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Impact of Micro financing in Agriculture (A Case of District Gujranwala, Pakistan)

Submitted To: M. M. Mahmood Shah Khan

Submitted By: Sultan Mahmood Program MS-Finance ID #: 110196006

University of Management and Technology Lahore

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Introduction
Microfinance is the supply of loans, savings, and other basic financial services to the poor. People living in poverty, like everyone else, need a diverse range of financial instruments to run their businesses, build assets, stabilize consumption, and shield themselves against risks. Financial services needed by the poor include working capital loans, consumer credit, and savings, pensions, insurance, and money transfer services. Microfinance institutions are those which provide credit and other financial services and products of very small amounts, mainly to poor for enabling them to raise their income level and improve living standards. In Pakistan poor rarely access services from the formal financial sector. They take loans for the fulfillment of their needs from informal sector. Formal Sector serves only those who have assets and can get them mortgaged / pledged and poor do not own such assets. Informal Sector is comprised of non-commercial money lenders who charge very high interest rates. Providers of financial services to the poor include donor-supported, nonprofit non-government organizations (NGOs), cooperatives; community-based development institutions like self-help groups and credit unions; commercial and state banks; insurance and credit card companies; post offices; and other points of sale. NGOs and other non-bank financial institutions have led the way in developing workable credit methodologies for the poor and reaching out to large numbers of the poor. Throughout the 1980s and 1990s, these programs improved upon the original methodologies and bucked conventional wisdom about financing the poor. They have shown that the poor repay their loans and are willing and able to pay interest rates that cover the costs of providing the loans. The clients of microfinancefemale heads of households, pensioners, displaced persons, retrenched workers, small farmers, and micro-entrepreneursfall into four poverty levels: destitute, extreme poor, moderate poor, and vulnerable non-poor. In September 2000, the member states of the United Nations unanimously adopted the Millennium Development Goals (MDGs). These goals were developed as a result of

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several conferences organized by UN in 1990s. One of These MDGs gives emphasis on human development through poverty reduction. A microfinance institution (MFI) is an organization that provides financial services to the poor. Simply a MFI can be broadly defined as any organization that provides financial services to the poor. Historical context can help explain how specialized MFIs developed over the last few decades. Between the 1950s and 1970s, governments and donors focused on providing subsidized agricultural credit to small and marginal farmers, in hopes of raising productivity and incomes. During the 1980s, micro enterprise credit concentrated on providing loans to poor women to invest in tiny businesses, enabling them to accumulate assets and raise household income and welfare. These experiments resulted in the emergence of nongovernmental organizations (NGOs) that provided financial services for the poor. In the 1990s, many of these institutions transformed themselves into formal financial institutions in order to access and on-lend client savings, thus enhancing their outreach. In the late 1960s a few NGOs in the rural areas of Pakistan begun to experiment with micro credit by offering subsidized loans. However they mostly failed to reach the poor due to abuse and corruption. The organized history of micro finance activities in Pakistan started with the launch of orange Pilot Project (OPP) in kutchi Abadies (Shanti Towns of Karachi) in early 1980s. (Abdul Qayyum and Muneer Ahmed) Now there are more than 16 microfinance institutions in Pakistan. As poverty reduction is one of the seven millennium development goals therefore Researchers selected to study the effect of Microfinance (Micro Credit) on Income Enhancement. I would be selected for research-paper Special Program for Food Security and Productivity Enhancement of Small Farmers (Crop Maximization Project-II) was approved by the Federal Government on 4th May, 2007 for a period of 5 years (July 2007 to June 2012) at a total cost of Rs 8013.522 million. It is being implemented in 1012 villages of 28 districts of all four provinces, AJK, FATA and FANA. The Food Security

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Program focuses on segment of small & medium farmers having limited resources, which are about 95% of the total farming community and having 63% of the total cultivated land. The program is based on participatory approach and involves farming community by establishing Village Organizations (VOs) at village level. The project strategize on: multidisciplinary interventions with potential of high returns and intensification of extension services for quick availability of technical backstopping to the farming community. The project is technology oriented which leads to provide technical assistance, skills and resources required for productivity enhancement and raising the income of small farmers. The technology packages are simple and time tested with proven benefits. The project helps establish Implement Pools, Input Sales & Marketing Centers and Revolving Fund to ensure availability of farm implements on rental basis, quality inputs on competitive prices, as well as loans to member farmers for productivity enhancement and setting up small enterprises at farm and village levels. The horizontal and vertical linkages are developed among small farmers groups, main agricultural markets and financial institutions to integrate them into value chains for post harvest management, facilitation of marketing and ultimately to raise the farm income. The project operates in 430 villages of 6 districts of Punjab province, viz., Sialkot, Gujranwala, Sahiwal, Sargodha, Muzaffargarh and Rahim Yar Khan; 230 villages of 8 districts of Sindh, viz., Mirpurkhas, Nawabshah, Noshahroferoz, Khairpur, Sanghar, Larkana, Badin and Mitiari; 160 villages of 5 districts of NWF Province which includes: Peshawar, Charsadda, Swabi, Bannu and Dera Ismail Khan; 150 villages of Balochistan involving Pashin, Qila Saifullan, Khuzdar, Jaffarabad and Lasbella districts. The state of AJK contributes 20 villages each from Kotli and Poonch districts. In addition, one village each of Khyber Agency and Gilgit are participating. It is estimated that about 50,000 to 60,000 households will be involved in income generation and productivity enhancement interventions and they would be operating on about 450,000 acres of land in the project area.

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Review of the Relevant Literature

Jonathan Morduch 2002 studied the impact of Micro finance on Poverty Reduction using Micro credit, Assets, Family size, education as independent Variables and Income of household as dependent variable. Author used Consultative Group to Assist the Poorest (CGAP) poverty assessment tool. Cashpor Housing Index, SEFs Participatory wealth rankings, and US Aids AIMS tools for assessment purpose. Evidence showed the positive impact of microfinance on poverty reduction. Results showed strong potential synergies between microfinance and the provision of basic social services for clients. The benefits derived from microfinance, basic education, and primary health is interconnected, and programs have found that the impact of each can increase when they are delivered together. Pallavi Chavan and R.RamaKumar Mar.2002 examined the role of Micro credit on poverty reduction by using micro credit as independent variable and income of borrowers as Dependent variable and other variables were number of borrowers, Amount of credit disbursed, and recovery rate. Comparative analysis approach was used there was a treatment group(beneficiaries) and a control group then compare the change and increase in incomes of both groups from 1988 to 1992. The results showed that Micro credit programs and institutions have generated a positive change in the income of borrowers but this change has only been marginal, it means due to their small scale of operations have made minimalist impact on earnings and employment generation for the rural poor. Shahzad Ahmad, Sajid Naveed 2004, Studied the role of micro finance in reducing Rural Poverty. The Study was conducted to evaluate the role of microfinance provided by Khushhali Bank in Poverty Reduction in Tehsil Rahim Yar Khan, Pakistan. Correlation analysis was carried out to determine the relationship of credit with income, crop production, asset formation, farm expenses and saving. It was found that the credit has positive relation with saving, farm expenses, crop productivity, and income and asset formation.

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Ranjula Bali Swain and Maria Floro Dec.21, 2007 examined the role of Micro credit on poverty Reduction by using micro credit as independent variable and Income, Consumption, risk, vulnerability and economic situation as Dependent variables. Comparative analysis was used between treatment group (SHG,s) and control group. Indian panel survey data from 2000 to 2003 was used Theoretical framework for analysis was used. For this purpose von Neumann-Morgenstern-based utility function (risk preferences) and the Ligon-Schechter methodological approach to measuring vulnerability specially expected utility (welfare) were used. Authors find that SHG members have lower Vulnerability as compared to a group of non-SHG (control) members. Furthermore, Researchers found that the poverty contributes to about 80 percent of the vulnerability faced by the household followed by aggregate risk Seemi Waheed 2009, examined the role of microfinance in poverty Reduction. She used Micro credit, Assets, Family size, education as Independent Variables and Income of household as Dependent Variable. Primary and secondary data was used and 68 households were interviewed. The Multiple Regression Analysis was used. The Results showed that Micro Credit Improves Income. All variables were significant in improving well being of Poor communities especially Micro credit and Education. Regression analysis showed that t- ratio of Micro Credit and educations are high showing significance of the variables in income improvement.

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Statement of the Problem

Does Microfinance increases Income of small farmers?

Research Objectives
1. To assess the impact of microfinance on income enhancement of small

farming communities in Gujranwala district.

2. To assess the impact of microfinance on savings of small farming

communities in Gujranwala district.

3. To analyze collected data and assess the food security of small farming

communities in Gujranwala district. Consistent with the literature following hypotheses would be formulated: H 1: Microfinance programs have positive impact on income of small farmers. H 2: Microfinance programs lead to increase the consumption of food item. H3: Microfinance programs have positive impact on savings of small farmers.

Significance of the study

This study is helpful in understanding the role of microfinance institutions in income enhancement of poor. It is quite helpful for microfinance institutions as they can use this study as an independent feed back for drafting their policies. The study can also help the regulators to understand the role of institutions and the feedback of beneficiaries.

Delimitation
The study was delimited to the small farming communities of Gujranwala district Special program for food security and productivity enhancement of small farmers launched by X Ministry of food and Agriculture (Ministry of National Food Security & Research) with the support of (IFAD) International Fund for Agriculture Development.

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Theoretical Model

Income

Savings

Microfinance
Working capital (Loans for Inputs)

Income diversification Interventions

Variables: Independent Variable

Microfinance (Credit/Finance)

Dependent Variables
Income Savings Working Capital (Loans for Inputs) Income diversification Interventions

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Proposed Research Methodology Population

Population would be consisted of all beneficiaries of special program for food security and productivity enhancement of small farmers in Gujranwala district.

Sample
The data will be consisted of beneficiaries who availed loans from special program for food security and productivity enhancement of small farmers in Gujranwala district. Sample of 120 people would be interviewed.

Instrument
The data would be collected through self administered questionnaire.

Selection of Instrument
The questionnaire would be used for the collection of data will be selected from South Asian Network of Economic Research Institutes (SANEI) Pakistan Institute of Development Economics Islamabad.

Data Collection
The data will be collected from the field with the help of self administered questionnaire. For the purpose of the study 120 beneficiaries would be selected from 20 Village Organizations (6 beneficiaries would be selected per village organization) in which continue Revolving Fund operation. The information would be collected from the field study and field surveys through self administered visits then it would be classified as per the necessity to meet the objectives of the study. In order to derive results from the primary data of the variables, the descriptive statistics and factor analysis would be used.

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Data Analysis
Role of microfinance on Income Enhancement would be examined by using data collected through personally administered questionnaire. The data would be analyzed both electronically and manually. The information will be collected from the field study and field survey through self administered visits then it would be classified as per the necessity to meet the objectives of the study. The systematic analysis will be done by using simple statistic tools and the data would be presented in the form of tables and percentage in a descriptive way.

Limitations and Assumptions

Development organizations announce their involvement in microfinance with a kind of sacred activity. People are appropriately spellbound by the rise of income, Microfinance organizations offer financial services to people too poor to attract the services of traditional banks. They offer small loansmicrocreditand may also offer income diversification interventions to the beneficiaries. Microcredit organizations place beneficiaries in small groups that meet together and guarantee each other, so that nobody can get a second loan until everybody in the group has repaid their first loan. Peer pressure and peer encouragement help beneficiaries stay on task. They are less isolated and less prone to discouragement. The microfinance will be beneficiated by the small farmers (owner of minimum one acre and maximum 20 acre land limit). The farmers will be registered in the special program for food security and productivity enhancement of small farmers.

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References:1. Jonathan Morduch Analysis of The Effects of Micro Finance on Poverty Reduction NYU Wagner Working paper, No 1014 Issued June, 28-2002. 2. Pallavi Chavan and R. Rama Kumar , Micro Credit and Rural Poverty : An Analysis of empirical evidence, Economic and Political weekly, volume 37 ,NO.10 pp. 955-965 March 2002.
3. Hermes, N. and R. Lensink, 2007. The empirics of microfinance: What do we

know? The Econom. J., 117(517): 1-10.

4. Donaghue, K., 2004. Microfinance in Asia pacific. Asian-Pacific Economic

Literature, 18(1): 41-61. 5. Ranjula Bali Swain and Maria Floro, Effect of Microfinance on Vulnerability, Poverty and Risk in low income households. Working paper 2007:31 Department of Economics December 2007 Uppsala University. 6. Shahzad Ahmad, Muhammad Sajid Naveed and Abdul Ghafoor Role of Microfinance in Alleviating Rural poverty: a case study of Khushhali Bank Program in Rahim Yar Khan Pakistan International Journal of Agriculture and Biology, 08 March 2004. 7. Seemi Waheed, Does Rural Microfinance Credit Improve Well-Being Of Borrowers in the Punjab (Pakistan) Pakistan Economic and Social Review Volume 47, No.1 (Summer 2009), pp, 31-47. 8. Primary Data Source was Field survey conducted by Researcher. 9. Ms. Shanti Sapkota Kalash, Social Transformation Center, Nepal. South Asian Network of Economic Research Institutes (SANEI) Pakistan Institute of Development Economics, July, 2008.

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10. Aslam, N., 2001. Role of Microcredit in Economic Revival and Poverty

Alleviation. Published in business and finance review in the daily The News of Monday, May 21, 2001
11. Website of Pakistan Microfinance Network www.mcirofinanceconnect.info 12. Malik, S.J., M. Mushtaq and M.A. Gill, 1991. Role of Institutional Credit in the

Agricultural Development of Pakistan. Pakistan Development Review, 30: 1039 48

13. Nazli, H., 2001. Role of Micro-credit in Economic Revival and Poverty

Alleviation. J. Institute of Bankers Pakistan, pp. 6778

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ANNEX 1: Questionnaires:
Date: Union Council: Tehsil:

Name of Village Organization: General Information:

1) Name: 2) Age: 3) Sex: 4) Occupation: 5) Level of Education: a. Illiterate b. Can read and write c. Primary Level d. Lower Secondary e. Secondary f. Higher Secondary and above 6) Marital Status: 7) Type of Family: Married Nucleated Unmarried Joint a. Male b. Female

08) Is the food production sufficient for the survival of your family? Yes No 09) Food Sufficiency: a. Surplus b. 1 year c. 9 months d. 6 months months

e. < 6

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Information regarding Special Program for Food Security and Productivity Enhancement of Small Farmers:
10) Why did you join SPFS? a. Other advised me b. It provides loan with low service charges c. Other people have increased their income through this program d. Due to its incentive programs e. Others (Specify)11) Do you think loan size is sufficient enough to fulfill your genuine start-up capital needs? Yes 12) How is the performance of your group members? Good (Specify) Just OK Bad Dont know Others No

13) How much amount are you saving per month? a) Less than Rs.3000 b) More than Rs. 3000 but Less than Rs. 6000 c) More than Rs. 6000 but Less than Rs. 9000 d) More than Rs. 9000. 13) Have you taken the loan? Yes 14) How much loan have you taken? Less than Rs. 30,000 Rs. 30,000 to Rs.60, 000 Rs. 60,000 to Rs. 90,000 Rs. 90,000 to Rs. 120,000 Rs.120, 000 to Rs.150, 000 Rs.150, 000 to Rs.180, 000 Rs.180, 000 to Rs.210, 000 Above Rs.210, 000 15) Did you find loan procedure as customer friendly? Yes 16) Did you find any difficulties to take loan from that program? Yes No

No No

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17) Are you satisfied with this program for recovery procedures? Yes 18) Did you find any difficulties to take loan from other sources? Yes 19) If yes, what are the difficulties for you? High interest rate (Specify)Lack of collateral

No No

Exploitation others

20) Do you find any difficulties in loan repayment? Yes 21) What did you do with the loan you have taken from SPFS program? Maximize production Invested in Agri-small enterprises/poultry farming/fisheries production Invested in animal husbandry/ cattle raising Invested as working capital Others interventions (Specify)22) Did you invest the money on your own decision? Yes 23) If no, who took the decision? Husband Children In-laws Others (Specify)Yes 25) If no, who decides for the expenditure of the money? Self Husband/Father/Son Father-in-law law Wife Others (Specify) Wife No No

24) Can you spend the money on your own choice? No Mother-in-

IMPACTS:
26) What happened to your income after utilization of the credit? Increased Decreased No change

27) Have you found any changes in the attitude of your family members towards you after joining that program? Yes No 28) Are you satisfied from the achievements that you get after joining the program? a. Fully satisfied b. partly satisfied c. Not satisfied d. Others (Specify)29) What suggestion do you recommend for the effectiveness of the program?

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