MICROFINANCE PAPER WRAP-UP: Female Empowerment and the Promise of Microfinance, by Roshaneh Zafar

Social entrepreneur Roshaneh Zafar, Founder and Managing Director of Pakistan’s third largest microfinance institution the Kashf Foundation, wrote an article entitled “Female Empowerment and the Promise of Microfinance” published on January 20^th, 2009 in Pakistan International News. The article summarizes the credit sources available to the impoverished in developing countries, and elucidates how microfinance can help the “unbankable” poor, especially women, break out of the vicious circle of debt and poverty. The full article is available at: http://www.thenews.com.pk/daily_detail.asp?id=157976

What follows is a summary of the paper:

Informal Credits and Vicious Circles

The sources of credit in any economy are often comprised of two categories: formal and informal. Formal credit sources mainly include commercial banks, leasing companies, and other non-banking financial corporations. These credit sources are usually characterized by highly bureaucratic, and in many ways, anti-poor and anti-women rules and procedures. As the poor are considered “unbankable” according to these institutions, impoverished households are essentially excluded from the formal financial sector. Consequently, the lack of access to formal credits becomes a major factor that dramatically reduces the economic opportunities of low-income groups. Therefore, poor people often turn to informal sources of credit, predominantly moneylenders. Although credit from moneylenders is often obtained without the requirement of collateral, interest rates are almost always comparatively high and, so the author contends, exploit the poor. As a result, instead of breaking out of poverty, the indigent find themselves trapped in a vicious circle of debt.

Female Empowerment and the Promise of the Microfinance

Microfinance is an important solution to defeat poverty for two principal reasons: first, by making financial services accessible and affordable to the poor, it fulfills needs unmet by the formal banking sector. Second, microfinance is a market-based, sustainable solution promoting economic participation by those at the bottom of the pyramid. In this sense, it differs markedly from charitable activities which can only be helpful so long as donations come in.

But why does microfinance work best with women? There are several reasons. In developing countries, women often depend on men for access to resources. Meanwhile, contributions and care provided inside the home by females are usually not readily measurable. The result is that women often face greater obstacles and are considered less “credit worthy” than their male counterparts when it comes to obtaining credit from formal sources. Consequently, microfinance provides an alternative source to satisfy their needs. Mainly, microfinancing helps women start micro-businesses and contribute monetarily to household income. Studies have shown that women use the profits from their businesses to send their children to school, improve living conditions, and expand their businesses. In summary, as micro entrepreneurs, women not only make a contribution to local economic activities, but also create tangible social safety nets for their families and communities.

Microfinance in Pakistan

In Pakistan, regulations have actively promoted commercialization of the microfinance sector, thus enabling poor persons to enter the formal economy and spur market competition. However, an ideology has not yet developed which accepts that poor people deserve financial services in the same way the rich do. Further, some Pakistanis hope that charities or subsidized financing for low-income communities will last. However, according to the author such thinking, “will ultimately force poor people to rely on moneylenders, since none of these are long-term options in terms of access to financial services.”

By Yanni Hao

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