social collateral (a gathering of a group of people who know each other and thus provide surety of the lending by the micro credit entity) or Group lending may not be legally recognized. In certain cases even the micro finance entity may not be in accordance with prevailing rules. Therefore the regulatory environment has to provide for this growth. (Erum Zaidi) The Pakistan Living Standard Measurement Survey (PSLM) conducted during 2004-05 shows a sharp decline in poverty incidence as suggested by falling Head 45
  46. 46. Count Ratio (HCR). The data indicates that the number of poor (i-e; people having income below the poverty line of Rs 878.64 per adult per month) has shrunk by 12 million. Region wise data indicates that the decline in rural poverty more profound (12.5 million people) that the urban decline (9.8 million).Pakistan’s performance in reducing poverty compares well with the MDG that has envisaged a 50% reduction in the poverty by 2015 in accordance with which the poverty reduction strategy paper (PRSP) has targeted to reduce the poverty level to 28% by FY06. (Erum Zaidi) The majority of our population is referred to as a group living on disadvantages. Comparing the economic conditions of the past years the inflation rate of Pakistan is growing rapidly. Growing inflation has also become one of the biggest trends in the society of Pakistan and it is affecting nothing but the lower class of Pakistani society. The rich are growing richer and on the other side the poor are becoming poorer. If we look at the basic needs of the people of Pakistan, what we expect from them is, “food, clothing and shelter” or we can form different perceptions of their basic needs “job, education and utilities”. The proportion of their three basic needs with their three basic perceived needs is crucial not only for the poverty alleviation but also for rising standard of living and economic stability (Erum Zaidi). The attempt of the Grameen Bank to alleviate poverty and enhance the skills and productivity of its rural women clients provides the fascinating backdrop to this important study of micro-credit institutions (Tazal Islam). Poverty is hunger and not knowing where your next meal is coming from, because you have already eaten the seeds you had stored for next year's planting. Poverty is not having a roof over your head and having nowhere to go. Poverty is being sick and not being able to see a doctor. It is the death of a child from a preventable illness because you are unable to pay for medicine or clean water. Poverty is not being able to read and not being able to go to a school. Poverty is 46
  47. 47. being unemployed and having little chance of getting a job even if there are any because you have no training. Poverty is powerlessness, lack of representation and freedom with no hope of change. Poverty is living one day at a time. Poverty is not being able to bury your dead (Global Education). Poverty is not created by poor people. It has been created and sustained by the economic and social system that we have designed for ourselves; the institutions and concepts that make up that system; the policies that we pursue (The Nobel Foundation, 2006). Micro credit and other financial services for poor people are important instruments for poverty reduction and for empowerment, especially for women. In declaring 2005 the International Year of Micro credit, the Global Development Research Center (GDRC) identified an opportunity to raise awareness of the importance of micro credit and microfinance in the eradication of poverty and to share good practices (Global Education). In the literature, the terms micro credit and microfinance are often used interchangeably, but it is important to highlight the difference between them because both terms are often confused. Sinha (1998, p.2) states “micro credit refers to small loans, whereas microfinance is appropriate where NGOs and Micro Financing Institutions supplement the loans with other financial services (savings, insurance, etc)”. Therefore micro credit is a component of microfinance in that it involves providing credit to the poor, but microfinance also involves additional non-credit financial services such as savings, insurance, pensions and payment services (Okio credit, 2005). Robinson states that the 1980s represented a turning point in the history of microfinance in that Micro Financing Institutions such as Grameen Bank and BRAC began to show that they could provide small loans and savings services 47
  48. 48. profitably on a large scale. They received no continuing subsidies, were commercially funded and fully sustainable, and could attain wide outreach to clients (Robinson, 2001). It was also at this time that the term “micro credit” came to prominence in development (MIX3, 2005). The difference between micro credit and the subsidized rural credit programs of the 1950s and 1960s was that micro credit insisted on repayment, on charging interest rates that covered the cost of credit delivery and by focusing on clients who were dependent on the informal sector for credit .It was now clear for the first time that micro credit could provide large-scale outreach profitably. Otero (1999, p.10) illustrates the various ways in which “microfinance, at its core combats poverty”. She states that microfinance creates access to productive capital for the poor, which together with human capital, addressed through education and training, and social capital, achieved through local organization building, enables people to move out of poverty (1999). By providing material capital to a poor person, their sense of dignity is strengthened and this can help to empower the person to participate in the economy and society (Otero, 1999). The aim of microfinance according to Otero (1999) is not just about providing capital to the poor to combat poverty on an individual level, it also has a role at an institutional level. It seeks to create institutions that deliver financial services to the poor, who are continuously ignored by the formal banking sector. Littlefield and Rosenberg (2004) states that the poor are generally excluded from the financial services sector of the economy so micro financing Institutions have emerged to address this market failure. By addressing this gap in the market in a financially sustainable manner, an micro financing institution can become part of the formal financial system of a country and so can access capital markets to fund their lending portfolios, allowing them to dramatically increase the number of poor people they can reach (Otero, 1999). 48
  49. 49. Wright (2000,p.6) states that much of the skepticism of micro financing institutions stems from the argument that microfinance projects “fail to reach the poorest, generally have a limited effect on income…drive women into greater dependence on their husbands and fail to provide additional services desperately needed by the poor”. In addition, Wright says that many development practitioners not only find microfinance inadequate, but that it actually diverts funding from “more pressing or important interventions” such as health and education (2000, p.6). As argued by Navajas et al (2000), there is a danger that microfinance may siphon funds from other projects that might help the poor more. They state that governments and donors should know whether the poor gain more from microfinance, than from more health care or food aid for example. Therefore, there is a need for all involved in microfinance and development to ascertain what exactly has been the impact of microfinance in combating poverty. Mayoux (2001, p.52) states that while microfinance has much potential the main effects on poverty have been: _ Credit making a significant contribution to increasing incomes of the better-off poor, including women, _ Microfinance services contribute to the smoothing out of peaks and troughs in income and expenditure thereby enabling the poor to cope with unpredictable shocks and emergencies. Hulme and Mosley (1996) show that when loans are associated with an increase in assets, when borrowers are encouraged to invest in low-risk income generating activities and when the very poor are encouraged to save; the vulnerability of the very poor is reduced and their poverty situation improves. Johnson and Rogaly (1997, p.12) also refer to examples whereby savings and credit schemes were able to meet the needs of the very poor. They state that microfinance specialists are beginning to view improvements in economic 49
  50. 50. security, rather than income promotion, as the first step in poverty reduction as this reduces beneficiaries’ overall vulnerability. Chowdhury, Mosley and Simanowitz (2004) argue that if microfinance is to fulfill its social objectives of bringing financial services to the poor it is important to know the extent to which its wider impacts contribute to poverty reduction. In the following sections I will examine the findings from wider assessments of microfinance interventions at a household and community level, to show what learning can be gained when impact assessments have a broad scope of analysis. Littlefield, Murdoch and Hashemi (2003, p.4) state that one of the first things that poor people do with new income from micro enterprise activities is to invest in their children’s education. Studies show that children of microfinance clients are more likely to go to school and stay longer in school than for children of non- clients. Again, in their study of FOCCAS, client households were found to be investing more in education than non client households. Similar findings were seen for projects in Zimbabwe, India, Honduras and Bangladesh. Chowdhury and Bhuiya (2004, p.377) assessed impact of BRAC’s poverty alleviation program from a “human well-being” perspective in a program in Bangladesh where they examined seven dimensions of ‘human-well being’. The project included the provision of microfinance and training of clients on human and legal rights .They noted that the project led to better child survival rates, higher nutritional status, improvement in the basic level of education, and increased networking in the community. Children of BRAC clients suffered from far less protein-energy malnutrition than children of non members, and the educational performance of BRAC member’s children was also higher than that of children in non BRAC households. BRAC member households spent significantly more on consumption of food items than poor non-members did and per capita calorie intake was also significantly higher. 50
  51. 51. However, Johnson (2004, p.5) states that having women as key participants in microfinance projects does not automatically lead to empowerment; sometimes negative impacts can be witnessed. She refers to increased workloads, increased domestic violence and abuse. This leads her to ask a crucial question of whether targeting women is just an efficient way of getting credit into the household, since women are more likely than men to be available in the home, attend meetings, be manageable by field staff and take repayment more seriously, even if they do not invest or control the loan themselves? Or on the other hand, if such targeting is fully justified on the grounds of enhancing gender equity. She claims the answer is probably somewhere between the two alternatives. She argues that micro financing institutions must analyze both the positive and negative impacts their interventions are having on women, and that micro financing Institutions need to work with men to help pave the way for a change in attitudes to women’s enhanced contribution to the household (2004, p.6). The impact of microfinance on poverty alleviation is a keenly debated issue as we have seen and it is generally accepted that it is not a silver bullet, it has not lived up in general to its expectation (Hulme and Mosley, 1996). However, when implemented and managed carefully, and when services are designed to meet the needs of clients, microfinance has had positive impacts, not just on clients, but on their families and on the wider community. There is however a need for greater assessment of these wider impacts if the true value of microfinance to development is to be understood (Zohir and Matin, 2004). The poor are marginalized not only in relation to economic processes in society, but also in relation to information and communication processes. The situation of the poor is frequently misconstrued or ignored in societal communication. At the same time, the poor are not able to make their voice heard and so are not able to 51
  52. 52. communicate accurate descriptions of their reality or engage in decision-making processes (Burke, 1999; Hills, 2000). Considerable debate remains about the effectiveness of microfinance as a tool for directly reducing poverty, and about the characteristics of the people it benefits (Chowdhury, Mosley and Simanowitz, 2004). Sinha (1998) argues that it is notoriously difficult to measure the impact of microfinance programs on poverty. This is so she argues, because money is fungible and therefore it is difficult to isolate credit impact, but also because the definition of ‘poverty’, how it is measured and who constitute the ‘poor’ “are fiercely contested issues” (1998, p.3). Poverty is a complex issue and is difficult to define, as there are various dimensions to poverty. For some, such as World Bank, poverty relates to income, and poverty measures are based on the percentage of people living below a fixed amount of money, such as US$1 dollar a day (World Bank, 2003). Carney (1998, p.4) defines a livelihood as comprising “the capabilities, assets (including both material and social resources) and activities required for a means of living.” Chambers (1997, p.10) states that livelihood security is “basic to well- being” and that security “refers to secure rights and reliable access to resources, food, income and basic services. It includes tangible and intangible assets to offset risk, ease shocks and meet contingencies.” Lindenberg (2002, p.304) defines livelihood security as “a family’s or community’s ability to maintain and improve its income, assets and social well-being from year to year.” Concern also state that livelihood security is more than just economic well-being as they define livelihood security as “the adequate and sustainable access to and control over resources, both material and social, to enable households to achieve their rights without undermining the natural resource base” (Concern, 2003). Livelihood 52
  53. 53. security therefore, like poverty, is not just about income, but includes tangible and intangible assets, and social well being. Johnson and Rogaly (1997, p.122) state that “NGOs aiming for poverty reduction need to assess the impact of their services on user’s livelihoods.” They argue (1997) that in addressing the question of the impact of microfinance, NGOs must go beyond analyzing quantitative data detailing the numbers of users, and volumes and size of loans disbursed, to understanding how their projects are impacting on clients’ livelihoods. They state (1997, p. 118) that the provision of microfinance can give poor people “the means to protect their livelihoods against shocks as well as to build up and diversify their livelihood activities”. Therefore when analyzing the impact of microfinance the overall impact of the microfinance services on the livelihoods of the poor needs to be taken into consideration. A livelihood security approach according to Concern (2003) aims for a holistic analysis and understanding of the root causes of poverty and how people cope with poverty. They identify livelihood shocks such as natural disasters and drought, the social, political and economic context, and people’s livelihood resources such as education and local infrastructure as factors affecting people’s livelihood security .Therefore, when analyzing the impact microfinance is having on livelihood security, as is the objective of this dissertation, a holistic analysis of people’s livelihood security must be conducted, rather than just focusing on the material/economic impact microfinance is having on the livelihoods of the poor. Health and education are two key areas of non-financial impact of microfinance at a household level. Wright (2000, p.31) states that from the little research that has been conducted on the impact of microfinance interventions on health and education, nutritional indicators seem to improve where micro financing institutions have been working. The Research on the Grameen Bank shows that members are statistically more likely to use contraceptives than non-members 53
  54. 54. thereby impacting on family size. Littlefield, Murdoch and Hashemi (2003, p.3) also acknowledge the sparse specific evidence of the impact of microfinance on health but where studies have been conducted they conclude, “house holds of microfinance clients appear to have better nutrition, health practices and health education than comparable non-client households”. Among the examples they give is of FOCCAS, a Ugandan micro financing institution whose clients were given health care instructions on breastfeeding and family planning. They were seen to have much better health care practices than non-clients, with 95% of clients engaged in improved health and nutrition practices for their children, as opposed to 72% for non-clients (Littlefield, Murdoch and Hashemi, 2003). Littlefield, Murdoch and Hashemi (2003, p.4) state that access to micro financing institutions can empower women to become more confident, more assertive, more likely to take part in family and community decisions and better able to confront gender inequities. However, they also state that just because women are clients of micro financing Institutions does not mean they will automatically become empowered. Hulme and Mosley (1996, p.128) also make this point when they refer to the “naivety of the belief that every loan made to a woman contributes to the strengthening of the economic and social position of women”. However, with careful planning and design women’s position in the household and community can indeed be improved. According to Littlefield, Murdoch and Hashemi (2003), the Women’s Empowerment Program in Nepal found that 68% of its members were making decisions on buying and selling property, sending their daughters to school and planning their family, all decisions that in the past were made by husbands. They refer to studies in Ghana and Bolivia, which indicated that women involved in microfinance projects, had increased self-confidence and had an improved status in the community. 54
  55. 55. Zohir and Matin (2004, p.318) state that many micro financing institution loans are used for agricultural production, trading, processing and transport, resulting in an increase in the use of agricultural inputs and increased output of agricultural production. This leads to enhanced employment opportunities in these sectors for the wider community and a reduction in the prices of such produce due to increased supply. They also state that trading activities financed by micro financing institutions can help to establish new marketing links and increase the income of traders, and this can lead to reduced migration due to increased employment opportunities and increased income (Zohir and Matin, 2004). From a social perspective, they state that reduced migration increases family cohesion and greatly contributes towards improving child upbringing. Zohir and Matin (2004) state that the interaction within micro financing institution groups can create co-operation and trust that not only facilitates the microfinance activities, but also contributes benefits beyond the service provided, such as a greater sense of community, trust and reliance on the group in times of crisis. These networks can lay the foundations for other social capital developments in the community. They state that examples of cultural impacts of social intermediation that affect the greater community could be a change in attitude of society towards the acceptable age of women’s marriage, domestic violence, dowry, etc. One of the key roles microfinance has to play in development is in bringing access to financial services to the poor, to those who are neglected by the formal banking sector. This is their social mission. Mainstream banks target clients that have collateral. The poor do not have assets to act as collateral, therefore they are ignored by the formal financial sector. These banks tend to be found in urban centers while the majority of the poor in the developing world live in rural areas, where financial services are not provided. Therefore, if micro financing 55
  56. 56. institutions are to fill this void they must reach the rural poor. However, according to most studies, microfinance is only reaching a small fraction of the estimated demand of the poor for financial services (Littlefield and Rosenberg, 2004). Micro financing institutions have more than just a social mission. Markowski (2002, p.117) states they have a dual mission: a social mission “to provide financial services to large numbers of low-income persons to improve their welfare”, and a commercial mission “to provide those financial services in a financially viable manner”. We have already seen that micro financing institutions are not fulfilling their social mission to the extent needed to meet the demands of the poor for financial services. Simanowitz with Walter (2002) argue that microfinance is a compromise between this social mission and commercial mission. As there is more emphasis on financial and institutional performance, opportunities for maximizing poverty impact and depth of outreach have been compromised. They call for a balancing of social and financial/commercial objectives because the current focus on financial objectives means fewer of those most in need of microfinance services are being targeted. To do this they argue “it is now time to innovate and design services that maintain high standards of financial performance, but which set new standards in poverty impact” (2002, p.3). The poor are marginalized not only in relation to economic processes in society, but also in relation to information and communication processes. The situation of the poor is frequently misconstrued or ignored in societal communication. At the same time, the poor are not able to make their voice heard and so are not able to communicate accurate descriptions of their reality or engage in decision-making processes (Burke, 1999; Hills, 2000). These two aspects of poverty on the one hand, the undermining nature of communication (or lack of communication) 56
  57. 57. about the poor in society, and on the other hand the inability of the poor to engage in those communication processes on equal terms are mutually reinforcing. Over the past three decades micro credit has gained enormous success in reducing poverty on a global scale. As an efficient financial mechanism, micro credit enables various governmental and non-governmental actors to realize the millennium development goals (MDGs) (Farhad Hossain) By adopting microfinance as a central element in their development programs, several development organizations, among them governmental and non- governmental organizations (NGOs), aim to decrease global poverty while simultaneously enhancing the profile of women and other underprivileged communities (Hossain, 2002). CGAP (2003) defines microfinance as ‘the supply of loans, savings, and other basic financial services to the poor’. Micro credit, a central theme of microfinance (Greene and Gangemi, 2006), is broadly recognized as ‘the practice of offering small, collateral-free loans to members of cooperatives who otherwise would not have access to the capital necessary to begin small businesses (Hossain, 2002: 79). Successful adoption and implementation of microfinance programs in development organizations such as ACCION in the United States, ASA and BRAC in Bangladesh and BRI in Indonesia has further increased the interest in microfinance phenomenon (ASA, 1997; Navajas et al., 2000). The success of microfinance initiatives have been countered by heavy criticism regarding exploitation of women, inability to effectively cater to target groups, unchanging poverty levels, high interest rates and loan repayment (Holt, 1994; Dignard and Havet, 1995; Christen, 1997; Mallick, 2002; Brau and Woller, 2004). 57
  58. 58. Very poor individuals are often described as high risk due to their lack of collateral and unstable sources of income and hence timely repayment of loans is often not anticipated. Holt (1994) and Christen (1997) cite loan repayment as one of the major challenges to microfinance, particularly in the Caribbean context, for example, given that a poor repayment culture has plagued numerous microfinance initiatives within the region (von Stauffenberg, 2000; Lashley, 2004). Dignard and Havet (1995) and ASA (1997) propose several causes of default in micro credit, which can be divided into four main categories. These are organizational, household/financial, group dynamics and other factors such as geographical location and environmental degradation. Christen (1997) observes that initially between 1970s and 1980s, the latter three categories were held responsible for high delinquency rates in credit programs for the poor. However, he suggests that contemporary microfinance programs have countered this view by demonstrating that the responsibility essentially relies upon factors within the control of the lending institution, that is, organizational factors such as staff inefficiency and skill as well as clear communication of repayment expectations. Despite the various factors influencing default in micro credit programs, the current literature generally concedes that high repayment rates are a common feature of most micro credit programs (Dignard and Havet, 1995; Brau and Woller, 2004). Deheija et al. (2005: 6) observe that ‘high repayment rates are insufficient to drive the microfinance revolution’. Consequently, they identify high interest rates as necessary for generation of profitability, in order to ensure reduced reliance of microfinance institutions (micro financing institutions) on external funding. 58
  59. 59. In a recent study by Knight (2007), it was observed that the interest rate is often dependent on the purpose of the loan. Interest rates have been lowered for particular initiatives such as education, agriculture and housing or mortgage, as well as those which encourage productivity and help the poor to obtain access to the basic necessities of life. Yunus (The Nobel Foundation, 2006) maintains that the high repayment rate which was present in the initial stages of his micro credit pilot program is still in force today at 99 percent. This is enforced by group lending which incorporates peer selection among the lending group (Ghatak, 1999 cited in Brau and Woller, 2004). Mallick (2002) further suggests that the role of women in microfinance is simply as an intermediary for loans to men, as a means of reducing the threat of physical violence by men when pressured by bank workers to make repayments. This, however, is countered by Newaz (2003) who advocates the effectiveness of microfinance in facilitating empowerment of women by creating prestige and rural social support systems for women, in terms of fulfilling societal, familial and practical responsibilities. Hossain (2002) also observes that the improved status of women over the last three decades has been illustrated by a significant increase in the number of female workers in banking, education, garment manufacturing and other service sectors as a result of microfinance initiatives. This observation suggests that with expansion of the micro credit field, the role of women in society has in fact become much less limited. Since the 1990s, alleviating poverty has been the top priority in international development. Within this framework, various initiatives have already been taken. One particular strategy in tackling poverty that has caught the attention of many aid donors and non government organizations (NGOs) is the provision of small 59
  60. 60. loans through micro credit programs. Bangladesh, one of the poorest countries in the world, is the cradle of this "micro credit movement." Grameen Bank in Bangladesh enjoys international fame, and its model has been replicated in countries all over the world (Develtere, Patrick; Huybrechts) There are different ways to measure the impact of micro credit on income and consumption. First there is the borrowers' recall of the "before-after" situation. Using this method in the early 1980s, Hossain concluded that both per capita income and household income were positively associated with the amount of credit obtained from Grameen Bank. The impact can also be gauged through member perception. On the basis of a survey of 1986 measuring borrower perception, Hossain found that 91 percent of Grameen Bank members improved their economic conditions after joining Grameen Bank. (Develtere, Patrick; Huybrechts) It should be noted that many households working in the agricultural sector have to deal with seasonality in consumption. At harvest time, their income reaches a peak. In other periods they have almost nothing. The programs of Grameen Bank and BRAC help to smooth their consumption pattern. Finally, for a program to be successful, it is not only important to alleviate the poverty of its clients but also to achieve a long-term sustainability of the benefits (Develtere, Patrick; Huybrechts). 60
  61. 61. Chapter 3 61
  62. 62. This chapter provides perspective on the research design used to investigate the research problem with specific reference to the survey design, selecting location, data collection method, limitations of the study, theoretical frame work, problem statement, variables (dependent, independent, moderating), transmission mechanism of micro credit to poverty alleviation, hypothesis development and hypothesis statements. Survey design Basically I am analyzing the role of micro credit in poverty alleviation. Micro credit is known as an effective tool for poverty alleviation. In poor countries like Pakistan greater attention has been paid to poverty alleviation through micro credit, especially in the last decade. Many micro credit institutions are working in Pakistan for poverty alleviation but still we can see that gap between poor and rich is increasing every day. Rich is becoming richer and richer and poor is becoming poorer and poorer. So; I compared living standard of poor people living in four urban slum areas of Rawal pindi and Islamabad (Muslim Colony, Dhok Kala Khan, Tehmaspabad and Shakrial) before and after utilization of the credit in order to analyze the role of micro credit in poverty alleviation. The sample size for this survey is 200 with 50 respondents per area. The study was based on questionnaires which were distributed after translating it into Urdu so that respondents can easily understand 62
  63. 63. it and fill it accordingly. The dependent variable is Poverty reduction where as independent variable is micro credit. And moderating variable is Environment. Environment is taken in a sense that it covers Political environment, it means that what are the government strategies to reduce poverty and to improve living standard of its people. What are the banks policies to reduce poverty, what is the interest rate? What are the conditions on which bank is lending loan to people, are conditions acceptable by people, are conditions affordable by people? Selecting location This study was conducted in two cities of Pakistan i.e. Rawal pindi and Islamabad. In both cities the study targeted four urban slum areas i.e. Muslim Colony, Dhok Kala Khan, Tehmaspabad and Shakrial. Data collection method I used Questionnaire as a data collection tool. Questionnaire allows the researcher to gather structured information from a large number of individuals. The analysis of questionnaire is easy due to the structured information in it. To get more relevant data I translated questionnaire into Urdu through In page and then I distributed them to respondents so that they can easily understand questions. Because if I asked them question in Urdu and they answer me I will not be sure that they perceived my question in exactly that way in which I am asking. So; to overcome this problem I found it better to translate questionnaire into Urdu so that every one can easily read it, understand it and answer it accordingly. Population consists of the totality of the observations with which researcher is concerned. Where as a Sample is a subset of a population. 63
  64. 64. Population in this study consisted of people of Muslim Colony, Dhok Kala Khan, Tehmaspabad and Shakrial who have taken micro credit and sample was of 200 with 50 respondents per area. Response rate was 100%. I have used Purposive sampling which is type of Non probability sampling in which the elements in the population do not have any probability attached to their being chosen as sample subjects. Purposive sampling confines to specific type of people who can provide the desired information, either because they are the ones who have it, or confirm to some criteria set by the researcher. As I selected those people who are using micro credit or have used micro credit. Purposive sampling is of two types’ judgment sampling and quota sampling. I have used judgment sampling. This sampling involves the choice of subjects who are most advantageously placed or in the best position to provide the information required. Because those people are experiencing micro credit or have experienced micro credit so they can better tell what impact micro credit has or had on their living standard. Better comparison can be made of their living standard before and after utilization of micro credit. The responses were tabulated and expressed in terms of percentage and frequencies. Thus the collected data were analyzed statistically using mean, Standard deviation and Range with the help of Statistical Package for Social Sciences (SPSS) and graphs were made on MS Excel. Limitations of the study One of the limitations of my study is that I was not able to spend more time among the community. It was not possible for a number of reasons. Such as it will not seem ‘normal’ to the community to live among them in order to get to know about their condition, to overcome this problem I tried to make such questionnaire which will be easy for them to read, understand and fill it. That is why I translated questionnaire into Urdu which everyone among them can read and understand. 64
  65. 65. But I think it would have been better if I could spend more time. Theoretical Frame Work After conducting surveys, completing a literature review and defining problem statement, one is ready to develop a theoretical frame work. A theoretical frame work is a conceptual model of how one theorizes or makes logical senses of the relationships among the several factors that have been identified as important to the problem. After theoretical frame work I developed hypothesis to examine whether the theory formulated is valid or not. The hypothesis relationships can therefore be tested through appropriate statistical analysis. Problem Statement Problem statement is also often referred to, is a clear, precise and succinct statement of the question or issue that is to be investigated with the goal of finding an answer or solution. Here in this study problem statement is: What impact micro credit has on poverty alleviation? 65
  66. 66. Variables A variable is anything that can take on differing or varying values. The values can differ at various times for the same object or person, or at the same time for different objects or persons. Dependent Variable The dependent variable is the variable of primary interest to the researcher. The researcher’s goal is to understand and describe the dependent variable, or to explain its variability, or predict it. In my study dependent variable is Poverty reduction. Independent Variable An independent variable is one that influences the dependent variable in either positive or negative way. That is, when the independent variable is present, the dependent variable is also present, and with each unit of increase in the independent variable, there is an increase or decrease in the dependent variable also. In other words, the variance in the dependent variable is accounted for by the independent variable. In this case independent variable is Micro Credit. Moderating Variable The moderating variable is one that has a contingent effect on the independent and dependent variables relationship. That is, the presence of a variable 66
  67. 67. (moderating variable) modifies the original relationship between independent and the dependent variables. I have taken environment as a Moderating Variable. Environment is taken in a sense that it covers Political environment, it means that what are the government strategies to reduce poverty and to improve living standard of its people. What are the banks policies to reduce poverty, what is the interest rate? What are the conditions on which bank is lending loan to people, are conditions acceptable by people, are conditions affordable by people? Independent variable Dependent variable Moderating variable 67 POVERTY REDUCTIONMICRO CREDIT ENVIRONMENT
  68. 68. Here micro credit is taken as an independent variable and poverty reduction as a dependent variable. When micro credit increases poverty decreases so; poverty reduction is dependent on micro credit. Previous researches conducted on this topic “Role of micro credit in poverty alleviation” shows that micro credit is an effective tool in poverty alleviation. “Micro-credit is known as an effective tool for poverty alleviation. In poor countries like Pakistan greater attention has been paid to poverty alleviation through micro-credit, especially in the last decade. The successful use of the micro credit is considered as a victory for the disadvantaged segments.” (Poverty alleviation through micro credit Zahid Shahab Ahmed (Pakistan)) 68
  69. 69. Transmission Mechanism of Micro credit to Poverty Alleviation 69 Micro credit Target poorest segment of society Increase in employment Rise in income level Better nutrition Increase in training and education Improvement in accommodation Increase in savings Improvement in living standard Increase in consumption of goods and services Aggregate demand increases
  70. 70. Some of the factors that show poverty reduction are Training and education, clean water and hygienic environment, Nutrition and adequate food, Accommodation, Income and savings. Hypothesis development Hypothesis can be defined as logically conjectured relationship between two or more variables expressed in the form of a testable statement. Once the researcher identifies the important variables in a situation and establishes the relationships among them through logical reasoning in the theoretical frame work, now is a time to test whether the relationships that have been theorized do in fact hold true. By testing these relationships scientifically through appropriate statistical analysis researcher is able to obtain reliable information on what kind of relationship exist among the variables operating in the problem situation. The results of these tests offer some clues as to what could be changed in the situation to solve the problem. Formulating such testable statements is called hypothesis development. 70 Increase in investment and employment opportunities Aggregate supply increases Economy grows and poverty declines

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