2012Cambridge Business & Economics ConferenceISBN : 9780974211428
Impact of Microfinance Loan on Poverty Reduction amongst Female Entrepreneurship in Pakistan
JavedGhulamHussain
Birmingham City University, City North Campus
Franchise Street, Perry Barr, Birmingham, B42 2SU, UK
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SamiaMahmood
Birmingham City University, City North Campus
Franchise Street, Perry Barr, Birmingham, B42 2SU, UK
Email:
Email:
Track: Economics and Finance
Cambridge Business and Economics Conference
Impact of Microfinance Loan on Poverty Reduction amongst Female Entrepreneurship in Pakistan
ABSTRACT:
The purpose of this paper is to examine the impact of microfinance loan on poverty reduction for female entrepreneurs as perceived by fund providers and experienced by aspiring female entrepreneurs in a developing country context. This study is based on an empirical investigation of 123 semi structured questionnaires and case study of 10 female entrepreneurs who secured funds for their enterprises. The study is exploratory and broadly focused. Emergent empirical results exploresthe impact of access to microfinanceon poverty reductionof women by establishing microenterprise and using case study approach to assess the attributes of female entrepreneur’s client and examines what may constitute success or failure in enterprise and household context. The research findings suggest entrepreneurial attributes and characteristics are critical for the success for an enterprise in general and the improvement in household of women in particular. The study contributes to the body of literature by attempting to understand and analyse the nature of micro clients’ success indicators, outcomes such as ability of individual to break out of poverty, improvement in family health, educational engagement of children and enhanced skills such asproduct knowledge, peer mentoring and business networks which contribute towards the success.
INTRODUCTION
The analysis of statistics by Minnitie et al., (2005) suggests women’s economic activity is central in promoting and enhancing growth prospects of world economies. Given such recognition it is important for all, but more specifically emerging economies to offer conducive economic and financial environment for females to engage in self employment. It is recognised that poverty is a complex inter linked and complicated phenomenon that cannot be considered or measured in terms of monetary value. According to United Nation Development Program UNDP Annual Report (2008) “lack of access to essential resources goes beyond financial hardship to affect people’s health, education, security and opportunities for political participation”. Poverty is traditionally viewed as lack of income, assets and the resources but recent studies recognise that it includesissues related to dignity and autonomy (Cagatay, 1998). Weiss, et al., (2003) distinguish the various groups of poor in order to understand degree and range of measure of poverty. Weiss dividepoor into two groups, one that are long term or chronic poor and other that are transitory poor, those who temporarily fall into poverty as a result of the adverse shock”. The Chronic poor are further divided into groups of destitute “those who are either so physically or socially disadvantaged that without welfare support they will always remain in poverty” and non destitute “the larger group who are poor because of their lack of assets or opportunities”. The non destitute group may be distinguished by depth of poverty with those significantly below the poverty line termed ‘core poor’ and transitory poor in order to develop strategic policies directed at specific cause (Weiss, et al., 2003).
Female poverty is an extremely important issue in the study of poverty alleviation due to size of the population and the critical role they hold to ‘up skill’ and ‘empower’ future generations. Poverty is viewed as a process in which instead of focusing on what poor lack, the focus is on what assets they own and resources they can access. Assessing poverty is a challenge and often qualitative approaches are used to identify participants own criteria to develop strategies for poverty solutions (Cagatay, 1998). This approach to poverty (Cagatay, 1998) has‘far reaching implications for analyzing the general nature of poverty as well as the relationship between gender inequalities and overall poverty levels’. Attempt to frame poverty and its systems continue to evolve but the most accepted approach is one that is offered by UNDP that helps to see the cause of poverty not only its symptoms. The UNDP measurement of human poverty focuses on capabilities such as clean water, health services and level of literacy. Such an approach attempts to reconcile capability approach withthe absolute and relative poverty. The concept of human poverty is helpful in clarifying the relationship between gender inequality and poverty, as it focuses on gender differences in deprivation of education, health, life expectancy and socially constructed constraints on the choices of various groups such as women or lower castes (Cagatay, 1998).
Poor people face trade-offs between different dimensions of poverty, however women encounter many more because of gender inequalities in distribution of income, access to credit, control over property or earned income and gender biases in labour market and social exclusion in variety of economic and political institutions (Cagatay, 1998); these factors are more prevalent in emerging economies and to a lesser extent in developed economies. Lucy et.al., (2008), in her study in Bangladesh reported that all citizens of the country suffer from poverty but women and children bear most of the poverty burden as women continue to face discrimination in the area of health, nutrition, access to education, employment and political participation. Women at large and more specifically in emerging economies are not only at greater risk of chronic poverty but also vulnerable to transient poverty due to familial, personal or social or economic crises, macroeconomic policies, political and ethnic conflicts or health related crises. Women are also time poor (time committed to raising family) and much of their work is economically unrecognised since it is unpaid, yet such an activity is essential for the future well being and enhancement of social care and family’s empowerment. Nevertheless, female are robust and adopt different strategies to deal with adversities but there is a need for formulating macroeconomic policies toeradicate poverty amongst women; it is extremely important issue to be left to market forces.
To gain an insight into the link between poverty and economic growth, Morrison et al., (2007) develops a framework to examine the link between poverty reduction and economic growth. According to Morrison, a given level of male earnings leads to improvements in women’s productivity and earnings and children wellbeing which results in poverty reduction and economic growth both simultaneously and in future growth. On the other hand increase in female earnings stimulates short term growth and reduces current poverty and stimulates long term growth and reduces future poverty through higher consumption expenditures and higher savings respectively, an exit map observed with families exiting poverty threshold. Moreover increased female earnings lead to higher bargaining power of women in the household that directly promotes child well being and educational access to education. Economically active women have positive correlation with the economic development. It is reported that a value chain program that target poor women of Pakistan benefits more than 50 percent of all participants from elevated status in the household due to their greater economic contribution. Women engagement in enterprise also leads to broader empowerment on a number of levels; participation in community groups, changing family relationships, and engagement with the larger society (Jones,et al.,2006). To capitalise and harness women efforts, the development programs explicitly inculcate women participation to achieve the goal of economic success.More specifically access to credit is essential (Cagatay, 1998), to enable women to gain a foothold on economic ladder to help them to uplift their families well being.
CONCEPTUAL AND CONTEXTUAL ISSUES
The poverty is a major challenge faced by most of the developing world and in some cases in pockets of developed countries too, this calls for strategies and development programs which may alleviate poverty and promote self-reliance. To achieve this objective microfinance has potential to make significant contribution towards reduction of poverty (Mawa, 2008).
This optimism about microfinance is reflected in various empirical studies. Morris and Barnes, (2005) studied three microfinance programs in Uganda and he found reduction in financial vulnerability through diversification of income source and accumulation of assets. Positive impact of the microfinance program in Uganda includes addition of new products and services, improved or expanded enterprise activities and markets, reduced cost of inventory purchases and increase in sales volume. Many scholars refer to Bangladesh as an example to illustrate the positive results linked with improved access to finance through microfinance, however, it is noted that the presence of microfinance in Bangladesh remain limited to a few regions. For instance Pitt and Khandker, (1998) study three group based programs in Bangladesh and found an increase in annual consumption expenditures. They reported the increase of every 18 taka for every 100 taka borrowed by women and 11 taka for every 100 taka borrowed by men. Chemin, (2008) reported that the participants of microfinance programs in Bangladesh have 3% more income for expenditure than the similar non participants. Moreover, he found positive impact of microfinance on supply of labour and both for male and female school enrolment. Another study on Bangladesh microcredit program argued that the impact of microcredit is short lived. The improvement associated with micro credit are associated with lower objective and subjective poverty with strong impact of it on poverty for about six years, thereafter the resulting benefit level off (Chowdhury, et al, 2005). Khandker, (2005) using panel data from Bangladesh indicate that microfinance contributes to annual poverty reduction for more than half of the 3 percentage for microfinance program participants. The benefits of microfinance spill over to wider community through local income growth that leads to increase expenditure that reduces the average village poverty level by 1 percentage point each year in program areas.
Critiques of microfinance, through research have shown that poverty is not reduced by microfinance it just burdened the poor with additional debt.Coleman, (1999) conducted his study on credit program of Northeast Thailand and concluded that there is insignificant impact of credit program on physical assets, savings, production, sales, productive expenses, labour time and the expenditures on health care and education. In later study by Coleman, (2006), he refines the methodology used in the previous study and concluded that credit programs are bias in favour of better off and tend to be skewed towards wealthier than the poor. He found that the impact of the program is positive on household welfare of the richer committee members than rank-and-file members of microfinance institution. Similarly Duong and Izumida, (2002) conducted a study on rural development finance in Vietnam, they also concluded that banks are rationing the credit on the basis of reputation, collateral of the household and the amount of credit applied.
The studies on microfinance are criticized for the methodologiesemployedto investigate the impact of microfinance on poverty. Such as the work of Pitt and Khandker, (1998) is criticized on the ground that low land holding constraint of less than half an acre was not strictly enforced in the sample (Weiss, et al, 2003). Morduch, (1998) reworked on it by simple comparisons that takes into account the bias not controlled in previous work. But he found no impact of microfinance program on consumption or increase in educational enrolment of children. However Pitt, (1999) on re-examination of the work reconfirms the earlier positive findings in Pitt and Khandker, (1998). Chemin, (2008) criticized that Pitt and Khandker, (1998) overestimate the results by not enforcing the eligibility criteria of land holding for borrowing and Morduch, (1998) underestimate the results as he did not account for non-random program placement. Similarly the results of the study by Coleman, (1999) appears highly questionable on the ground that after months of village bank membership there is no impact on the income or asset variables (Weiss, et al, 2003). From this discourse it is found that empirical evidence on the impact of microfinance on poverty not only differs in their conclusions showing mixed results in different countries but also casts doubt on the ground of biases caused by different statistical techniques used. The conflicting results suggests further research on issue of microfinance to gain an in-depth insight of its impact on poverty reduction will lead to higher level confidence of the impact microfinance for poverty reduction measures.
On the other hand Hermes and Lensink, (2007) argued that although microfinance has a positive impact on economic development, it has not reached the poorest of the poor. Microfinance is a good method to fight poverty but there is a need to target poorest borrowers first. The microfinance institutions have to make distinction between “marginally poor” and “very poor” (Sengupta and Aubuchon, 2008). As Weiss.et al., (2003) pointed out that the microfinance loan officers and members of borrowers in group lending may exclude the very poor from borrowing because of high risk of bad credit. Chemin, (2008) also in his study concluded that microfinance is not targeting the poorest. A research on seven Micro Finance Institutions (MFIs) in four countries that are Bolivia, Bangladesh, Uganda, and the Philippines, to compare clients of MFIs with non-clients, concluded that “most clients come from moderately poor and vulnerable non-poor households, with some clients from extreme-poor households also participating;programs that explicitly target poorer segments of the population generally have a greater percentage of clients from extreme-poor households; anddestitute households are outside the reach of microfinance programs” (Helms, 2006).
Helms, (2006) indicated that microfinance is serving limited number of clients and many potential clients remained unserved; he points out a different view as “Microcredit is not appropriate for the destitute and hungry who have no reliable income or means of repayment. In many cases, small grants, infrastructure improvements, employment and training programs, and other nonfinancial services may be more appropriate for destitute people”. Mosley and Rock, (2004), from their study of six African microfinance institutions, suggested that the advantage of microfinance is that it reaches vulnerable, non-poor, the working poor or entrepreneurial poor. Microfinance operations benefits the extreme poor indirectly through labour market as poor people enter into labour market as employees of microfinance clients, and human capital as increased expenditures on education and health extend to poor through intra-household and inter-generational effects and social capital externalities (enhancement of social capital for the clients extends to poor through extension of credit groups to include poor and through stabilisation of village income) than by direct lending.
Microfinance isoften criticized on the grounds that it is administration is costly due to high transaction and information cost and that is why most of the Microfinance programs depend on donor subsidies. Most importantly there are few rigorously tested empirical research studies on poverty reduction effect of micro-credit (Hermes and Lensink, 2007). Therefore, there is still room for research in area of microfinance to find out its effect on poverty alleviation. More specifically, it would be beneficial to investigate microfinance impact in a specific region from the direct interaction with the borrowers and lenders of such program to identify the real impact of it on poverty reduction in that country and towards this end this research.
Use of Microcredit to reduce poverty and enhance economic growth appears to have gained recognition in developed and emerging economies. For example, State Bank of Pakistan Quarterly report, (2005) offered its own model to evaluate performance of Microfinance providers. Microfinance is considered an effective tool to fight poverty through enabling individuals to engage in self employment. Microfinance institutions tend to target women as poorest segment of the society which helps to enhance the women empowerment. The logic of the proposed approach is that female participation in the economy leads to improvement in gender equality and has a positive impact on the status of women within family decision making that enhances social status of women that leads to lower birth rate and increase the family wellbeing.
The studies above and the ensuing debate have provided insight into the role of Microfinance institutions to alleviate poverty. These studies have contrasted benefits with challenges and considered the wider social dynamics which emerge when access to finance is offered to females.
In the context of Pakistan, 6th most populated country in the world, 169.9mand 23% of its population living below the poverty line that is $1.25 a day is a challenge for policy makers within country and donors too. Up till 2005-06 the efforts to reduce poverty were having some positive impact but the world economic and political crises have negated improvement in poverty reduction (Economic Survey of Pakistan, 2009-10) and these findings are corroborated by Multidimensional Poverty Index (MPI)[i] 2010 indicators. However, poverty amongst women remains a cause for concern for government and international community at large. 55.5% women are living below poverty line (United Nations Human Poverty Index, 1995 cited in Goheer, 1999, p.2) and they experience greater barriers to break out from poverty trap due to market inefficiencies which are compounded with social, religious and cultural norms. To break this cycle of poverty microfinance is often considered to be an effective strategy to enable poor and vulnerable females,the most marginalised sections of the population,to engage with economic activity. This study attempts to examine how Microfinance institutions impact on the well being of females and what are the factors contributing towards the success of women engaged with MFIs?