1.

INTRODUCTION
The term microfinance is used for providing financial services to poor and needy people, these services include micro credit, micro savings, micro insurance and payment transfers etc . It provides the mean for the accumulation of money so that these needy people can have different choices to overcome their financial problems. Microfinance is associated with positive impact not only on the business side i.e it helps in improving the output of the small organization by providing the mean for purchasing assets and other required material, it also help in resolving household issues such as house hold income , savings, childrens education, health and nutrition and womens empowerment. Microfinance can also be define as supply of loans, savings, and other basic financial services like insurance .As due to the collateral requirement the poor people cannot avail these financial services from the formal commercial banks in this way microfinance tends to provide to them exclusive of these conditions. For these financial services, the poor people are willing to pay for because of the added advantage they receive for not collateralizing anything. The term also refers to the practice of sustainable delivering such services. More broadly, it is a movement that envisions a world in which as many poor and near poor households as possible have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance, and fund transfers (Christen, R. P., Rosenberg, R., and Jayadeva, V., 2004). 2. Problem Identification and Objective of the Report The beginning of a new era in microfinance was marked by the 2001 Microfinance Ordinance. The ordinance along with other regulations by SBP, laid some foundations for the development of the financial system. The focus of such a strategy was to realize the importance of the Micro finance Banks (MFBs) and their outreach to the population. By 2007, six MFBs received their licenses. Overall the development of this industry has been rapid and less solid as expected. The total number of loans outstanding is still negligible compared with the total potential demand, and deposit services are not well developed

(Microfinance Gateway, 2007). Thus there is a dire need for an analysis of the microfinance trends and its growth in Pakistan. Such an analysis would retrieve information of what the MFPs or the government lack and what changes need to be made in order to make the MF industry grow.

OBJECTIVE OF MICRO LENDING

Rural people in developing countries are engaged in informal financial activities like savings clubs, rotating savings and credit associations, mutual insurance societies that have a tendency to be erratic and insecure. They mostly invest in those things that can be frequently converted in to cash such as livestock, jewelry, gold etc. they mostly keep their money with their neighbors or safe custody and raise capital by contributing specific amount of money every day, week, and month and successfully awarded the port on a rotating basis this the way of forming informal way of saving groups. . Although widely prevalent, such practices do have high limitations as they are less secure and more unreliable. In such savings arrangements poor people can lose their money due to fraud or mismanagement. These savings are also subject to fluctuation in market prices, fire, thieves, illness etc. The informal rotating savings groups tend to be small and rotate small amounts of money. As compare to the informal financial services Formal financial services are rather difficult for the poor to access because of their various legal requirements such as collaterals, credit history, etc such banks dont offer small loans because they can only make money by providing large loans and also they do not access small savings accounts. In these conventional financial scenarios, the services provided by the MFIs are the only way to overcome this problem. Grameen bank in Bangladesh provides small loans to women in the village Jobra is one of the most successful bank in making such efforts (Matthews, J., 1994 Muhammad Yunus, the founder of Grameen bank mentions in his book Banker to the poor: Poverty is not created by the poor. It is created by the structures of society and the policies pursued by society.

Goals of Microfinance
Microfinance is a type of banking service that is provided to unemployed or low-income individuals or groups who would otherwise have no other means of gaining any financial services. Ultimately, the goal of microfinance is to give low income people an opportunity to become self-sufficient by providing a means of saving money, borrowing money and insurance. The goals of MF banks are the following: To provide diversified, trustworthy and timely financial services to the economically active poor. To mobilize savings for financial intermediation. To create employment opportunities. To provide real avenues for the administration of the micro-credit program of government and high net worth individuals. To provide payment services such as salaries, gratuities and pensions on behalf of various tiers of government. To engage the poor in the socio-economic development of the count

Key Principles of Microfinance

The poor need a variety of financial services, not just loans We all need financial assistance that should be flexible, appropriate and economically priced. Not only cash loans can fulfill poors need but they also need medical insurance, saving and cash transfer etc. Microfinance is a powerful instrument against poverty It is necessary to provide the access of financial services to deprived people for increasing their income, building assets and reduced their liabilities and need to empowering against the poverty. Microfinance means building financial systems that serve the poor Microfinance is a best way of providing financial services to the poor people so that they can meet their basic financial needs. in order to make it easily reachable for the poor, microfinance should become an integral part of the financial sector.

Financial sustainability is necessary to reach significant numbers of poor people

Due to the lack of strong Retail financial intermediaries most people are are unable to access financial services. Building microfinance institution is not the solution but it is only the way to reach significant scale and impact far beyond that donor agency can fund. Financial sustainability should be practice while providing financial services this basically means reducing transaction cost, offering diversified products and services and finding new ways to reach the unranked poor.

Microfinance is about building permanent local financial institutions

Basically it means to develop a permanent way of providing financial services to the poor by building mire financial institutions. Such institutions should be able to mobilize and recycle domestic savings, extend credit, and provide a range of services. Dependence on funding from donors and governments including government-financed development banks will gradually diminish as local financial institutions and private capital markets mature. Microcredit is not always the answer Microcredit is not always the answer for every situation. People whor are below the economic line need other form of support before making use of loans. In some cases small grants, infrastructure improvements, employment and training programs, and other nonfinancial services may be more appropriate tools for poverty elimination. Interest rate ceilings can damage poor peoples access to financial services It costs much more to make many small loans than a few large loans. Unless micro lenders can charge interest rates well above average bank loan rates, they cannot cover their costs, and their growth and sustainability will be limited by the scarce and uncertain supply of subsidized funding. When governments regulate interest rates, they usually set them at levels too low to permit sustainable microcredit. At the same time, micro lenders should not pass on operational inefficiencies to clients in the form of prices (interest rates and other fees) far higher than they need.

The governments role is as an enabler, not as a direct provider of financial services

Supportive policy environment is set by National Government which plays an important role in the development of financial services. The most important thing that a government should do is to avoid interest rate cap by maintaining financial stability and refrain the market from distorting unsustainable subsidized, high delinquency loans programs. By improving the business environment for entrepreneurs, reducing the corruption and improving access to market infrastructure government can improve the way of providing financial services National governments play an important role in setting a supportive policy environment that Donor subsidies should complement, not compete with private sector capital

In order to develop supporting infrastructure (like rating agencies, credit bureaus, and audit capacity etc) and building institutional capacity of financial providers donor should use appropriate grant, loan and equity instrument on a temporary basis. To have an effective impact donors must use integrated financial services, hire expertise and specialist for the designing and implementation of the projects and should make sure continued support. The lack of institutional and human capacity is the key constraint Microfinance provides financial services by combining banking laws and supervision along with the social goals to government entities and donor agencies. It make the provision of financial services much diversified and easier for the donors The importance of financial and outreach transparency Transparency of information is very important while providing financial services to the poor, they should clearly know the rules of lending and how much risk and return is attach with the required financial service this accurate, standardized and comparable information is not only important for the poor clients but also for the e regulators, donors and investors. that financial institutions and other partners meet the minimum performance standards as a condition for

Microfinance Institutions
Microfinance institution (MFI) provides financial services to the poor. These services vary in their legal structure, mission, methodology, and sustainability; they all share the 5

common characteristic of providing financial services to a clientele poorer and more vulnerable than traditional bank clients. In simple words it can be define as an organization that offers financial services to the very poor. They are non-governmental organizations committed to assisting some sector of the low-income population. MFIs build resources by support of government or public institutes or formal/informal NGOs (Sapovadia, V. K., 2003-2004). Historical context (as discussed previously) shows that experiments in the field of microfinance starting from 1950s till 1980s resulted in the emergence of several non-governmental 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 microfinance activities relatively higher interest is charged as compare to the usual banking service because they provide services for a small amount of money therefore the cost of these loans are rises automatically. According to CGPA there are three types of costs that MFI has to cover when it makes micro loans the first two costs i.e. cost of the money that it lends and the cost of loans default are proportional to the amount lent. For instance, if the cost paid by the MFI for the money it lends is 10%, and it experiences defaults of 1% of the amount lent, then these two costs will total $11 for a loan of $100 and $55 for a $500loan. An interest rate of 11% of the loan amount thus covers both these costs for either loan. The third type of cost, transaction cost, is not proportional to the amount lent. The transaction cost of the $500 loan is not much different from the transaction cost of the $100 loan. Both loans require roughly the same amount of staff time for meeting with the borrower to appraise the loan, processing the loan disbursement and repayments, and follow up monitoring. Suppose that the transaction cost is $25 per loan and that the loans are for one year. To break even on the $500 loan, the MFI would need to collect interest of $50+5+$25 = $80, which represents an annual interest rate of 16%. To break even on the $100 loan, the MFI would need to collect interest of $10+1+$25 =$36, which is an interest rate of 36%. Because the interest rates charged by microfinance institutions very often range from 2.5% to a 4% a month (about 31% to 50% a year), it has been subjected to controversial debates.

Classification of MFIs
(a) Providers: Microfinance finance institutions have been classified as follows:

(1) Formal Provider: they are subjected to general laws and specific banking laws and regulation, development banks, savings and postal banks and non bank financial intermediaries. (2) Semiformal Provider: they are registered to general and commercial laws but they are not liable to bank regulations and supervisions. (3) Informal Providers: it includes credit associations and rotating savings (ROSCAs). These are the non registered group on which no laws are applied. (b) Ownership: Ownership structure of MFIs are of many types such as member owned, share holders and profit maximizing share holders. (c) Focus: the focus of some providers is on providing financial assistance to the needy people by making them availing wide and different range of financial services and also non financial services such as training, social and technical services like health and technical services. (d) Services: services that are acquired by the poor people are same as the demand of the other s. the most commonly acquired service is non collateralized loans delivered through a range of group based and individual methods, these services also include saving accounts, insurance and remittances, but these services are limited by legal structures such as non regulated institution are not allowed to provide saving accounts and insurance. Poverty can be eliminated by different ways without undermining financial sustainability. Microfinance is one way of doing it but the services of micro finance differ in many ways, this is mainly due to the difference in their origin with many having developed out NGO development organization. Initially in early 1990 higher cost was associated with micro financing activities and training programs, therefore there was lot of pressure in separating these activities from other banking activities. Recently lot of work is done to minimize the cost and to generate cost reduction programs which mainly include ways in which complementary services can be delivered more cost and impact effectively mainly though group based training/learning system. In Pakistan microfinance networks

are being established for group based trainings for the employees of various MFIs, among which Pakistan Microfinance Network is the biggest one. The Pakistan Microfinance Network (PMN) is a network of organizations engaged in microfinance and dedicated to improving the outreach and sustainability of microfinance services in Pakistan.

MICROFINANCE IN PAKISTAN
In Pakistan microfinance was started in 1990 with two projects: the Orangi Pilot Project and the Aga Khan Rural Support Program (AKRSP). But the organized micro finance activities started in 2001 as a result of Micro Finance ordinance 2001.the one third of the total population of Pakistan is below the poverty line therefore microfinance is a tool that provide financial help to these poor and needy people. ). In 1999, the AKRSP and the National Rural Support Programme accounted for 84 percent of total microfinance services; Kashf Foundation was then the only specialized microfinance institution. Today, a multitude of institutions provide microfinance services in Pakistan. Twenty of these institutions are registered on The Microfinance Information eXchange (MIX) Market (an online information service), 19 of which are members of the Pakistan Microfinance Network (PMN). Most of these institutions are not specialized in microfinance, but combine microfinance with other development programs, such as health and education. Microfinance providers in the country can be classified into the following groups: Microfinance banks (MFBs): specialized institutions that operate as microfinance banks; Rural Support Programmes (RSPs): programs that run microfinance operations as a part of integrated rural development initiatives; Nongovernmental organizations/microfinance institutions (NGOMFIs): nongovernmental organizations that run microfinance operations as part of integrated development programs or that focus exclusively on microfinance Commercial financial institutions: commercial institutions involved in microfinance Government-owned institutions: institutions involved in microfinance that are owned by the government. Many positive changes have been taken place after the coalition which signifies a positive movement towards lessening the army role on in politics. Pakistans long-term outlook is unpredictable because terrorism, sectarian tension, and deepening socioeconomic divisions are undermining stability. Security concerns are being raised by threats from militant

groups and regional conflicts. The Government of Pakistans perceived bias towards Punjab, the most affluent province in the country, has caused disgruntlement among the population of underdeveloped areas, such as Baluchistan. This unrest often results in political violence, with militants sabotaging important infrastructure, such as natural gas lines. Regionally, there remains the potential for further conflict with India over Kashmir, although the peace process currently appears to be generating dividends, albeit small. The government welcomes foreign investment and has supported the privatization of public sector assets over the years. However, corruption remains a key concern of doing business in the country. This concern, coupled with the security threats highlighted above, makes Pakistan is a challenging country for foreign investment.

Microfinance Banks in Pakistan All MFBs fall under the microfinance Ordinance of 2001 licensed by the State Bank of Pakistan.Based on the volume of the capital and geographic are MFBs can be established at the district, province, or national level. At present, there ar. Six MFBs is established in the country at present with loan portfolios ranging from$846,000 to $43 million, as follows: 1. Khushhali Bank ($43 million) 2. Pak-Oman Microfinance Bank Limited ($1.5 million) 3.Rozgar Microfinance Bank Limited (n/a) 4. Network Microfinance Bank Limited ($846,000) 5. First Microfinance Bank Limited ($11 million) 6. Tameer Microfinance Bank Limited ($6.6 million)

The First Microfinance Bank is the only to have reached operational self-sufficiency. All MFBs operate at the national level except for Rozgar Microfinance Bank and the Network Microfinance Bank.

Rural Support Programmes

Microcredit facilities were offered to the Northern Areas of Pakistan during 1982, by the Aga Khan Foundation that was under the Aga Khan Rural Support Program (AKRSP). In the 1990s, the Government of Pakistan acknowledged the idea of microfinance by establishing the National Rural Support Programmer (NRSP) at the national level and, later, by establishing other such programs at provincial and regional levels. The largest RSP and provider of microcredit is NRSP, which has more than400, 000 active borrowers. A license is expected to be received from the State Bank of Pakistan to transform into the NRSP Microfinance Bank by the endof 2008. The second-largest RSP is the Punjab Rural Support Programmer (PRSP).

Microfinance Institutions
NGOs either provide dedicated microfinance services or offer them as part of integrated development programs. There are several NGO-MFIs providing microcredit services in Pakistan, the most established of which is Kashf Foundation. Created in 1996, Kashf has over 295,000 active borrowers and was the first MFI to become sustainablein 2004. Similar to NRSP, Kashf Foundation was planning to transform into a microfinance bank as of April 2008. Commercial Financial Institutions Apart from their core business line, CFIs provide microfinance services by creating separate microfinance departments or divisions. For example, ORIX Leasing (Pvt) Limited provides microfinance services through separate branches, with its other business lines subsidizing the microfinance operation.

Government-owned Institutions
The National Bank of Pakistan (NBP) provides a range of services to micro entrepreneurs, including credit and savings accounts, through the Rozgar scheme. This initiative provides credit facilities to selected youth groups, with loans of up to $1,500 at highly subsidized rates. The National Savings Centre provides savings services through 12 savings programs that operate through 12 regional directorates and 366 savings centres. Finally, the Pakistan Post Savings Bank has the largest savings bank network in the country.

Overview of Microfinance Players

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Currently the network of microfinance providers in Pakistan spans 1,343 branches and services about 1.5 million clients with a gross loan portfolio of PKR 15.1 billion ($250 million). The sector is dominated by one or two players within each of the groups described above. The heavy concentration of a few institutions in the sector: just three (NRSP, Khushhali Bank, and Kashf Foundation) serve 70 percent of the market. The largest and fastest-growing providers in the sector, these institutions have outpaced the rest of their competitors. Most microfinance providers are concentrated in the Punjab and Sindh provinces. Their infrastructure and higher population density, relative to other provinces, are the likely cause of more specialized MFIs being active in Punjab than in any other province. A comparison of the data by province shows that almost 60 percent of total active borrowers in the country are from the Punjab, followed (with a considerable lag) by Sindh Province, with 23 percent of active borrowers. Punjab and Sindh are the two most densely populated provinces in the country, with 56 and 25 percent of the total population of Pakistan, respectively. The uneven penetration of microfinance between provinces may therefore be attributed to the population distribution in the country. CHALLENGES IN MICRO FINANCE

Funding: MFIs that rely heavily on the funding support of the Poverty Alleviation Fund in Pakistan (Poverty Alleviation Fund) to finance lending operations that are limited. MFBs Similarly, due to the slow progress in deposit mobilization, is still not sustainable in the generation of internal funding. Experience difficulty in access to the commercial sector, especially from commercial banks to avoid risks in 2009. However, the average systolic blood pressure to ensure that micro-finance credit facilities play a major role in the mobilization of funds between large commercial banks to the microfinance sector in recent

High operating costs: the high operating cost of the sector, the proportion of loans (currently 22%) is a major challenge to make the microfinance business model viable. Has been to rely on bricks and mortar branches and a broad base of human resources in addition to a large extent to high operating costs. 11

Credit Risk: Overall quality of credit portfolio of the sector is still unsatisfactory. However, rapid growth in 2007 and 2008 to finance several small lending institutions for the same customers in a saturated market. Due to the lack of adequate internal controls, the phenomenon of excessive borrowing by the customer has the ability to spread, and the creation of indirect effects. In addition, high rates of inflation affects the ability of borrowers to repay small and growing trend in the pricing of small loans may also create the risk of default

Organizational Development: : Sustainable growth and organizational

development go hand in hand. To a large extent, the quality of current provision of management teams, technology, and internal control systems for micro-finance players are not conducive to the desired level of growth.

External factors: The macroeconomic environment and the situation to defy the law and order prevailing in the country are also discourage the growth of the microfinance sector

To address these challenges, the microfinance sector needs to be more innovative, more efficient, and more transparent. Diversity: There is government commitment and broad-based financial inclusion to promote overall economic growth. It will be important to continue the implementation of policy approaches that provide financial incentives for sustainable access and use a wide range of services (savings and loans, payments and transfers, and insurance). Industry needs to move away from the approach and provide credit only comprehensive financial services such as small savings, remittances, and micro insurance. Innovation: Both policy makers and microfinance players are keen to encourage technological innovation and institutional means to broaden access to and use of the financial system. SBP will launch soon Innovation Challenge Fund financial aid under the auspices of the United Kingdom under the auspices of "fiscal consolidation program (FIP)", to support the institutional and technological innovations in the industry. To reduce

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operating costs and achieve scale rapidly, and the financing of small enterprises have the players to take advantage of technology and mobile phone networks customers "Will help such as these platforms have also made proposals specialized business, for example, financially inclusive government to people (G2P) payments. And will encourage the SBP models that promote branches of the bank. and the SBP will also establish and lead an informal consultative forum of key stakeholders in the branches of banks. Advisory Group will create synergies, and to facilitate the innovation sector and market development, and the development of collective understanding about the critical issues. Funding: Deposit mobilization will be crucial for the development of long-term financing for small projects. However, in the short and medium term, the average systolic blood pressure Poverty Alleviation Fund, in collaboration with interested donors, to develop plans for joint funding for this sector. It will be base on the funding of current credit instruments further enhance the other. Expansion in the placement of MFBs, SBP will consider allowing access to payment systems, banking and the development of systems for the protection of deposits. Enterprise lending: Must expand the scope of lending to different sectors of economic and geographic. SBP will issue regulatory guidelines for MFBs to broaden loans, and developing the structure of the reports to assess the geographical distribution of the growth of microfinance, possible funding from donors to support the product development and market studies. The expected growth in the portfolio also requires the development of strong risk management systems within organizations microfinance. It is expected that MFCIB leader in Lahore to be extended to the rest of the country. This would reduce the incidence of customer over-indebtedness Institutional development: identify and promote the special needs of institutional and capacity development of individual players, assistance under the existing Fund "FIP institutional strengthening." Consumer protection and empowerment: SBP will review and strengthen its regulatory and oversight to ensure the protection of the rights of microfinance clients. In addition, the average systolic blood pressure, in close collaboration with key stakeholders launched nation-wide program of financial literacy to raise awareness among customers about the products and banking services and their rights.

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Corporate Governance: It will be for microfinance organizations to improve governance standards of the best strategic direction and effective control, and strong internal controls Minimum regulation of MFIs: Microfinance sector is informal is still a significant market share, reputation, and therefore bears the danger of bad credit because of possible decisions and / or undesirable practices of consumer protection. Therefore, it will be a feasibility study to have the United Nations and MFIs with the regulations within the regulatory minimum. This will improve the discipline at the sector level, transparency, and governance. Microfinance in Pakistan did not achieve major breakthroughs to reach the millions of deprived people who need a wide range of financial services. Pakistan is one of the lowest levels of penetration in the financial world, with 56% of the adult population is excluded completely, and another 32% served informally. However, despite the great support from the government, donors and the State Bank of Pakistan, and the microfinance sector are only able to take advantage of a small part of the potential market, with borrowers currently stands at nearly 2 million people. In 1999-2000,the various government initiatives to establish a basis for sector2 national microfinance. In 2007 heralds the second stage, where politics and focus on the strategy was to accelerate the pace of growth through scalable and sustainable approach. To promote sustainability and encourage market-driven official, State Bank of Pakistan (SBP), with a wider consultation of stakeholders, and develop a national strategy entitled "Awareness expand microfinance" (EMO), which was approved by the Republican Party in February 2007. The strategy set out a target of three million borrowers to be achieved by the end of 2010 and 10 million by the year 2015 and provided the orientation of trade and sustainable development of this sector. From 2007 to 2010, major reforms were implemented in the framework of the strategy and the EMO sector experienced high annual growth of nearly 43% in 2007 and 2008. However, decreased rates of growth in the fourth quarter of 2008, growth has been slow since then, defaulting borrowers in microfinance for almost 2 million people. POLICY AND REGULATORY FRAMEWORK OF MICROFINANCE Branchless Banking Regulations: in order to increase the finalcial mobility SBP has initiate a branchless banking system which is a ver good step to make the process

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much easier. In November 2008 Telco M/s Telenor was the one to aquire the higher shares of tamer microfinance bank. Tameer has made now 'solution 2.0 banking as the primary operating system for raising and service branches in the branches of the banking network and branches is now able to use the "bank branches" units to provide banking services real time at a cost of low financial overheads not only within this geographic region neighbors but also in the remote community sites spread wide. In half the period of 2009, and also the reconstruction of BB any model 'Easypaisa ". Under this model, the Bank provides easy transfer of funds and the occasion of the payment of bills through a network of shops paisa easy, and privileges to Telenor, Telenor Sales and service centers branches microfinance Bank of reconstruction. It provides services like paying online bills, internal transfers of services and P2P, and transfers of major financial. This BB model has attracted the interest the new investors as this branchless banking system has setup profitable and scalable models in microfinance.

. FMFB Pakistan Post Partnership: The last model to finance small projects was appeared in 2008, the first bank to finance in part, a partnership initiative with the participation of Pakistan and to expand the scope of microfinance services to vulnerable populations in rural and urban areas in the country. This partnership has addressed the inaccessibility of microfinance to the needy people. FMFB has more 40,000 borrowers which are being served through 68 different offices of PPO. . Kiosks/Service Centres: The third development with regard to new and effective channels cost of providing the SBP's decision to allow MFBs to open kiosks in the headquarters of a third party. MFBs that will apply for the opening kiosks in time they are submitted its annual plan to expand the branch. The planned detection of micro-finance bank is already open kiosks at its sister institution disclose any concern.

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These kiosks increase especially detection strategy to mobilize deposits from the target market.

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Indicators MFBs

Dec07 MFIs Total MFBs

Dec08 MFIs Total MFBs

Dec09 MFIs Total MFBs

Sep10 MFIs Total

Number of MFPs Number of Branches

6 232

24 870

30 1102

7 271

20 1186

27 1457

8 854

21 1159

29 1443

8 289

23 1309

31 1598

Total No. of Borrowers

435,40 7

831,7 75

1,267,18 2

558,057

1,137,36 4

1695421

626,219

1,199,82 6

1,826,04 5

694,249

1,378,06 2

2,072,311

Number of Male Borrowers

65,391

560,9 23

626,314

449,421

442,205

891626

449,114

347,363

796,477

496,614

435,962

932,540

Number of Female Borrowers Gross loan portfolio (Rs. in '00

370,01 6

270,8 52

640,868

108,636

695,159

803,795

253,930

775,638

1,029,56 8

197,635

942,136

1,139,771

4,456,2 59

8,293 ,724

12,749,9 83

6,886,4 40

13,114,7 49

20,001,1 90

9,004,0 00

12,719,0 00

21,723,0 00

10,789,5 43

15,584,4 57

26,374,00 0

Average Loan Balance (Rs)

10,235

9,971

10,062

12,340

11,531

11,797

12,807

11,326

11,896

14,524

12,429

12,727

Total No. of Depositors Deposits (Rs. In '000)

146,25 8 2,822,8 45

146,258

254,381

254,381

459,024

459,024

724,647

724,647

2,822,84 5

4,115,6 67

4,115,66 7

7,099,2 06

7,099,20 6

8,328,78 9

8,328,789

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PERFORMANCE INDICATORS OF MICROFINANCE BANKS IN PAKISTAN, AS OF END SEPTEMBER 2010 Branche Borrowe s 113 rs 352,743 Advance Deposi s ts (PKR (PKR 000) 4,129,635 000) 198,782 Assets (PKR 000) 6,620,837 Borrowi ng (PKR 000) 4,019,160 Equity (PKR 000) 2,230,746 1.96% 118.90% NPL (%) OSS (%)*

MFBs

KBL

FMFB

83

204,301

3,181,759

5,291,011

6,051,049

---------

523,428

4.97%

103.10%

Tamee

40

104,726

2,835,506

2,296,135

4,136,529

513,379

1,089,686 0.92%

85.50%

r 27 18,142 449,178 474,050 1,271,234 300,000 402,065 3.65% 52.2%

Kashf

Pak

17

8,113

109,214

28,125

719,455

---------------

677,340

9.09%

90.9%

Oman 5 6,224 84,251 40,686 278,122 --------------230,747 38.51% 101.01%

Netwo

rk 4 14 726 23,221 122,826 ----------96,963 64.46% 45.60%

Rozgar

Total

289

694,263

10,790,269

8,352,010

19,200,052 4,832,539

5,250,975 3.00%

99.2%

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LITERATURE REVIEW According to United Nation (UN) (2000) The term "microfinance institutions" now, and indicates a wide range of organizations specializing in providing these services, including NGOs, credit unions and cooperatives, and private commercial banks, non-bank financial institutions and parts of the state-owned banks. "The poor are not able to get loans from commercial banks, usually due to a lack of warranty and guarantee. But there are many other reasons that also engaged the commercial banks are not willing to finance the poor. These are the reasons that the poor have less education, no experience, training, adequate, and expenditure high in small loan transactions, and the low rate of profit. therefore the option of limited access to loan to pay the poor result in more poverty. this situation led to appear the idea of micro credit and microfinance. Micro-finance, and thus, a means to finance people, they do not have a warranty or guarantee of any property. Microfinance is a means of financing for the poor to work, to reduce poverty and enable them and giving social benefits in a sustainable manner. According to Murdoch, and Agion, due to the financing of small enterprises, and there are many possibilities have emerged, including the extension of markets, reducing poverty and promoting social change. But there is widespread confusion that microfinance and lending to the poor only loan, but as we have stated that microfinance is not more loans, but also include issues of poverty alleviation, the development of the social impact on the poor and education of the poor to save. Therefore, micro-finance institutions, today, not only NGOs, but as the banking system overall. This discussion leads us that microfinance is a form of financial services to poor people to help them for their business activities through the granting of small loans. Microfinance is a term from a wide range of financial services such as deposits, loans, payment services and financial transfers, and insurance for disadvantaged families and those with limited income, and their small enterprises Microfinance services are provided by three (3) types of sources: (i) Formal institutions, such as rural banks and cooperatives Non-Productivity of Microfinance Loans in Pakistan (ii) Semi-formal institutions, such as (NGOs) nongovernment organizations (iii) Informal sources such as money lenders and shopkeepers

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Institutional microfinance is defined to include microfinance services provided by both formal and semiformal institutions. Microfinance institutions are defined as institutions whose major business is the provision of microfinance services. (Asian Development Bank) F.A.J. Bouman's (1990) Microfinance is the provision of very small loans that are re-paid within short periods of time, and is essentially used by low income individuals and households who have few assets that can be used as collateral. State Bank Of Pakistan (1998) Microfinance may be defined as the financial services needs including credit, savings, insurance and payment transfers etc., of the poor households and their micro enterprises. According to Ledgerwood (2000) Microfinance has evolved as an economic development approach intended to benefit low-income women and men. The term refers to the provision of financial services to low income clients, including the self employed. In the simple and short words, I can define the microfinance in the following words: Microfinance is the way to alleviate of poverty by providing the micro services (credit, insurance, saving, health etc.) to the poor or unbanked people.Economic activities base upon sellers and buyer and their capacity. Sellers, before market their product, look at buyer intention and capacity. On the other hand, banking activities depend on both sellers and buyers. Lenders (MFIs) finance both sellers and buyers for their activities. Commercial Banks invested in projects at large scale while with this, banks invested in consumer finance also. While MFIs usually dont invest in consumer finance, but give finance only for micro enterprise. MFIs encourage people to lift up their standards by doing businesses and earning from them and this is a consistent and sustainable way. According to ADB (2008) Microfinance is the provision of a broad range of financial services such as deposits, loans, payment services, money transfers, and insurance to poor and low-income households and, their microenterprises. Nair Nawaz (2006) concludes that no single intervention can defeat poverty in general and urban poverty. In particular poor people need employment, schooling and health care. Some of the poorest require immediate income transfers or relief to survive. Access to financial services, forms a fundamental basis on which of many of the other essential

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interventions depends. Moreover improvements in health care, nutritional advice and education can be sustained only when households have increased earnings and greater control over financial resources. Financial services thus reduce poverty and its effects in multiple concrete ways. And the beauty of micro-finance is that, as programs approach financial sustainability they can reach far beyond the limits of scarce donor resources. Financial services thus reduce poverty and its effects in multiple concrete ways. And the beauty of micro-finance is that, as programs approach financial sustainability they can reach far beyond the limits of scarce donor resources. educational qualification. Most of them were only metric. Due to this factor they were unable to keep a proper track of their business records. According to the micro-finance borrowers of SME bank; the interest on the loaning amount high. However, the disbursement of loan is quick and large amount of loan is issued in lump sum. Despite, the less reach of MFIs to their targeted customers the improvement brought by them in the business conditions of small entrepreneurs being reached is highly appreciable Meier (2006)conclude that obviously, the goal of deriving are liable credit scoring function, which can be used by MFBA to assist in the credit decision process, was not reached. From our analysis, we conclude that the following reasons are responsible for this: a.) Insufficient percentage of long enough arrears; and, b.) Potentially, measurement errors, errors in the analysis; c.) Our wrong choice of independent variables. The obtained results give some insights into which factors possibly influence arrears. Looking at the variables, which had significant coefficients other than 1, it seems tobe that non-business income and expenses play an important role in repayment behavior. As one would expect, the risk of falling into arrears is increased by the absence of income earned outside the business analyzed (i.e. otherincome and Family income). In the area of business structure, results of the analysis suggested that the higher the debt over equity ratio, the higher the risk of delays in payment. The sector of business activity also seems to be influential. Whereas a full assessment of the risks associated with each sector was not obtained, results suggest a noticeable increase of risk for businesses engaged in production, when compared to trade. Apart from that, the clients age is important, the analysis confirms the common sense belief that risk of arrears diminishes with age. Probably the most confusing finding of this analysis is that the probability of delays increases with the number of employees. Since it is

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somewhat hard to construct a logical explanation for this, this result might be an artifact of some sort and should be used with caution. In summary, we believe that MFBA should currently not consider developing a Developing Credit Scoring Model for Microfinance Bank of Azerbaijan 15credit scoring model at this stage. Given the low volume of .bad credits. Such attempts would be in vain. We would rather recommend to developing, based on the results of this analysis, and in co-operation with the banks credit officers, an expert based scoring model/ scorecard. Such a model would, at this stage, help to standardized the decision making process in the bank, and thus allow reducing credit transaction costs and time, while relying on the expert knowledge of the banks loan officers. Asaf khan (2005): concludes that a large body of evidence now exists which shows that financial sector development can make an important contribution to economic growth and poverty reduction. This is especially likely to be true in developing countries, whose financial sectors are likely to be particularly underdeveloped, and without it economic development may be constrained, even if other necessary conditions are met. However, the poor in developing countries often do not have access to ongoing formal financial services and are forced to rely instead on a narrow range of often risky and expensive, informal services. This constrains their ability to participate fully in markets to increase their incomes and to contribute to economic growth. Micro-finance is not a panacea, but it is more promising approaches that may we have for development for sometime in its own. I suggest that by thinking about financial sector development from micro-finance vantage point. We might increase the likelihood that financial sector development more broadly can contribute to poverty alleviation. Mohammad Arshed khan (2004):concludes that the problem of poverty is a global issues specifically the third world countries. People falling in the definition of poor include those who either lack adequate sources of income to meet the socio- economic need of their families. Poverty is manifested in various forms like lack of resources to have access to the health facilities, education and decent living besides high rate of illiteracy, high drop-out ratio of children, child labor and bonded labor where the whole families are tried to undertake the tasks assigned by person who provides them fix amount of money in exchange for their labor for completion of specified job. All the above-cited forms of poverty are visible in our societies specifically the village communities and semi-urban

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areas. Long term poverty alleviation strategies take a considerable period of time to produce the desired impact; therefore short-term strategies can prove very effective and produce the desired results by redressing the situation within shortest possible times as evidenced from Bangladeshs success, which has been achieved primarily due to a bold and innovative micro-financing scheme launched by the grameen bank. Donaghue, Kieran (2004): conclude that the world of micro finance is in one sense heterogeneous, comprising a multitude of organizational types, methodologies, products and scales of operation. But convergence around a commitment to a more commercial approach, at least in the sense of recognition of the need to charge interest rates sufficient to cover costs, is increasingly evident. Within this broad convergence there are many variations, around such issues as the need to target the very poor, the developmental value of bundling nonfinancial with financial services, and the degree of emphasis on financial services that promote income growth as against those that reduce vulnerability. But on an underlying tenetthat delivering financial services to large sections of the worlds poor can and should be done without subsidythere is increasing agreement. The implication that many poor households can pay the full cost of one important means of their own development explains much of the excitement that Micro finance has generated among its advocates. Countries of the Asia Pacific region exemplify convergence in their micro finance industries to varying degrees. Indonesia, with its extensive network of financial intermediaries reaching a large proportion of poor household son a sustainable basis has in many respects laid out the path forward, although it has some way to go itself. But it remains to be seen whether and with what degree of enthusiast countries such as Viet Nam and China will follow. The fact that in a number of countries directed credit-type programs continue to operate, even though the model itself is intellectually on the defensive, indicates the political attractiveness of these programs. And the modest scale of a majority of the regions NGO-MFOs raises questions about the role of this institutional form in the sectors growth. The South Pacific poses its own set of issues, and the relevance of micro finance to the development challenges of this region remains unclear. This paper has highlighted a number of success stories in in micro finance in Asia, successes that suggest that the poor can be provided with improved access to financial services without subsidy, and that they value this access highly. Whether these successes reflect specific and

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relatively unusual circumstances, or whether they contain lessons of broad relevance to development, are difficult questions requiring detailed analysis. John Weiss (2003): conclude that despite the extensive spread of micro finance, research studies on the actual impact of MFIs are often more ambivalent about its impact than is the aid community. In part this reflects the methodological problems of establishing appropriate statistical controls and in part no doubt also the range of variation found in practice in the way in which micro finance operates. Our view is that, despite the difficulties, more good poverty impact studies are important to sharpen understanding of its role as an anti-poverty tool, to assess its impact in different environments and to shape the debate on ways forward for MFIs. Amongst practitioners there is widespread acceptance of the view that it is both necessary to diversify the products of micro finance and adapt them to local circumstances. Any simple replication of formulae successful elsewhere is rightly treated with suspicion. However the evidence surveyed here suggests that the conclusion from the early literature, that whilst microfinance clearly may have had positive impacts on poverty it is unlikely to be a simple panacea for reaching the core poor, remains broadly valid. Reaching the core poor is difficult and some of the reasons that made them difficult to reach with conventional financial instruments mean that they may also be high risk and therefore unattractive microfinance clients. There has been an extensive debate, which we do not touch on here, on the financial sustainability of MFIs. We would simply make the point that just because an institution needs a subsidy to cover its costs in itself is not a reason for not supporting the institution. The issue should be, what benefits in terms of income gains for the poor. can be achieved with the subsidy and how does the ratio of subsidy to benefits compare with that for other interventions. Detailed cost effectiveness studies are rare and those that are available show both high and low scores for MFIs in the same country. Hence there is a need to continually improve design and outreach and to see MFIs as part of the package for targeting the poor, rather than the whole solution. Our view is that despite the difficulties, poverty impact studies of MFIs can provide important information and that continued efforts should be made to sharpen understanding of the impacts of different forms of MFI activity on the poor, including their cost-effectiveness. Dr.vijay k. bhasin (2001) conclude that in the present study, we have evaluated the performance of the micro-finance enterprises with regard to the training services to the

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hairdressers, dressmakers and wood-processors. The NBSSI has been performing very well as far as the training services are concerned. As far as the provision of credit is concerned, NBSSI has not performed well according to the expectations of hairdressers, dressmakers and wood-processors because of lack of and the rate of loan recovery could be increased. During the descriptive analysis, we have observed that hairdressers have used different sources of informal finance for the expansion of their businesses and this finding stands in contrast with the findings of Aryeetey(1992) and Soyibo (1994). Our finding that majority of Hairdressers, Dressmakers, and Wood-processors took loans from their friends/relatives and suppliers/clients is in conformity with the findings of RPED (1993), Hyuha et al. (1993 )and Atieno (1998). Our finding that it is only the informal sector that caters for the needs of hairdressers, dressmakers, and wood-processors in Cape Coast is in conformity with the findings of Aryeetey (1994) and Soyibo (1994). Respondents were asked to indicate the reasons for borrowing from the various sources and they indicated that the most important reasons are favorable terms of lending, easier formalities and no collateral required. Respondents were asked to indicate what happens if they are unable to pay back the loan and they indicated that they face credit interruption, get persistent request for repayment and rescheduling. On the front of efficiency measurement, we observed that the stochastic frontier production functions are preferred to average production functions in all the three micro-enterprises. The most relevant inputs for the estimation of these frontiers are equipment, electricity and man-hours worked. We observed many variations in the efficiency of hairdressers, dressmakers and wood-processors within each group and across these groups, which indicates that there is ample scope for raising the level of efficiency in these micro-enterprises. Our findings for the estimates of technical efficiencies are very similar to the findings of Njikam (1998), Ajibefun and Daramola(1999) and Obwona (2000). The most significant determinants of technical efficiencies of hairdressers, dressmakers and wood-processors were identified as age of operator, business experience, level of education, training programmers, access to credit, and the contact with the lender. Our findings with regard to the determinants of technical efficiency are inconformity with some of the findings of King and Levine (1993),Ajibefun and Daramola (1999) and Obwona (2000)

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Simon Philips (1997)concludes that how am researching how beneficial Micro credit enterprises have been in overcoming poverty and what is the capacity of Micro credit enterprises to affect more general change. My research proceeds from questions rose atthe Conference on Hunger and Poverty regarding the effect of governments and international organizations on NGOs and other civil society organizations, and the capacity of credit as an entry point for larger social change. David Roodman called 2009: a milestone year for microfinance. And it certainly was providing two separate randomized studies on the impact of microcredit. Simultaneously, other studies have also emerged on the broader topic of microfinance. Yet, certainly the literature of microfinance cannot be so new? After all, governments have long known that increasing access to rural and low-income finance was important. India instituted a rural bank expansion program in 1977. Mexico did something similar in 1992. According to Otero (1999): The provision of financial services to low-income poor and very poor self-employed people. These financial services according to Ledgerwood (1999) generally include savings and credit but can also include other financial services such as insurance and payment services. Schreiner and Colombet (2001): They define microfinance as the attempt to improve access to small deposits and small loans for poor households neglected by banks. Therefore, microfinance involves the provision of financial services such as savings, loans and insurance to poor people living in both urban and rural settings who are unable to obtain such services from the formal financial sector. Sinha (1998): states microcredit refers to small loans, whereas microfinance is appropriate where NGOs and MFIs1 supplement the loans with other financial services (savings, insurance, etc). Robinson 1980: represented a turning point in the history of microfinance in that MFIs such as Grameen Bank and BRI2 began to show that they could provide small loans and savings services profitably on a large scale. They received no continuing subsidies, were commercially funded and fully sustainable, and could attain wide outreach to clients. Economic activities base upon sellers and buyer and their capacity. Sellers, before market their product, look at buyer intention and capacity. On the other hand, banking activities

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depend on both sellers and buyers. Lenders (MFIs) finance both sellers and buyers for their activities. Commercial Banks invested in projects at large scale while with this, banks invested in consumer finance also. While MFIs usually dont invest in consumer finance, but give finance only for micro enterprise. MFIs encourage people to lift up their standards by doing businesses and earning from them and this is a consistent and sustainable way. Zohir and Matin (2004) state that the interaction within MFI groups can create co-operation and trust that not only facilitates the microfinance activities, but also contributes benefits beyond the service provided, such as a greater sense of community, trust and reliance on the group in times of crisis. These networks can lay the foundations for other social capital developments in the community. They state that examples of cultural impacts of social intermediation that affect the greater community could be a change in attitude of society towards the acceptable age of womens marriage, domestic violence, dowry, etc. (ibid.). Osmani (1998) analyzed the impact of credit on the well being19 of Grameen Bank women clients. The project was found to have increased their autonomy in that they were able to spend family income more freely than non-clients. They had greater control over family planning, but the project was not shown to have had an impact on clients control over other decision-making but they were found to have greater access to household resources than non-clients did. Robinson states that the 1980s represented a turning point in the history of microfinance in that MFIs such as Grameen Bank and BRI2 began to show that they could provide small loans and savings services profitably on a large scale. They received no continuing subsidies, were commercially funded and fully sustainable, and could attain wide outreach to clients (Robinson, 2001). It was also at this time that the term microcredit came to prominence in development (MIX3, 2005). The difference between microcredit and the subsidised rural credit programmes of the 1950s and 1960s was that microcredit insisted on repayment, on charging interest rates that covered the cost of credit delivery and by focusing on clients who were dependent on the informal sector for credit (ibid.). It was now clear for the first time that microcredit could provide large-scale outreach profitably. MIX defines an MFI as an organisation that offers financial services to the very poor. (MIX, 2005).

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According to the UNCDF (2004) there are approximately 10,000 MFIs in the world but they only reach four percent of potential clients, about 30 million people. On the other hand, according to the Microcredit Summit Campaign Report (Microcredit Summit, 2004) as of December 31st 2003, the 2,931 microcredit institutions that they have data on, have reported reaching 80,868,343 clients, 54,785,433 of whom were the poorest when they took their first loan. Even though they refer to microcredit institutions, they explain that they include programs that provide credit for self-employment and other financial and business services to very poor persons (Microcredit Summit, 2004).

Research Methodology This is an exploratory research and would try to identify the factors responsible for the differences in the MF policy and its realization. It is based on secondary data that is collected through various resources mainly literature available over the internet. A few key

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words that were used for searching such online literature were microfinance, microfinance in Pakistan, microfinance in developing countries, role of policies in microfinance. Various reports of the World Bank (CGAP), reports by SBP, various institutes of Pakistan (including Pakistan Microfinance Network), and other world financial institutions (Asian Development Bank, United Nations Development Programme etc) have been studied to gather the relevant information that was used in order to draw conclusions on the subject. to analyze the trends and growth in the microfinance sector of Pakistan following methods has been used in my research Graphical Analysis Mean Standard deviation Covariance Linear regression model

Graphical Analysis
There are many statistical tools for model validation, but the primary tool for most modeling applications is graphical residual analysis. Different types of plots of the residuals from a fitted model provide information on the adequacy of different aspects of the model. Numerical methods for model validation, such as the R2 statistic, are also useful, but usually to a lesser degree than graphical methods. Numerical methods for model validation tend to be narrowly focused on a particular aspect of the relationship between the model and the data and often try to compress that information into a single descriptive number or test result. Numerical methods do play an important role as confirmatory methods for graphical techniques, however. For example, the lack-of-fit test for assessing the correctness of the functional part of the model can aid in interpreting a borderline residual plot.

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Mean: In mathematics and statistics, the arithmetic mean, or simply the mean or average when the context is clear, is the central tendency of a collection of numbers taken as the sum of the numbers divided by the size of the collection. The collection is often the sample space of an experiment. The term "arithmetic mean" is preferred in mathematics and statistics because it helps distinguish it from other means such as the geometric and harmonic mean. In addition to mathematics and statistics, the arithmetic mean is used frequently in fields such as economics, sociology, and history, though it is used in almost every academic field to some extent. For example, per capita GDP gives an approximation of the arithmetic average income of a nation's population. While the arithmetic mean is often used to report central tendencies, it is not a robust statistic, meaning that it is greatly influenced by outliers. Notably, for skewed distributions, the arithmetic mean may not accord with one's notion of "middle", and robust statistics such as the median may be a better description of central tendency. Standard Deviation: It is a widely used measure of variability or diversity used in statistics and probability theory. It shows how much variation or "dispersion" exists from the average (mean, or expected value). A low standard deviation indicates that the data points tend to be very close to the mean, whereas high standard deviation indicates that the data points are spread out over a large range of values. The standard deviation of a statistical population, data set, or probability distribution is the square root of its variance. It is algebraically simpler though practically less robust than the average absolute deviation. A useful property of standard deviation is that, unlike variance, it is expressed in the same units as the data. Co Variance: In probability theory and statistics, covariance is a measure of how much two random variables change together. If the greater values of one variable mainly correspond with the greater values of the other variable, and the same holds for the smaller values, i.e. the variables tend to show similar behavior, the covariance is a positive number. In the opposite case, when the greater values of one variable mainly correspond to the smaller values of the other, i.e. the variables tend to show opposite behavior, the covariance is negative. The sign of the covariance therefore shows the tendency in the linear relationship between the variables. The magnitude of the covariance is not that easy to

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interpret. The normalized version of the covariance, the correlation coefficient, however shows by its magnitude the strength of the linear relation. Regression Model: In statistics, regression analysis includes many techniques for modeling and analyzing several variables, when the focus is on the relationship between a dependent variable and one or more independent variables. More specifically, regression analysis helps one understand how the typical value of the dependent variable changes when any one of the independent variables is varied, while the other independent variables are held fixed. Most commonly, regression analysis estimates the conditional expectation of the dependent variable given the independent variables that is, the average value of the dependent variable when the independent variables are held fixed. Less commonly, the focus is on a quantile, or other location parameter of the conditional distribution of the dependent variable given the independent variables. In all cases, the estimation target is a function of the independent variables called the regression function. In regression analysis, it is also of interest to characterize the variation of the dependent variable around the regression function, which can be described by a probability distribution. Regression analysis is widely used for prediction and forecasting, where its use has substantial overlap with the field of machine learning. Regression analysis is also used to understand which among the independent variables are related to the dependent variable, and to explore the forms of these relationships. In restricted circumstances, regression analysis can be used to infer causal relationships between the independent and dependent variables

GRAPHICAL ANALYSIS WITH RESULTS AND DISCUSSION

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The beginning of a new era in microfinance was marked by the 2001 Microfinance Ordinance. The ordinance along with other regulations by SBP, laid some foundations for the development of the financial system. The focus of such a strategy was to realize the importance of the Micro finance Banks (MFBs) and their outreach to the population. By 2007, six MFBs received their licenses. Overall the development of this industry has been rapid and less solid as expected. There has been a rapid increase in the development of microfinance institutions since (2001 -2010). Due to high inflationary rate and unemployment in the country people are availing more loans, and a microfinance institution is the mean through which poor and needy people can avail loan. Today, there are millions of poor people around the country who turn to be entrepreneurs through the micro-credit sector. Microcredit is the extension of small loans to unemployed, poor entrepreneurs and others living in poverty not bankable. These individuals lack collateral, steady employment and a verifiable credit history and therefore cannot meet even the most minimum qualifications to gain access to traditional credit.

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