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Increasing Micro finance Outreach

Increasing Micro finance Outreach

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Published by Sohailuddin Alavi
This paper was developed as a basis for CIPE Policy Round table discussion in 2007. It explores the prevailing state of micro finance dynamics and performance from the perspective of its outreach followed by broad recommendations
This paper was developed as a basis for CIPE Policy Round table discussion in 2007. It explores the prevailing state of micro finance dynamics and performance from the perspective of its outreach followed by broad recommendations

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Published by: Sohailuddin Alavi on Apr 13, 2013
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Improving Outreach and Possible Solutions to Micro Enterprise Financing
By: Sohailuddin Alavi
Preamble
This paper serves as the basis for initiating dialogue on concerns and possible remedies, particularlyimproving institutional outreach, for the lack of enterprise financing, specifically in the context of the StateBank of Pakistan (SBP)’s strategic directions for the Year 2010. The author conducted Focus GroupDiscussions with key personnel from microfinance banks / specialized microfinance institutions, under theauspices of CIPE as a prelude to developing this paper.
Challenge Statement
In Pakistan, about one-third of the population is “un-banked,” or lacking access to finance, which ifappropriately tapped can offer tremendous opportunities to both banking institutions and businesses. As astep towards mainstreaming the un-banked, SBP has envisaged increasing the size of micro and smallenterprise (MSE) financing from one million borrowers to four million borrowers, and from Rs. one billion tofour billion by the year 2010. In this context, increasing institutional outreach and sinking micro financinginto the sector are considered pivotal strategies. Other areas of interest include regulatory regimes, productand process innovations, relationship management and monitoring, and market intelligence data.
Background
MSEs have been instrumental in fueling economic growth across the globe. These businesses are rightlyconsidered as the backbone for a country’s industrial base; as an effective instrument of dispersing equalemployment opportunities and gender mainstreaming; and as one of the tools to redress poverty, especiallyin the context of financial hardships. Financial institutions believe that this segment of the businesscommunity is the most viable for expanding banking opportunities, both from commercial as well ascorporate citizenship perspectives. This is due to the fact that there exist a huge number of potentialcustomers, while loan recovery rates are extremely high. However, it requires a focused approach bymicrofinance banks (MFBs) and other micro financing institutions.About 50% of Pakistan's workforce is self employed, typically owning or operating micro and smallenterprises. This trend is likely to increase as corporate and industrial organizations continue to downsize,leaving former staff members with no option other than starting a business. Outsourcing is also on the risein corporate and industrial setups, creating more business opportunities for MSEs.Though many micro and small entrepreneurs have demonstrated commitment and sound trade acumen,they tend to forego many opportunities to expand their businesses beyond the minimum level needed tosustain them and their families. Two major reasons are cited as lack of rational approach in managing theenterprise: lack of access to financial resources and lack of access to conventional financial services.The micro and small entrepreneurs can be clustered into different categories for the purpose of focusing ontheir diverse characteristics, needs, and expectations. Enterprises can also be categorized into groupsrepresenting different trades. This analysis provides a useful insight for identifying possible relationships.a)Categories by Entrepreneurs
 This paper was developed for CIPE Policy Roundtable on Microfinance (2007)
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Prospering entrepreneurs with proven track record 
Have overcome market forces and progressed reasonably well
Have built in fairly reasonable equity over time
Have taken advantage of market opportunities
Have the capacity to manage the enterprise, make use of the given and additional financialresources productively, and contain risk within fairly bearable limits
Can meet financial obligations
Have passion, commitment, business discipline, and integrity
Mostly come from lower middle to lower strata of the society
Relationship with such entrepreneurs tends to be commercially viable and sustainable, whilefrom the entrepreneurs’ perspective the micro financial services are generally affordable atcompetitive prices
Potential entrepreneurs
Have the potential to succeed in business but have yet to prove abilities
Have ideas, passion, commitment, business discipline, and integrity
Can take advantage of market opportunities
Have little or no equity
Have the capacity to manage the enterprise, make use of given and additional financialresources productively, and to contain risk within fairly bearable limits
Have reasonably fair chances of sustaining and progressing in the business
Mostly come from lower middle to lower strata of the society
Relationship with such entrepreneurs is potentially viable and sustainable; however, fiscalresponsibility issues may arise. Hence relationship needs to be structured based on individualentrepreneur’s requests and track record. 
Poorest of the Poor 
Have urgent need of survival (self and family)
Have little capacity and unlikely to succeed
Have little sense of direction
Have no resource base
Have urgent needs for consumption and enterprise financing
Represent household below the poverty line
Relationship may begin from a corporate citizenship perspective, but innovative microfinanceservices can make the relationship commercially sustainable for both in the long run.
Hobbyists
Have fairly sustainable alternate source of income generation
Have no or little resource constraint
Have rather casual attitude towards managing the business
Use the enterprise for personal gratification or keeping oneself busy
Mostly come from high middle class to affluent strata of the society
Relationship most of the time is viable, with no accessibility / affordability issues at thecustomer’s end.
 This paper was developed for CIPE Policy Roundtable on Microfinance (2007)
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Opportunists
Fairly affluent
Have fairly sustainable alternate source of income generation
Create dummy enterprises to obtain easy financing
Channel micro enterprise financing towards personal consumption
Mostly come from high middle to affluent strata of the society
Relationship is inherently riskier and unviable, unless specific risk management tools are usedin managing such relationships, if at all deemed fit.b)Categories by Enterprises
 
Retail Outlets
By definition, these are shops owned and operated by a single person – the entrepreneur (menor women).
These shops generally sell consumer merchandise, or offer small scale manufacturing ofconsumer / household goods.
Their profit function is based on buying and selling differentials multiplied by inventory turnover.
Their financing requirements are generally for maintaining or creating an inventory and runningexpenses (working capital).
Service Outlets
By definition, these are individuals with technical skills who provide services within the localcommunity – artisans, technicians, utility service providers, transporters, etc. (men or women).
These entrepreneurs provide various consumer services primarily to households andindividuals.
Their profit function is based on the services revenue multiplied by the activity level.
Their financing requirements are generally for the equipment and running expenses.
Vendors
By definition, these are individuals or a group with technical skills that provide services toequipment (product) manufacturers, such as CMT units in the textile industry, accessoriesmanufactures, after-sales service providers, etc.
These entrepreneurs provide value-added services to the original equipment manufacturers.
Their profit function is based on the value addition margin multiplied by the activity level.
Their financing requirements are generally for raw materials, equipment, and working capital.c)Microfinance Operations in PakistanMany organizations apart from MFBs are targeting microentrepreneurs in the informal sector,known as micro finance institutions (MFIs). Though their focus partially converges with that offinancial institutions, the unique positions and products of MFIs differ due to their approach. Theseorganizations offer micro financing as a social mandate, catering only to the poorest of the poor.Other financial institutions, however, operate from a much broader perspective and use a moresystematic approach, as they are in a position to offer a stream of financial services most neededby entrepreneurs. This co-existence of MFIs and MFBs is creating unique diversity, which shouldbe leveraged to broaden funding in both sectors.
 This paper was developed for CIPE Policy Roundtable on Microfinance (2007)
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