DissertationOn

“Impact of micro-finance on income generation & employment generation”

(A case study of Bank of Khyber)

DEDICATED

TO

My kind mother and my father who devotedly sacrificed their all assets to bring me to the position and they through their love, affection, close care, moral and financial Support, left no stone unturned to afford me sincere help at all critical occasions of life.

TABLE OF CONTENTS

CONTENTS Page No :

ACKNOWLEDGEMENT iEXECUTIVE SUMMARY iiLIST OF ACRONYMS iiiLIST OF TABLES iv

LIST OF GRAPHSv

LIST OF CHART viCHAPTER 1 INTRODUCTION

1.1 Background Of Study 1

1.2 Research Question 3

1.3 Objectives of the study 3

1.4 Importance of Research 4

1.5 Feasibility Of Research Work 4

1.6 Limitations 5

1.7 Scope Of study

1.8 Research Methodology

1.9 Scheme Of Report

CHAPTER 2 LITERATURE REVIEW 6

CHAPTER 3 MICRO FINANCE

3.1 A Brief History Of Micro Finance 13

3.2 Who Are The Clients Of Micro Finance? 17

3.3 Micro Finance Institution 18

3.4 Micro Finance Service Providers 18

3.5 Regulation And Government Initiatives 20

3.6 Steps For The Development Of Micro Finance Sector In Pakistan

By The Government

20

3.7 Scenario Of Micro Finance In Pakistan 23

3.8 Reasons For Weak Micro Finance In Pakistan 24

3.9 Problems Associated With Micro Finance 24

3.10 Need For Micro Finance 24

CHAPTER 4 BANK OF KHYBER

4.1History Of Bank Of Khyber 26

4.2 Vision 28

4.3Mission Statement 28

4.4Core Values 28

4.5Board Of Directors 29

4.6Network Of Branches 29

4.7Objectives Of Bank Of Khyber 29

4.8Policies Of Bank Of Khyber 30

4.9Micro Finance Unit Of Bank Of Khyber 31

4.10Bank Of Khyber Organization Chart 32

CHAPTER 5 ANALYSIS OF DATA

5.1 Findings & Analysis 34

5.2SWOT Analysis Of Bank Of Khyber 52

CHAPTER 6 CONCLUSIONS & RECOMENDATION

6.1 CONCLUSIONS 55

6.2 RECOMMENDATIONS 57

BIBLOGRAPHY 60

ANNEXURE

ACKNOWLEDGEMENTS

I would thank my supervisor Mr. Zia ud din for his help and patience through out my

report.I also wish to express thanks to the staff of the bank of Khyber and special thanks

to Mr. Shahid Amin who is MTO in Bank of Khyber, sadder road branch Peshawar.

And also thankful to staff of the Bank of Khyber, state life branch especially department

of MFD for his timely help and guidance in conducting the Survey and providing me

with the information needed for this research.

I would like to mention name of my cousin Mr. Nauman Ahmed Raza whose

cooperation greatly facilitated this process, and special thanks to my family members for

the support, which they give to me during my research.

Nida Aman

EXECUTIVE SUMMARY

Micro-finance is the major source of uplifting that segment of the population that is at the

lowest ebb of per-capital income. The low-income segment of the population, especially

in the under-developed and developing countries, generally does not have any source of

financing that could possibly ensure a secure income source for their future.

In most underdeveloped and developing countries the high rate of unemployment is

greatly comprised of the population with least income. In order to give this segment of

population an impetus, financial institutions need to give them a kick-start financing

facility upon which they may build later on, so as to start earning for themselves on

regular basis. Thus, Micro-finance serves a dual-pronged purpose in that it not only helps

raise the employment ratio but also increases the per-capita income.

In many underdeveloped and developing countries, micro-finance has been the biggest hit

in this regard. The most astounding example is being that of Bangladesh. Keeping in

view the questions of fact that Bangladesh mostly comprised of low-income, unemployed

population, an entrepreneur took the initiative and started extending micro-finance

facility to the unemployed segment of the population. Micro-finance is not only fruitful in

terms of the low-income people but is also equally beneficial for the financial institutions.

It has been noticed that the low-income, unemployed population allocate the debt-funds

efficiently and the rate of loan default is very low among them.

In Pakistan however, micro-finance is still in the stage of inception. In order to develop

an entrepreneurial culture in the country a lot still needs to be done in Pakistan. Financial

institutions are still reluctant in extending micro-finance facilities to individuals for they

see a higher level of risk regarding loan default. The government on the other hand needs

to promulgate a sound and boasting policy in order to levitate the low-income,

unemployed segment of the economy. This will not only ensure a raise in the per-capita

income and employment ratio but will also lead to a sound and stable economy.

Bank of Khyber as a case study: The Bank of Khyber is providing loan to private as

well as public sector organizations, not only for the prosperity of the people but also for

the development of NWFP. In this way, job opportunities surface in different sectors,

mainly for the people of NWFP, which may help the country get out of the clutches of

unemployment and related poverty problems. Besides, the running finance & demand

finance facilities, it has also started loaning for small clusters, which has a separate

controlling department called the Micro Finance Department. MFD has been introduced

to cover the businesses, which are on a small scale either in the shape of shops, small

projects or home-level projects of ladies, like embroidery, beauty parlors & stitching

centers. The area, which is focus in this report, is to find out the impact of micro finance

on income and employment generation taking Bank of Khyber as a case study.The data

was analyzed and the results were drawn.

Findings: According to the results 50% of the respondents who received micro finance

facility are in the age range of 26 to 35. 93.33% of the respondents are male...66.66% of

the respondents have matric qualification. 93.33% of the respondents have sole

proprietorship. 93.33% of the respondents have borrowed loans for the purpose of

expansion of existing business,. 40% of the respondents have income between 4000-8000

before borrowing a loan,. 53.33% of the respondents have no worker in their business

before borrowing a loan. 50% of the respondent’s requests for the amount are in the range

of between 31000-40000 100% of the respondents paid installment monthly. 66.66% of

the respondents repay the loan in 18 months.66.66% of the respondents are not satisfy

from the interest rate.66.66% of the respondents are not feel easy to repay the loan. 40%

of the respondents have income between 8000-12000 after borrowing a loan .53.33% of

the respondents have two workers in their business after borrowing a loan 66.66% of the

respondents are not intend to re-borrow after repaying first loan. So the analysis shows

the positive impact of micro finance on income generation and employment generation.

RECOMMENDATIONS:

1. Proper training should be given to the finance credit officers in dealing with the

clients especially the microfinance-clients.

2. The MFIs should properly assist the client before sanctioning the loan

3. There should be proper back check and monitoring of the clients to minimize the

risk of default

4. To begin with, quick follow-up visits right after a missed payment is key to

reducing arrears.

5. The saving trend should be introduced in the micro-finance and the clients should

be educated for the savings.

6. The client should be properly educated for the utilization of the loan.

7. The professionals approach should be adopted by the MFIs in hiring micro-

finance staff to decrease the default.

8. The credit officers should be checked from time to time.

9. The credit officer’s appraisal should be conducted in the field.

10. The check and balance system for the credit officers should be introduced.

11. The efficient, trust worthy and interested employees should be hired for the post

of credit officers.

12. The micro-finance department in the commercial banks should be developed.

13. The credit officers should be provided facilities for motivation.

14. The disbursement and recovery should be done by credit officers.

15. Proper person among the group should be selected as a group member by the

MFI.

16. For group loans, regular visits to the home and business of the chairperson are

important

17. MFIs should use group-lending methods to lower transaction costs.

18. It should be ensured that each group should use the loan for the purpose specified

in the loan application.

19. Each member of the group should participate in all training activities

LIST OF ACRONYMS

BOK Bank of Khyber

HO Head office

MD Managing director

DEPTT Department

MFD Micro finance department

AVP Assistant vice president

SVP Senior vice president

SEVP Senior executive vice president

EVP Executive vice president

P.T & E DEPTT Personal training and establishment department

CF Consumer finance

CFF Consumer finance facility

SWOT Strengths weaknesses opportunities and threats

ORG Organizations

BOD Board of director

GOVT Government

RS Rupees

SBP State bank Pakistan

MCB Muslim commercial bank

HBL Habib bank limited

ABL Allied bank limited

IBP Institute bankers Pakistan

PICIC Pakistan industrial and commercial investment corporation

NIT National investment trust

LIST OF TABLES

LIST OF GRAPHS

S.no Tables Page. No

01 Table 1 (Age wise distribution of respondents) 3402 Table 2 (Gender of respondents) 3503 Table 3 (Qualification of respondents) 3504 Table 4 (Form of business of respondents) 3605 Table 5 (Purpose of borrowing a loan of

respondents)37

06 Table 6 (Total income of business of respondents before borrowing a loan)

38

07 Table 7 (No: of workers in business of respondents before borrowing a loan)

39

08 Table 8 ( Amount of loan borrowed of respondents) 4009 Table 9 (Rate of borrowing (annual)) 4110 Table 10 (Repayment mode) 4111 Table 11 (Repayment period) 4212 Table 12 (How is the interest rate) 4313 Table 13 (Easy to repay the principal amount plus

interest)44

14 Table 14 (Total income of business of respondents after borrowing a loan)

45

15 Table 15 (No: of workers in business of respondents after borrowing a loan)

46

16 Table 16 (intend to re-borrow after repaying first loan)

47

S.no Graphs Page. No

01Graph 1 (Age wise distribution of respondents)

34

02 Graph 2 (Gender of respondents) 3503 Graph 3 (Qualification of respondents) 3604 Graph 4 (Form of business of respondents) 3605 Graph 5 (Purpose of borrowing a loan of respondents) 3706 Graph 6 (Total income of business of respondents

before borrowing a loan)38

07 Graph 7 (No: of workers in business of respondents before borrowing a loan)

39

08 Graph 8 ( Amount of loan borrowed of respondents) 4009 Graph 9 (Rate of borrowing (annual)) 4110 Graph 10 (Repayment mode) 4211 Graph 11 (Repayment period) 4212 Graph 12 (How is the interest rate) 4313 Graph 13 (Easy to repay the principal amount plus

interest)44

14 Graph 14 (Total income of business of respondents after borrowing a loan)

45

15 Graph 15 (No: of workers in business of respondents after borrowing a loan)

46

16 Graph 16 (intend to re-borrow after repaying first loan)

47

LIST OF CHART

S.no Chart Page. No

01 Bank of Khyber organization chart 33

CHAPTER 1

INTRODUCTION

1.1 Background of studyMicrofinance is a term for the practice of providing financial services, such as

microcredit, microsavings or microinsurance to poor people. By helping them to

accumulate usably large sums of money, this expands their choices and reduces the risks

they face.As suggested by the name, most transactions involve small amounts of money,

frequently less than US$100. Microfinance is also associated with a positive impact on

social and human development. For example, impact assessments have found positive

changes in micro enterprise output, assets, employment and income. In additional to these

effects on the entrepreneurial activity of the poor, microfinance is being attributed with

positive effects on issues such as household income, savings, children's education, health

and nutrition, and women's empowerment.

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.

The Microfinance Institutions are specialized financial institutions, which cater to the

financial services needs of the poor. The commercial banks and other traditional financial

institutions are neither mandated nor have the capacities to serve the microfinance

market. They perceive the poor as high risk, high cost and difficult to serve market and

keep themselves away from them. The NGO-MFIs and the specialized poor focused

programs therefore, have been the major providers of microfinance both domestically and

internationally. The NGOs alone however, given their resource constraints- financial and

managerial- are not likely to substantially increase the outreach of MF services to the

poor in the foreseeable future. The concept of formal microfinance banks, having

capacity to provide a range of financial services to the poor on self sustainable and

commercial basis has therefore, emerged since mid 90s and gaining increased acceptance

in most parts of the world including Pakistan.

1.2 Research Question:

What is the Impact of micro-finance provided by bank of Khyber on income generation

& employment generation?

1.3 Objectives of the study:

The objectives of my research are:

1 To find out the impact of microfinance on employment generation.

2 To find out the impact of microfinance on the profitability of business.

1.4 Importance of Research:

This report will help generally & is of importance to the students who are working in the

same field and especially for those students who are studying Business sciences. This

report is also helpful for the financial institutions involved in the microfinance schemes

like Banks and NGOs.

1.5 Feasibility Of Research Work:

This research work is feasible because I have limited my work only to a single bank. This

specific approach to my work able me to complete my work within prescribed timeframe.

1.6 Limitations :

This study is limited to Bank of Khyber.

1.7 Scope of study:

As we know that most of the population of Pakistan lives under poverty line. The impact

of micro-finance on economy is that it eliminates poverty. It helps the poorer to improve

their living standard by sustaining small trades and business. This topic is selected

because it is very wider in scope due to its possible impacts in different forms on its

target clients. Poverty alleviation, income generation, employment generation and women

empowerment are few of its impact areas.

1.8 Research methodology:

For the purpose of writing this report, the following methods of data collection have been

used:

Primary data

Information collected for the first time and existing in raw form is known as primary

data.

It includes the following

a) Personal observations.

b) Discussions with staff of BOK.

c) Questionnaire.

Secondary data

The information, which has undergone through complete statistical techniques and exists

in a refined form, is known as secondary data.

It contains the following:

a) Internet

b) Books.

c) Bank of Khyber annual reports

d) Articles

1.9 Scheme of study:

This research has been divided into seven parts or chapters. CHAPTER (1) gives an “

Introduction” by informing the readers about the topic of study, purpose of conducting

such a study. It also tells about the way the research has been conducted, through

research design and research methodology. CHAPTER (2) is based on the “literature

Review”. CHAPTER (3) is about the “micro-finance” and issues related to micro-

finance and micro-finance institution. CHAPTER (4) is about the bank of my research

that is BANK OF KHYBER. CHAPTER (5) is about the “Analysis of data” that is

based on primary research conducted through the questionnaire targeting the clients of “

bank of Khyber”, CHAPTER (6) provides conclusion of the research and also some

recommendation for further improvements in the micro-finance sector.

CHAPTER 2

LITERATURE REVIEW

This chapter deals with the work done so far on Microfinance and its impact on different

areas of interest. For the purpose of simplicity, work of these authors on microfinance has

been summarized in brief paragraphs along with their names. The magnificent work done

by some of these authors are as follows:

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 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.

Naeem (2006) analyzes that micro-finance is not a new concept; however, Pakistan has

to go a long way in this sector through learning from others’ success stories as well as her

own experience in the sector. The findings in this previous chapter are based on the

survey of small enterprise micro-finance borrowers of the SME bank. The careful

analysis of those findings leads to the following concluding remarks. During survey it

was mission of micro-finance policy in Pakistan. It is because of many reasons. Majority

of people are unaware especially in rural areas about the micro-finance program, showing

somewhat inefficient marketing campaigns of the banks providing micro-loans. The

borrowers who used to applying for micro-finance to SME bank were having less

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

According to the survey; the income of majority of the small enterprises has already

become double after the utilization of micro-loans. 29% of the borrowers expanded their

existing business due to increase in their incomes.57% of the small entrepreneurs got the

ability to maintain and continue their existing business which was very difficult for them

before after the utilization of micro-loans. All these show a great impact of micro-finance

on the improvement of small enterprises. More specifically, the SME bank micro-finance

facility has vital role in improving the economic conditions of small enterprises, but to

make this institution more sustainable and beneficial, certain improvements are required

which have been presented in the form of recommendations in the next chapter. At the

end, in a concluding remark for the micro-finance industry, as found in literature review,

bright prospects can be forecasted for the growth and success of this industry in Pakistan.

Kristina Meier, Dan balk (2006) conclude that obviously, the goal of deriving a

reliable 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. other income 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

client's 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 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 a

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 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 Bangladesh’s success, which has been achieved primarily due to a bold and

innovative micro-financing scheme launched by the grameen bank

Kieran Donaghue (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 tenet—that delivering financial services to large sections of the

world’s poor can and should be done without subsidy—there 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 region’s NGO-MFOs raises

questions about the role of this institutional form in the sector’s 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 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 micro

finance 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 and wisdom a kapalu (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 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, dressmaker’s 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 programmes, 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).

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 at

the 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. The Micro credit Summit in

Washington in February 1997 will be the focus of the "macro" immersions of my thesis. I

also plan to include a short case study of the Grameen Bank's experience of scaling up.

CHAPTER: 3

MICRO-FINANCE

This Chapter encompass the history of Micro-finance, clients, institutions, service

providers, regulations, government initiatives and steps taken by government for the

development of micro finance sector in Pakistan. It also heaves light on the scenario of

micro finance in Pakistan, discussing future prospects of micro finance in Pakistan,

highlighting the reasons for weak micro finance in Pakistan. Chapter ends by

emphasizing on the need for micro finance in Pakistan.

3.1 A brief history of micro finance

Since the beginning of time and middle Ages:

Informal saving and credit groups have operated for centuries across the developing

world. In Europe, the Catholic Church founded pawnshops in the 15 century, spread

throughout the urban areas of region.

1700s-1800s:

Jonathon Swift initiated the Irish Loan Fund System, which provides small loans to poor

farmers who had no collateral; this system had about 300 funds throughout Ireland. In the

1800s, various types of larger and more formal savings and credit institutions began to

emerge in Europe, organized primarily among the rural and urban poor. These

institutions were known as People's Banks, Credit Unions, and Savings and Credit Co-

operatives. Then this system expends to Germany; where financial cooperatives give

birth in 1864, and other countries in Europe, North America, and finally developing

countries.

Early 1900s:

Adaptations of these models begin to appear in parts of rural Latin America. These rural

finance interventions aimed to modernize the agriculture sector, mobilize “idle” savings,

increase investment through credit, and reduce oppressive feudal relations that were

enforced through indebtedness.

1950s to 1970s:

Between the 1950s and 1970s, governments and donors focused on providing agricultural

credit to small and marginal farmers, in hopes of raising productivity and incomes. These

efforts to expand access to agricultural credit emphasized government interventions in the

form of targeted credit through state owned development finance Institutions, or farmer’s

cooperatives in some cases, that received loans on concession and were lent to customers

at below market interest rates. These subsidized schemes were rarely successful.

Meanwhile, starting in the 1970s, experimental programs in Bangladesh, Brazil, and a

few other countries extended tiny loans to groups of poor women to invest in micro-

businesses. This type of micro enterprise credit was based on solidarity group lending in

which every member of a group guaranteed the repayment of all members. These "micro

enterprise lending" programs had an almost exclusive focus on credit for income

generating activities targeting very poor (often women) borrowers. Early pioneers

include

Grameen Bank1;

In Bangladesh, Professor Muhammad Yunus established Grameen Bank in 1983 as a

challenge to existing collateral-based financial system, has had a promising result. It

operates exclusively for the poor on the promise that rural people, who won too little

land, support themselves as farmers, can never the less make productive use of small

loans and repays them on time. The bank also promotes social development by making

the poor accountable to individually and socially. Such intermediation improves

productivity and income of the poor. This, in turn, also improves their loan payment rate

and hence contributes to the Grameen Bank’s financial Viability. As the result it is the

most successful credit program for poor and this may be seen from the outreach status

and loan recovery so that the bank’s loan recovery rate has consistently remained above

90 percent. It spread rapidly to hundreds of villages

ACCION International2:

1 Grameen Bank is notable exception, which recently introduced a number of very popular deposit services into their product mix, including a pension saving account responds to poor Bangladeshi clients, need for longer-term saving (Hirschland, Saving Services for the poor: An Operational Guide, 143). 2 www.accion.org

An early pioneer, was founded by a law student Joseph Blatchford, to address poverty in

Latin America’s cities began as a student run volunteer effort in the shanty town of

Caracas with $90,000 raised from private companies, ACCION today is one of the

premier micro finance organizations in the world,

With a network of lending partners that spans Latin America, the United

States and Africa. ACCION international supported the development of solidarity group

lending to urban vendors; Foundation Carvajal developed a successful credit and training

system for individual micro entrepreneurs3.

SEWA Bank4:

In 1972 the Self Employed Women's Association (SEWA) was registered

as a trade union in Gujarat (India), with the main objective of "strengthening its

members' bargaining power to improve income, employment and access to social

security." In 1973, to address their lack of access to financial services, the

members of SEWA decided to found "a bank of their own.

1980s:

Through the 1980s, the policy of targeted, subsidized rural credit came under a slow but

increasing attack as evidence mounted of the disappointing performance of directed

credit programs, especially poor loan recovery, high administrative costs, agricultural

development bank insolvency, and accrual of a disproportionate share of the benefits of

subsidized credit to larger farmers. Financial system schools viewed credit not as a

productive input necessary for agricultural development but as just one type of financial

service that should be freely priced to guarantee its permanent supply and eliminate

rationing. The financial systems school held that the emphasis on interest rate ceilings

and credit subsidies retarded the development of financial intermediaries, discouraged

intermediation between savers and investors, and benefited larger scale producers more

than small scale, low-income producers.

3 Ledgerwood, Joanna. (2000). Microfinance handbook. Washington, D.C.:The World Bank 1818 H Street, N.W. 24 A bank owned by a women’s trade union.

1990s-Upto Now:

These two features - high repayment and cost-recovery interest rates - permitted some

MFIs to achieve long-term sustainability and reach large numbers of clients. Another

flagship of the micro finance movement is the village banking unit system of the Bank

Rakyat Indonesia (BRI), the largest micro finance institution in developing countries.

This state-owned bank serves about 22 million micro savers with autonomously managed

micro banks. The micro banks of BRI are the product of a successful transformation by

the state of a state-owned agricultural bank during the mid-1980s. The 1990s saw

growing enthusiasm for promoting micro finance as a strategy for poverty alleviation.

The micro finance sector blossomed in many countries, leading to multiple financial

services firms serving the needs of micro entrepreneurs and poor households. These

gains, however, tended to concentrate in urban and densely populated rural areas. For

micro finance, this means viewing micro finance as an essential element in any country's

economic system.

Today financial system that works for the poor is on the build by entering by banks and

other commercial actors. Today the focus is on providing financial services only,

whereas the 1970s and much of the 1980s were characterized by an integrated package of

credit and training; which required subsidies. Most recently, micro finance NGOs

(including PRODEM/BancoSol in Bolivia, K-REP in Kenya, and ADEMI/BancoADEMI

in Dominican Republic) have begun transforming into formal financial institutions that

recognize the need to provide savings services to their clients and to access market

funding sources, rather than rely on donor funds. This recognition of the need to achieve

financial sustainability has led to the current “financial system” approach to micro

finance.

3.2 Who Are the Clients of Microfinance?

The clients of micro finance—female heads of households, pensioners, displaced persons,

retrenched workers, small farmers, and micro-entrepreneurs—fall into four poverty

levels: destitute, extreme poor, moderate poor, and vulnerable non-poor.  While

repayment capacity, collateral availability, and data availability vary across these

categories, methodologies and operational structures have been developed that meet the

financial needs of these client groups in a sustainable manner. 

More formal and mainstream financial services including collateral-based credit, payment

services, and credit card accounts may suit the moderate poor.  Financial services and

delivery mechanisms for the extreme and moderate poor may utilize group structures or

more flexible forms of collateral and loan analysis.  Serving the destitute is more

challenging (and impossible for many financial service providers), but innovative

schemes, such as the Bangladesh Rural Advancement Committee's IGVGD program,

have opened up pathways to economic activity and access to financial services for them.

The client group for a given financial service provider is primarily determined by its

mission, institutional form, and methodology.  Banks that scale down to serve the poor

tend to reach only the moderate poor. Credit union clients range from the moderate poor

to the vulnerable non-poor, although this varies by region and type of credit union.

NGOs, informal savings and loan groups, and community savings and credit associations

have a wide range of client profiles. Of the more than 150 micro finance providers that

report to the Micro Banking Bulletin, those lending to individuals tend to reach the

moderate poor, with an average loan balance divided by GNP per capita of 91%.   

Donors and investors wishing to assess the relative poverty of institution‚s clients can use

CGAP‚s Poverty Assessment Tool. Although it can take up to four months and cost

$10,000–$15,000 to run, depending on context. The Poverty Assessment Tool provides a

more standardized and globally applicable set of indicators than those provided by

conventional targeting tools. It is primarily suitable for donors and investors.

3.3 Micro finance institutions:

A micro finance institution (MFI) is an organization that provides financial services to

the poor.  This very broad definition includes a wide range of providers that vary in their

legal structure, mission, methodology, and sustainability. However, all share the common

characteristic of providing financial services to a clientele poorer and more vulnerable

than traditional bank clients. 

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. 3.9

3.4 Micro-finance Service Providers

Micro-finance services are provided by informal, semi-formal and formal sources and

institutions. Informal sources of finance account for approximately 83% of the credit

supply and are provided by moneylenders, shopkeepers, traders, middlemen, family and

friends for consumption and production purposes. Every village has at least one informal

committee that collects regular savings and offers loans to members in a similar

management arrangement to RoSCAs (Rotating Savings and Credit Associations).

Compared to the other sources of micro-financing, common interest rates in informal

sources are much higher, ranging from 50% to 120% per annum.  

In the semi-formal sector, NGOs and participatory organizations such as Rural Support

Programs (RSP) have been the primary promoters of micro-finance services in Pakistan.

RSPs are multi-functional as they provide a range of services and aim to achieve

provincial and national coverage. These participatory bodies operate in urban or rural

areas, sometimes in both, focusing anywhere from one village to the entire nation. The

Rural Support Programs in Pakistan consist of the National Rural Support Programme

(NRSP), the largest, Balochistan Rural Support Programme, Sarhad Rural Support

Programme (SRSP) and the Aga Khan Rural Support Programme (AKRSP). Originally

seen as a group of government-assisted NGOs with a mandate to promote rural

development, they now see themselves as something between a government body and an

NGO. NRSP has the largest member base in Pakistan, with approximately 293,000

members gathered in Community Organizations (COs). Some NGOs, like Kashf

Foundation and the Orangey Pilot Project, now specialize in micro-finance and have

reached a substantial and growing number of clients.  

In the formal sector, two commercial banks, the Bank of Khyber and the First Women

Bank, provide micro-finance services to low-income clients, directly through their

branches, or as wholesale funds to partner MFIs. The micro-finance specific ordinances

promulgated in 2000 and 2001 by SBP allowed for the establishment of two specialized

micro-finance institutions, the Khushhali Bank, a retail micro-finance bank jointly owned

by public and private banks, and The First Micro-finance Bank Limited, established from

the transformation of the micro-finance activities of the Aga Khan Rural

Support Programme. Orix Leasing and Network Leasing are two leasing companies

involved in micro-finance by providing leasing products to low-income clients. Network

leasing has been granted a license to set up a micro-finance bank.

The outreach of all MFIs in Pakistan is only 5% of the total demand or need for micro-

financial services (Sadia Saeed, 2004). In Pakistan, most private sector lending

institutions achieve only an eighty-seven to ninety-four percent recovery rate, compared

to the international average of ninety-seven percent. (Web 8)

3.5 Regulations and government initiatives

The MFIs Ordinance 2001 was promulgated by the Government of Pakistan to support

the development of the micro-finance sector by introducing the concept of micro-finance

banks. Under this ordinance, micro-finance banks created with the necessary amount of

capital, can offer micro-finance services. In addition, the State Bank of Pakistan (SBP)

introduced additional prudential regulations related to micro-finance operations. This

ordinance, and the relevant prudential regulations of the SBP, regulates The First Micro-

finance Bank and the Khushhali Bank.  

3.6 Steps for the Development of Micro-finance Sector in Pakistan by the Government

As already said the micro-finance sector in Pakistan is still in its infancy stage and has a

long way to go. Some momentum can be seen during the last few years as huge amount

of disbursements has taken place since June 1999. But, even after this bulk of

disbursements, the numbers of the beneficiaries and the volume of credit disbursed are

still quite low in relation to the needs and demand of the intended target group.

The major factor inhibiting the growth of micro-finance sector in Pakistan are the lack of

adequate human and institutional capacity, shortage of local expertise and weak

coordination among the various stakeholders. The Swiss Agency for Development and

Cooperation (SDC) and other donors are helping Pakistan to overcome these constraints

and develop the micro-finance industry in Pakistan. It is expected that once Financial

Sector Strengthening Programme (FSSP) of Pakistan is successful developed, there’ll be

no need for further recourse from external donors. (Ishrat Hussain, 2003)

Pakistan has established Zarai Taraqqiati Bank Ltd and Cooperative Banks to provide

credit to small farmers, and the First Women Bank to provide credit to women

entrepreneurs, individuals and small firms, along with few others to expand the outreach

of financial services and help the goal of poverty alleviation in the country. These

institutions will act as the prototype in developing the methodology and expertise in these

areas and then this prototype will be replicated through the mainstream financial

institutions in the country. This is the only durable basis through which the poor can

benefit from financial sector of the country. The Pakistan’s micro-finance approach is

based on learning from other countries’ successful practices in this sector, and internally

the strategy for the promotion of this sector consists of the following six elements: (Ishrat

Hussain, 2003)

1. First, there is a strong political commitment towards supporting micro-finance as an

integral tool of poverty alleviation program. The government has given a top priority to

the efforts for the nurturing and growth of this sector, and the Ministry of Finance

monitors and tracks the micro-finance sector on a regular basis. The Government has

invited the World Bank, ADB and other bilateral donors to actively assist Pakistan in this

sector. Consequently the enabling environment for development and growth of MF is

highly conducive. Efforts are made that the constraints, snags and problems faced during

the implementation of the program are removed in consultation and full involvement of

the stakeholders.

2. Second, the government believes that the extent of poverty prevailing in Pakistan

requires a combined efforts approach and thus encourages the involvement of multiple

actors and institutions - community organizations, NGOs, public sector, private sector,

and Rural Support programs - in the delivery of micro-finance. The examples of this

approach include the Khushali Bank, which is owned by several leading financial

institutions - private, public and foreign - rather than by the Government of Pakistan. This

has allowed it to function in a professional manner.

3. Third, it is believed that the income generation by the poor cannot take place only

through availability of credit if there is no infrastructure, or markets for selling their

produce. And, if that is the case, there won’t be any scope for sustainable micro-finance

since the poor won’t be able to repay if their investment doesn’t pay them back.

Therefore, infrastructure, social services and capacity building are clearly recognized and

built in the program.

4. Fourth, since the sector being in infancy stage, it is not clear as to which particular

delivery mechanism will be effective and that is why there is a need to experiment with

plurality and diversity. Therefore, the government is experimenting with a variety of

institutional models for delivery mechanisms and outreach to the poor. For example,

there is the wholesale organization such as PPAF, which is successfully disbursing a $

100 million line of credit provided by the World Bank. And, the Khushali Bank is a retail

bank and has already reached out to 100,000 customers and is targeted at 700,000 by

2007. The First Micro-finance Bank established in the private sector is expanding its

branch network throughout the country. The integrated program vehicles such as the

NRSP, PRSP etc. combine micro-credit with other services. There are several single

product Micro-finance NGOs such as Kashf Foundation in Lahore. Two commercial

banks are also providing lines of credit for micro-finance. Leasing companies have also

begun to take some interest and two of them are already engaged in the sector. In addition

there are several self-standing donor supported projects delivering micro-finance.

5. Fifth, an innovative feature of the Micro-finance Sector Development is that as the

poor segments of the population are much more prone and vulnerable to shocks they need

to be protected. Thus a bad harvest or drought or strikes in the cities or violence

completely wipe out the earning capacity of the poor and disable them from repaying

their c and the returns on labor are disrupted for no fault of theirs a risk mitigation

mechanism had to be created to insulate the poor borrowers from these unforeseen

hazards. A Risk Mitigation and Deposit Protection Fund have been created to provide

protection to the MFIs borrowers and depositors. They can seek recourse to this fund

under adverse circumstances beyond their control.

6. Sixth, the regulations for the micro-finance sector adopted by the SBP are different

than other financial institutions. Its role is more of a facilitator, guide and problem solver.

In few words, since the micro-finance industry being in its initial stages; the micro-

finance development strategy continues to undergo review and modification to make it

NGOs and all other MF practitioners have to work together to make this strategy work

and accelerate the speed with which we can reach out to the potential beneficiaries.

(Ishrat Hussain, 2003)

3.7 Scenario of micro-finance in Pakistan

Past & Current Scenario of Micro-finance in Pakistan

The success of different NGOs, especially rural support programmes in providing new

innovative channels for savings, flexible repayment schedules and group-based loaning

as led to high savings by the poor and the poorest, almost 100% repayment recovery and

a wide coverage of the borrowers. This experience provides an ample proof of the

untapped savings potential. The lack of appropriate saving products has often

necessitated recourse to savings in kind i.e. livestock rearing.

Future Prospects of Micro-finance in Pakistan

Prime Minister Shaukat Aziz said micro-finance is a capable system of eradicating

poverty and ensuring basic needs of life, including education, health and community

development to improve the living conditions of the poor. Addressing the concluding

session of first ever conference on 'Micro-finance in Pakistan, Innovating and

Mainstreaming', held at the Convention Center, Islamabad the prime minister said the

government has accorded high priority to fight against poverty, and initiated a number of

projects, including Khushhali Bank. (Web 6)

3.8 Reasons for weak micro-finance in Pakistan

Due to the lack awareness about micro-finance

Due to the lack of infrastructure

Due to the lot of requirements

Due to the not proper use of loan

3.9 Problems associated with Micro-finance

Due to small amounts that are lent in micro-finance to individual borrowers,

there’s a need to reach many borrowers to have higher gross amount disbursed by

an MFI to achieve financial sustainability.

Having large number of clients of an MFI, and the supervision involved

(specifically going to their door-steps) results in higher costs for the MFIs.

(Sadaffe Abid, 2005)

Since large number of target clients live in villages and the lack of MFIs (specifically

banks) in these areas restricts their reach to their target clients.

3.10 Need for Micro-finance

With a current GDP per capita of US$420, almost 35% of the 150 million

Pakistani people live below the poverty line. 

The 1990s saw a substantial increase in poverty, with 80% of the 97 million in the

rural population living with less than US$1 per day.

36.3% of the rural population is considered poor by Pakistan standards, while

urban poverty is 22.4% (1999 data). 

Agriculture income accounts for only half the revenues of the rural population

with non-farm activities and remittances providing the rest. 

The poor, and the majority of the middle class, have very little access to credit.

The formal banking sector has usually avoided lending to the poor because of

supposed difficulties in collection and lack of collateral. Therefore, the poor must

rely on alternative sources for funds, such as relatives or suppliers, or depend on

moneylenders who charge extremely high interest rates. The poor also participate

in local ROSCAS, called committees, however, tensions between net savers and

net borrowers often cause fragility.

Current micro-finance providers only serve an estimated 5%, or 6.5 million, poor

households needing micro-finance services.

In rural areas, access to financial services is needed mostly for agricultural,

livestock and non-farm activities. In urban Pakistan, micro-finance clients are

mostly vendors, small traders, cottage industry workers and low-wage earners.

CHAPTER: 4

BANK OF KHYBER

Bank of Khyber has been chosen as a case study to see the impact of micro finance on

income generation and employment generation. Research area is limited to Peshawar

Region. This Chapter is basically a concise introduction to Bank of Khyber Peshawar.

4.1 History of bank of Khyber:

The bank of Khyber is one such bank, which came into being after the passing of a

resolution in the provincial assembly of NWFP in 1991. The focus point for the

establishment of this bank is to provide employment opportunities for the manpower of

this province & to provide financial assistance to the people of NWFP, who are engaged

in small, medium and large scale businesses. Most of the nationalized commercial banks

have their Head offices in provinces other than NWFP, which is the main hindrance to

availing loan in time from these banks. The banks have to take formal approval from their

H/O in order to advance loans to their customer or to make some transactions within the

branches. Therefore, it was felt that there was a great need to have a bank, which has its

Head office in the same province also, so that there could be no time delay.

Initially, the bank of Khyber had agency arrangements with ABL and MCB for

clearing and collecting cheques from other banks, but with the grace of Almighty Allah

and the hard work of its management, it became a scheduled bank. It started its operation

in SBP and to have a clearing officer of its own for clearing purposes and tackling of

other matter with SBP. Presently, this bank has started to work as an agent for all its

branches in Peshawar and other cities where SBP arrangements are not possible. In 1995,

the bank of khyber availed an opportunity for a foreign exchange license and its corporate

main branch became the first authorized dealer to deal in foreign exchange business and

trade services/finance. The bank of khyber corporate main branch also provided its

services to its different branches, which had import/export businesses but were not

authorized for such business. After the successful completion of the foreign exchange

business, the licenses were also availed for the

BOK ASHRAF ROAD BRANCH, PESHAWAR

BOK SADDAR ROAD BRANCH, PESHAWAR

BOK KHYBER BAZAR BRANCH, PESHAWAR

Now other than its branches in the NWFP, the bank of Khyber has its network of

branches in Islamabad, Lahore, and Karachi & Muzaffarabad also

The bank is providing loan to private as well as public sector organizations, not

only for the prosperity of the people but also for the development of NWFP. In this way,

job opportunities surface in different sectors, mainly for the people of NWFP, which may

help the country get out of the clutches of unemployment and related poverty problems.

Besides, the running finance & demand finance facilities, it has also started loaning for

small clusters, which has a separate controlling department called the Micro Finance

Department. MFD has been introduced to cover the businesses, which are on a small

scale either in the shape of shops, small projects or home-level projects of ladies, like

embroidery, beauty parlors & stitching centers. This level of loans may be advanced to

customers, after they provide two guarantors to the bank of khyber.

The SBP has recently allowed the opening of banks and branches based on a pure Islamic

banking system in the country. For the said purpose an Islamic banking department has

been established by the SBP to provide necessary guidance to the banks and concerned

staff. They have also instructed all the banks to introduce necessary steps for promotion

of Islamic banking. In pursuance of SBP instructions an Islamic banking division has

been established by the bank of Khyber to evaluate and implement policy and procedural

matters to cater to the Islamic banking demand of our valued customers. The recruitment

of suitable staff for Islamic banking operations and their necessary training arrangements

are under process.

4.2 Vision:

Gradual conversion into Islamic banking to develop and promote a true Islamic economic system.

4.3 Mission statement:

Mission, broadly stating is the purpose for which an organization exists and why should it

compete in certain sectors and industries within mission, sometimes stated as purpose, the

organization addresses itself to what it intends to accomplish both in the short and long

run. Mission is a very broad statement of organizational direction, and is normally

summarized and document in mission statement. In the same way, the bank of Khyber

being an organization has mission. The mission documented in the mission statement is

as follows:

“We are committed to ensure our ability and to provide resources with high quality

services to our clients and to help create a supportive environment for micro business and

export-based ventures while maintain a high motivated staff”

4.4 Core values

1) Highest quality of service

2) Professionals

3) Integrity

4) Team work

5) Innovation & utilization of latest technology

6) Corporate & social responsibility

4.5 Board of directors:

The bank ultimate governing body is the “Board of Directors” comprising of six

members and a chairman. The chairman of the board is nominated by the govt, of NWFP

who will be a senior banker/diplomat of repute. The two members of the board are also

nominated by the govt., as govt, is the major stakeholder of the bank. Usually these two

members are secretary finance govt of NWFP and assistant chief secretary NWFP.

One member of the board is nominated by DEG (A German Development Bank) a 15%

Stakeholder of the bank. While two members are selected by the government from

public/private sector. The managing director of the bank represents the bank in the board

and acts as a member of the board.

A law graduate works as a secretary to the board of directors. He calls the board meeting

and maintains the minutes and proceeding of the board of directors. Recently the govt of

NWFP dismissed the managing director of the bank who was also working as chairman

of the board and appointed the senior most official of the bank who was working as EVP

in the bank and also working as secretary to the board of directors as acting managing

director of the bank.

4.6 The network of branches:

The BOK has a network of 29 branches, which are located in different areas of our

country. In order to strengthen the operation network in the country, the management is

planning to open new branches at important cities and locations.

4.7 Objectives of bank of Khyber:

Objectives are the end towards which activities are aimed. In fact these are the results to

be achieved. The bank of Khyber has also certain objectives. These are:

1. The purpose behind the establishment of the BOK was to fulfill the demand of the

business community of NWFP to have a commercial bank with its head office in

the province.

2. To mobilize private savings for investing them in the province

3. To promote industrial, agricultural and other socio-economic processes in order to

help under developed areas and create employment opportunities.

4. To participate in the capital markets and eventually establish a stock market in the

province.

5. To focus on creating a diversified and sound portfolio of high-technique, agro-

based, export-oriented and engineering projects.

6. Establishment of a commercial bank with its head office locally has improved

accessibility of local business to senior management of the bank and accelerated

the credit decision-making process.

Participate and seek the share of the province in the capital market of Pakistan by way of

subscription through locally pooled resources in the leading stock exchanges of the

country and eventually paving the way for establishing a stock market in the province.

The bank of Khyber has been created with the objectives of providing much

needed banking facilities to all segments of the population of the province with this

objective, the bank has opened 23 branches throughout the province. The branches cover

all divisions and important commercial centers of the province. Further expansion is

under way and branches are to be opened in all districts as well as other important

commercial centers.

4.8 Policies of the bank of Khyber:

1. Managerial policy:

The president control the affairs of bank of Khyber and member of the executive

committee who are normally senior executive vice president of the bank based at the

head office Peshawar.

2. Operational policy:

Deal with the method of provision of better services to its customers. Through the

introduction of new schemes as a means of satisfaction for their customer.

3. Marketing policy:

Adopts certain marketing techniques to enhance the image of the bank. Most of the

market takes place for the mobilization of deposit scheme. But most of the time emphasis

is laid on the counter betterment and market aspects in order to provide good services to

customer for their attraction

4.9 Micro-finance unit of bank of khyber:

Micro lending operations in bank of Khyber are structured in a separate department

called Micro Finance Department (MFD) under the credit division of the bank. MFD

aims to be the largest Micro Finance provider in NWFP on sustainable basis. Its main

objective is providing access to financial services by the low income and disadvantaged

segment of the society with adequate emphasis upon women. The persuit of this objective

will significantly contribute to the improvement of employment opportunities, income-

generating activities. This ultimately supplements government interventions of poverty

alleviation in NWFP.

Bank of Khyber offer loans to their customers are as follows DFM; which stand for

“demand micro-finance”. A type of loan, which is given for the enhancement of running

business. The limit of loan is 50,000, but for the first time it is given up to 30,000.

Another is MCF, which stands for “motor cycle finance”. A type of loan which is given

to Government employees for convince and also to businessmen. A loan is given

according to the motorcycle quotation. Then SCF, which stands for “staff computer

finance”. A type of loan which is given to staff for personal use. The limit of loan is up to

30,000.

If the amount requested above than 30,000 the mark-up rate is 18% and if the

amount requested less than 30,000 the mark-up rate is 20%.

4.10 The bank of Khyber organizational chart:

The graphical representation of an organizational structure is known as an organizational

chart. The organizational chart is a formal document, which shows the chain of command

and titles, which have been given to the managers and other members of the organization.

BANK OF KHYBER ORGANIZATION CHART

Organization

Board of

Managing Director

Managing Committee

International Banking Dept.

ComputerAccount & Treasury Dept

Banking Operations

Investment

Personal & establishment Div

Branch Operation Dept

M.F.D

Credit Division P.T.E Dept

Public Relation Dept.

Marketing Dept.Branch 29

Asset Management Dept.

CHAPTER: 5

SURVEY FINDINGS & ANALYSIS

A survey was done in order to collect data for the purpose of finding the impact of micro-

finance on income and employment generation. Survey was conducted in Peshawar in

collaboration with the Bank of Khyber. The total Number of respondents were Thirty.

This chapter presents the findings of data and its analysis.

5.1 Findings & Analysis:

Table 1 Age-wise distribution of respondents

Age (years) No: of respondents Percentage18-25 6 20%26-35 15 50%36 and above 9 30%Total 30 100%Source: field survey (2008)

Graph: 1

This table and graph shows the age-wise distribution of the respondents. The table shows that 6 respondents i.e., 20 percent of the whole are in the age group between 18-25,15 respondents, which are 50 percent, are in the age group between 26-35, 9

respondents,which are 30 percent, are in the age of 36 and above. The table shows that

most of the respondents who have received micro finance facility are in the age range of

26 to 35.

Table 2: Gender of respondents

Gender No: of respondents PercentageMale 28 93.33%Female 2 6.66%Total 30 100%

Source: field survey (2008)

Graph: 2

This table and graph shows the gender of respondents. The table shows that 28

respondents, which are 93.33 percent of the whole, are male, 2 respondents, which are

6.66 percent of the whole, are female. The table shows that most of the respondents who

have received micro finance facility are male.

Table 3: Qualification of respondents

Qualification No: of respondents PercentagePrimary-matric 20 66.66%F.a/F.sc/B.a/B.sc 10 33.33%

Total 30 100%Source: field survey (2008)

Graph: 3

This table and graph shows the qualification of respondents. The table shows that 20

respondents that are 66.66 percent of the whole have primary to matric degrees, 10

respondents that are 33.33 percent of the whole have F.A/F.SC/B.A/B.SC degrees. The

table shows that most of the respondents who have received micro finance facility have

primary to matric degree.

Table 4: Form of business of respondents

Form of the business No: of respondents PercentageSole proprietorship 28 93.33%Partnership 2 6.66%Total 30 100%Source: field survey (2008)Graph: 4

This table and graph shows the form of business of respondents. The table shows that 28

respondents that are 93.33 percent of the whole have sole proprietorship, 2 respondents

that are 6.66 percent of the whole have partnership. The table shows that most of the

respondents who have received micro finance facility have sole proprietorship.

Table 5: Purpose of borrowing a loan of respondents

Purpose of borrowing No: of respondents PercentageStarting a new business 2 6.66%Expansion of existing business

28 93.33%

Total 30 100%

Source: field survey (2008)

Graph: 5

This table and graph shows the purpose of borrowing a loan of respondents. The table

shows that 2 respondents that are 6.66 percent of the whole have starting a new business,

28 respondents that are 93.33 percent of the whole have expansion of existing business

The table shows that most of the respondents who have received micro finance facility

have expansion of existing business.

Table 6: Total income of business of respondents before borrowing a loan

Total income of business before borrowing

No: of respondents Percentage

4000-8000 12 40%9000-13000 8 26.66%14000-18000 10 33.33%Total 30 100%

Source: field survey (2008)

Graph: 6

This table and graph shows the total income of business of respondents before borrowing

a loan. The table shows that 12 respondents that are 40 percent of the whole are in the

range of between 4000-8000, 8 respondents that are 26.66 percent of the whole are in the

range of between 9000-13000,10 respondents that are 33.33 percent of the whole are in

the range of between 14000-18000. The table shows that most of the respondents who

have received micro finance facility are in the range of between 4000-8000

Table 7: No: of workers in business of respondents before borrowing a loan

No: of workers before borrowing loan

No: of respondents Percentage

None 16 53.33%01 10 33.33%02 4 13.33%Total 30 100%

Source: field survey (2008)

Graph: 7

This table and graph shows the number of workers in business of respondents before

borrowing a loan. The table shows that 16 respondents that are 53.33 percent of the

whole have no worker, 10 respondents that are 33.33 percent of the whole have only one

worker, 4 respondents that are 13.33 percent of the whole have two workers .The table

shows that most of the respondents who have received micro finance facility have no

worker

Table 8: Amount of loan borrowed of respondents

Amount of loan borrowed

No; of respondents Percentage

20000-30000 5 16.66%31000-40000 15 50%41000-50000 10 33.33%Total 30 100%

Source: field survey (2008)

Graph: 8

This table and graph shows the amount of loan borrowed by respondents. The table

shows that 5 respondents that are 16.66 percent of the whole are in the range of between

20000-30000, 15 respondents that are 50 percent of the whole are in the range of between

31000-40000,10 respondents that are 33.33 percent of the whole are in the range of

between 41000-50000. The table shows that most of the respondents who have received

micro finance facility are in the range of between 31000-40000

Table 9: Rate of borrowing (annual)

Rate of borrowing (annual)

No of respondents Percentage

18% 25 83.33%20% 5 16.66%Total 30 100%

Source: field survey (2008)

Graph: 9

This table and graph shows the rate of borrowing (annual). The table shows that 25

respondents, which are 83.33 percent of the whole are 18%, 5 respondents which are

16.66 percent of the whole, are 20%. The table shows that most of the respondents who

have received micro finance facility are 18%

Table 10: Repayment mode

Repayment mode No: of respondents PercentageMonthly 30 100%Half annual 0 0%

Annual 0 0%Total 0 100%

Source: field survey (2008)

Graph: 10

This table and graph shows the repayment mode. The table shows that 30 respondents

that are 100 percent of the whole are paid monthly, 0 respondents that are 0 percent of the

whole are paid half annual, 0 respondents that are 0 percent of the whole are paid annual

The table shows that most of the respondents who have received micro finance facility

are paid monthly

Table 11: Repayment period

Repayment period No: of respondents Percentage18 months 20 66.66%24 months 8 26.66%36 months 2 6.66%Total 30 100%Source: field survey (2008)

Graph: 11

This table and graph shows the repayment period. The table shows that 20 respondents

that are 66.66 percent of the whole are paid in 18 months, 8 respondents that are 26.66

percent of the whole are paid 24 months, 2 respondents that are 6.66 percent of the whole

are paid in 36 months The table shows that most of the respondents who have received

micro finance facility are paid 18 months

Table 12: How is the interest rate

How is the interest rate No: of respondentsPercentage

Satisfy 10 33.33%

Not satisfy20 66.66%

Total 30 100%

Source: field survey (2008)

Graph: 12

This table and graph shows the response of respondents toward interest rate. The table

shows that 10 respondents that are 33.33 percent of the whole are satisfy, 20 respondents

that are 66.66 percent of the whole are not satisfy, The table shows that most of the

respondents who have received micro finance facility are not satisfy

Table 13: Easy to repay the principal amount plus interest

Easy to repay amount No: of respondentsPercentage

Yes 10 33.33%

No20 66.66%

Total 30 100%

Source: field survey (2008)

Graph: 13

This table and graph shows the response of respondents toward the repayment of loan.

The table shows that 10 respondents that are 33.33 percent of the whole are yes, 20

respondents that are 66.66 percent of the whole are No, The table shows that most of the

respondents who have received micro finance facility are no

Table 14: Total income of business of respondents after borrowing a loan

Total income of business after borrowing

No: of respondents Percentage

8000-12000 12 40%13000-17000 10 33.33%18000-22000 8 26.66%Total 30 100%

Source: field survey (2008)

Graph: 14

This table and graph shows the total income of business of respondents after borrowing a

loan. The table shows that 12 respondents that are 40 percent of the whole are in the

range of between 8000-12000, 10 respondents that are 33.33 percent of the whole are in

the range of between 13000-17000,8 respondents that are 26.66 percent of the whole are

in the range of between 18000-22000. The table shows that most of the respondents who

have received micro finance facility are in the range of between 8000-12000

Table 15: No: of workers in business of respondents after borrowing a loan

No: of workers before No: of respondents Percentage

borrowing loan02 16 53.33%03 10 33.33%04 4 13.33%Total 30 100%

Source: field survey (2008)

Graph: 15

This table and graph shows the number of workers in business of respondents after

borrowing a loan. The table shows that 16 respondents that are 53.33 percent of the

whole have two workers, 10 respondents that are 33.33 percent of the whole have only

three workers, 4 respondents that are 13.33 percent of the whole have four workers .The

table shows that most of the respondents who have received micro finance facility have

two workers.

Table 16: Intend to re-borrow after repaying first loan

Easy to repay amount No: of respondentsPercentage

Yes 10 33.33%

No20 66.66%

Total 30 100%

Source: field survey (2008)Graph: 16

This table and graph shows the intend to re-borrow after repaying first loan respondents.

The table shows that 10 respondents that are 33.33 percent of the whole are yes, 20

respondents that are 66.66 percent of the whole are No, The table shows that most of the

respondents who have received micro finance facility are no

5.2SWOT analysis of Bank of Khayber:

1. Strengths:

Bank of provincial govt:

As the BOK is the bank of NWFP government the people response more

confidence in the BOK as compared to other banks and deposit more money in it also.

The BOK also has many government accounts due to which its reputation and image

becomes stronger & more positive.

Provide training to students:

Hundreds of students perform internship courses every year at BOK and play a

vital role in the future of the banking sector.

Launching of new product:

With the ordinary deposits accounts the BOK has launched a SDA (special

deposit account) on which it provides mark-up/profit on a daily basis. Most of the

people prefer to open such an account.

Micro finance unit:

This department provides micro lending facilities to small businesses like shops,

boutiques, and beauty parlors. Through this department the BOK earns even more

revenue every year.

2. Weaknesses:

Lack of technology:

The BOK faces a problem of availing technological facilities because on-line

banking systems and ATM-like facilities are not available to the customers while other

banks is providing such type of facilities.

Branches in other countries:

In foreign countries the BOK has no branch and this creates problems for

importers and exporters.

No proper marketing:

There is no proper marketing policy, which is essential for every organization.

Lack of a promotional policy or promotional department disallows the bank to become

more familiar to the people.

Heavy load of bad debts:

As it is a provincial government bank so the concerned loan officers sanction the

loans to the government’s people who in turn do not make the repayment of these loans.

That ultimately goes to the bad debts account & becomes a burden on the bank.

3. Opportunities:

Hire skillful people

Hire skilled & professional educated personnel: The BOK has the opportunity to

hire skilled, professional and educated persons who are specialized in the course of

banking and accountancy like CASs & MBAs.

Advancement in technology:

They have the opportunity to advance their technology especially to start on-line

banking and ATM facilities, which is the need of the day. To compete with others they

have to take the opportunity and install new software in all their branches.

Reduction in commission & charges:

The BOK can attract all the business and non-business community by providing

low bank charges commission on DD, TT & MT. thus the BOK can give maximum

market share.

4. Threats:

Advance technology of other banks:

The technology of the other banks is advanced from the BOK because of the on-

line banking system and ATM facilities. The BOK does not have these facilities.

Recovery of loan:

As it is the bank of provincial government so most of the politicians take loans

from the bank. The recovery becomes impossible from such politicians due to which the

bank faces problems of bad debts and the bank incurs major loss.

Foreign banks:

The number of foreign banks is increasing day by day in Pakistan. They also

provide good quality services at the same cost as the BOK provides to their clients. Thus

this too is a potential threat for the BOK.

CHAPTER: 6

CONCLUSIONS AND RECOMMENDATIONS

6.1 CONCLUSIONS

Micro finance relates to providing credit to those people that want to improve their

livelihood by investing the provided capital in some business creation or want to provide

for their day-to-day small needs. The importance of microfinance can be judged from the

rationale that it provides the masses with an opportunity to generate self-employment for

them and get a chance to put their abilities to good use and thus generate income for

them. The micro segments of any country forms the backbone of its economy, and in fact

it is the microeconomic indicators that give a true glimpse of the economic growth or its

decline. In the recent years the attention is being shifted by the policy makers from

macroeconomics to the microeconomics, and it has been proved by the practical example

set in Bangladesh and in many other countries of the world that microfinance in reality

plays a very important role in the uplift of the masses in the grass root levels. Micro

finance is, as a part of development finance, rural or urban, targeted towards specific

groups of people, male or female, falling in the lower bracket of society; financial

services include savings, credit and other services such as micro money transfer and

micro finance.

The objectives of my report are to find out the impact of micro-finance on income

generation and employment generation. I collected data through primary sources and

secondary sources. Primary data is collected information through personal observations,

discussions with staff of Bank of Khyber, questionnaire and secondary data is collected

through Internet, books, Bank of Khyber annual reports and different Newspapers.

The data was analyzed and the results were drawn. According to the results 50% of the

respondents who received micro finance facility are in the age range of 26 to35, which is

the maximum while the minimum number of respondents 20% are in the age range of 18-

25.93.33% of the respondents are male which is maximum while the minimum number of

respondents 6.66% are female.66.66% of the respondents have matric qualification,

which is maximum while the minimum numbers of respondents 33.33% have F.A, F.SC,

B.A, and B.SC. 93.33% of the respondents have sole proprietorship, which is maximum

while the minimum numbers of respondents 6.66% have partnership. 93.33% of the

respondents have borrowed loans for the purpose of expansion of existing business,

which is maximum while the minimum numbers of respondents6.66% have borrowed

loans for the purpose of starting a new business. 40% of the respondents have income

between 4000-8000 before borrowing a loan, which is maximum while the minimum

numbers of respondents26.66% have income between 9000-13000 before borrowing a

loan. 53.33% of the respondents have no worker in their business before borrowing a

loan, which is maximum while the minimum numbers of respondents 13.33% have two

or more workers in their business before borrowing a loan. 50% of the respondents

request for the amount are in the range of between 31000-40000 which is maximum

while the minimum numbers of respondents 16.66% request for the amount are in the

range of between 20000-30000 100% of the respondents paid installment monthly which

is maximum while the minimum numbers of respondents 0% paid installment annual and

half annual. 66.66% of the respondents repay the loan in 18 months which is maximum

while the minimum numbers of respondents repay the loan in 36 months.66.66% of the

respondents are not satisfy from the interest rate which is maximum while the minimum

numbers of respondents33.33% are satisfy from the interest rate.66.66% of the

respondents are not feel easy to repay the loan which is maximum while the minimum

numbers of respondents 33.33% feel easy to repay the loan. 40% of the respondents have

income between 8000-12000 after borrowing a loan which is maximum while the

minimum numbers of respondents 26.66% income between 18000-22000 after borrowing

a loan 53.33% of the respondents have two workers in their business after borrowing a

loan which is maximum while the minimum numbers of respondents 13.33% have four

workers in their business after borrowing a loan. 66.66% of the respondents are not

intending to re-borrow after repaying first loan which is maximum while the minimum

numbers of respondents33.33% are intend to re-borrow after repaying first loan. So the

analysis shows the positive impact of micro finance on income generation and

employment generation.

The financial ratios of the bank show for 2006 the current ratio is 0.33x, which is far

below the ideal value 1, which shows that bank current assets are not sufficient to cover

its current debt obligations. For 2006 the debt to equity analysis ratio is 12.08%, which is

lowest as compared to previous years. For 2006 the debt to assets analysis ratio is

88.86%, which is so low. For 2006 ROA, ROE, NPM are 2.16%, 29.4%, 30.28%, which

are so low and a sign of not a good performance of bank. For 2006 asset turnover ratio is

0.07x, which is higher so the higher it is the better, it is.

6.2 RECOMMENDATIONS

For overall organization:

1. In order to survive and grow in intense competition, the bank should pay more

and more attention to “business development”. Business development means

policies and programs to promote the proper marketing of different scheme and

services that has been already offered.

2. The rules and regulations within the organization and the procedure must be

dynamic, flexible and subject to continuous monitoring and evaluation.

3. Proper training programs and refresher courses should be designed for employees

to increase their performance and give awareness to them with new concepts of

banking and finance of the banking world.

4. The bank of Khyber lacks female staff I their various branches. It is suggested

that more female staff should be recruited and open new female branches.

5. Loan procedure should not be cumber some and should be made easy. Prolonged

documentation should be avoided.

6. The bank should be made independent of political influence, which will ensure

the efficiency of the bank.

7. To improve the lending position of the bank. Bank of Khyber must reduce the

mark-up rates, as well as the procedure of loan securing should be made

convenient.

8. The bank should start online banking transitions so as to facilitate the customer.

9. There is centralization in bank of Khyber. For the improvement decentralization

must be introduced.

10. The selection and recruitment of employees is not done on merit. For recruiting

competent employees, hiring process and job description should be modified and

improved.

For micro-finance department

19. Proper training should be given to the finance credit officers in dealing with the

clients especially the microfinance-clients.

20. The MFIs should properly assist the client before sanctioning the loan

21. There should be proper back check and monitoring of the clients to minimize the

risk of default

22. To begin with, quick follow-up visits right after a missed payment is key to

reducing arrears.

23. The saving trend should be introduced in the micro-finance and the clients should

be educated for the savings.

24. The client should be properly educated for the utilization of the loan.

25. The professionals approach should be adopted by the MFIs in hiring micro-

finance staff to decrease the default.

26. The credit officers should be checked from time to time.

27. The credit officer’s appraisal should be conducted in the field.

28. The check and balance system for the credit officers should be introduced.

29. The efficient, trust worthy and interested employees should be hired for the post

of credit officers.

30. The micro-finance department in the commercial banks should be developed.

31. The credit officers should be provided facilities for motivation.

32. The disbursement and recovery should be done by credit officers.

33. Proper person among the group should be selected as a group member by the

MFI.

34. For group loans, regular visits to the home and business of the chairperson are

important

35. MFIs should use group-lending methods to lower transaction costs.

36. It should be ensured that each group should use the loan for the purpose specified

in the loan application.

37. Each member of the group should participate in all training activities.

BIBLOGRAPHY

www.bok.com.pkwww.pmn.org.pkwww.accion.orgwww.microfinance.com

Lidgerwood, Joanna. (2000). Micro finance handbook. Washington, D.C.: The World Bank 1818 H Street, N.W. 2

Ishrat Hussain “Strategy for development of Microfinance in Pakistan” 2003.Questionnaire For Micro-Finance Borrowers

Hirschland, Saving Services for the poor: An Operational Guide, 143.

ANNEXURE

QUESTIONNAIRE

Format of Questionnaire made For survey is as follow:

PERSONAL PROFILE

1) Name: _____________________

2) Age : 18-25 26-35

35-45 45 and above

3) Gender: Male Female

4) QUALIFICATION: ___________________

5) Form of Business:

Sole proprietorship

Partnership

Other (please specify)______________________

i. If ‘Partnership’ then number of partners ___________

6) Type of Business: ______________________

7) Month and Year of starting Business____________________

8) Purpose of borrowing (you may tick more than one)

Starting a new business.

Expansion of existing business.

If new business than type ______________________________

9) Total income of your business before borrowing Rs._________________

10) Total number of workers in the business _____________)

11) Amount of loan borrowed Rs.________________________

12) Rate of borrowing:(Annual) _______________________________

13) Repayment mode__________________

14) Repayment period ______________________

15) How is the interest rate?

Not satisfactory

Satisfactory.

16) Is it easy to repay the principal amount plus interest?

Yes

No

17) Total income after borrowing the loan Rs.________________________

18) Number of workers after borrowing_________________________

19) Do you intend to re-borrow after repaying the first loan?

Yes

No

If ‘yes’ then Purpose of re-borrowing ____________________________