Role of Microfinance Banks in Provision of Credit for Poverty Reduction in Pakistan

Role of Microfinance Banks in Provision of Credit for Poverty Reduction in Pakistan

Kamran Raiysat (Diocesan Board of Education Islamabad/Rawalpindi, Pakistan) and Humaira Younas (Diocesan Board of Education Islamabad/Rawalpindi, Pakistan)
DOI: 10.4018/978-1-5225-7158-2.ch008

Abstract

Microfinance banks started their operations in Pakistan in 2000 and have been working over the years. This chapter mainly considers microfinance bank growth in the provision of credit for poverty reduction. Six hypotheses are developed to address the main issues under investigation in this study. Secondary data is used to calculate compound annual growth rate for the period 2011–2015. Results showed growth in microfinance banks (total assets and branch network) and provision of loans/credit (customers, gross advances, net advances and advance per customer). For better returns on investment and economic development, further investment is suggested in the same sector.
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Introduction

Banks have always been playing a major role in the economic development of any country because these are considered to be life blood of any economy. Origin of banks goes beyond centuries but according to Richard Hildreth (2001) the first regulated institution which resembles with the present bank was established nearly seven centuries ago but, in its origin, it had nothing to do with the present banking business because its main purpose was to collect loans during the war. He also described that in the seventeenth century the Bank of Amsterdam and the Bank of England (prototype of all the modern banks) were established. Now there are banks all over the world and contributing towards the economic and social development.

Major commercial banks have been giving loans to the rich for the sake of earning profit and do not care much about the poor but there have been many similar institutions which have been working for the welfare of the poor and the Irish Loan Fund system in 18th century cannot be ignored because it is considered to be the first proper microfinance institution and after that the concept of microfinance institutions have spread around the world. In 1992 Banco Sol was the first commercial bank dedicated solely for the microfinance (CGAP).

Banking in Pakistan

According to Raiysat (2016) banking business started in Pakistan at the time of its independence with five commercial banks. A State Bank of Pakistan was also established to control the operations of the banks in Pakistan. The State Bank of Pakistan with help of Security and Exchange Commission of Pakistan is putting its efforts in betterment of banking sector in Pakistan. There has been a slum in the performance and growth of the banking sector in Pakistan when the Government of Pakistan in 1974 took a decision to nationalize all the institutions but in 1992 with the privatization decision and introduction of foreign private banks the banking sector again started growing and performing well. Standard Chartered Bank of Pakistan and Citi Bank Limited have played an effective role in this regard and banking sector is divided into five sub sectors which are private commercial banks, public commercial banks, foreign banks, Islamic banks, specialized banks and microfinance banks. The importance of microfinance was realized at its peak in the late 1990s. Khushhali Microfinance Bank was the first microfinance bank which started its operations in Pakistan under the State Bank of Pakistan in 2000. Within a period of next four years, four new microfinance banks i.e., The First Microfinance Bank Limited (2001), Apna Microfinance Bank limited (2003), Rozgar Microfinance Bank limited (2003) and Tameer Microfinance Bank limited (2005) started the operations in Pakistan. At present there are 11 microfinance banks. Sindh microfinance bank is the latest bank which has started its operations in May 2016.

Key Terms in this Chapter

Total Credit: Total credit includes the financing facility provided to the customers including internal staff members.

Branch Network: Number of branches or operational units of microfinance banks.

Total Assets: Total assets includes all the assets of the microfinance banks.

Loans/Advances: Credit Facility provided to customers.

Customers: Number of individuals who are taking services from the microfinance banks.

Net Credit Excluding Staff Loans: Net Credit Facility includes financing facility provided to external customers only.

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