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Borrowing behaviour
2012 Cambridge Business & Economics Conference ISBN : 9780974211428 Factors influencing borrower’s behavior and decision making patterns in the success of a micro finance model—A case study on the remote areas of Karachi, Pakistan Submitted by: Mirza Raza Ali Student, M Phil Program Institute of Business Management (IoBM) Karachi, Pakistan Director, Finance and Planning Newports Institute of Communications & Economics (NICE) Karachi, Pakistan Tel.: 0092-21-34547417, Cell: 0092-300-2267677 Factors influencing borrower’s behavior and decision making patterns towards micro financing models—A case study on the remote areas of Karachi, Pakistan ABSTRACT June 27-28, 2012 Cambridge, UK 2012 Cambridge Business & Economics Conference ISBN : 9780974211428 In the developing world, Micro Finance Institutions (MFIs) offer various financing modes for customers who, generally, are neither well-aware nor apprised about such modes and related financial obligations Moreover, MFIs emphasize on safeguarding the lender’s interest due to risk exposure However, it must also be realized that borrowers’ perspective has a significant impact in the success of any micro financing model Realizing the importance of the borrowers’ perspective for a successful and sustainable financing model, the research reviews major factors that influence the behaviors and decision making patterns of borrowers towards micro financing The case study research was adopted by selecting respondents from three remote areas of Karachi, the largest metropolitan city of Pakistan The study evaluated prevailing educational, communal, economic, political, and cultural circumstances and its impact on the borrowers’ behavior A low literacy rate, depriving economic conditions, extreme political involvements and pressures, inflexible and unsupportive communal and social norms, strong cultural differences amongst population living in remote areas coupled with low awareness and slow market penetration strategy of MFIs have restrained the growth of micro financing amongst its potentially strongest target market in Pakistan The MFIs may also facilitate the borrowers to establish strategic alliances on profit sharing basis with the educated middle income classes, hence enabling both the parties to effectively run small and medium sized businesses The research provides a comprehensive insight to the MFIs in Pakistan for addressing the borrower’s concern and realigning their vision and mechanisms to suit the borrower’s needs and expectations INTRODUCTION The success of microfinance institutions (MFIs) in developing ingenious financial products and services for their clients relates to the local dynamics of the customers, which varies from nations to nations The formulation of any microfinance model for a specific population involves a June 27-28, 2012 Cambridge, UK 2012 Cambridge Business & Economics Conference ISBN : 9780974211428 comprehensive study ranging from basic information of customer demographics to the complex issues involving behavioral and psychological aspects Therefore, it is imperative that MFIs, while developing financial products, consult behavioral economists and consumer psychologists along with the potential customers to adequately visualize the possible repercussions and implications for achieving desired results It would be an added value to have collaboration with anthropologists and sociologists to better comprehend the impact of financial products on the livelihood of clients We have observed, particularly in the developing world, that the potential and existence of microfinance is substantial but unregulated Although microfinance is largely studied in the context of financial economics, but other facets involving diverse yet complex nature of borrowers’ dynamics must also be considered for evaluating the overall economic impact of micro financing In Pakistan, the amount and scope of research on micro financing issues has been limited to the economic aspects of borrowers However, researchers have not yet explored the social, political, communal and cultural perspectives of borrowers, which have a key influence in shaping their interests, attitude and perceptions towards micro financing models The literature review explores the success of micro financing models in the developing countries like Bangladesh, India, Sri Lanka, Bolivia and Zambia MFIs in Pakistan must understand the challenges and issues restraining their success through intense academic research, which would enable them to develop microfinance models tailored to suit the perceptions and expectations of their customers Such a study would evaluate the level of knowledge and interest about micro financing prevailing in the lower income groups The awareness of micro financing may encourage the poor people to empower themselves and contribute towards the economic development of Pakistan LITERATURE REVIEW June 27-28, 2012 Cambridge, UK 2012 Cambridge Business & Economics Conference ISBN : 9780974211428 In the new millennium, the world is experiencing rapid progression in technology and human development for attaining high efficiencies and long term sustainability In its efforts for making the world a better place to live in, nations worldwide have also realized the increasing poverty levels due to wealth concentration and its inequitable distribution, especially in the developing world The increasing poverty may hamper the process of growth and development in all spheres Therefore, it becomes imperative that the populations in lower income groups should be involved in the economic activity by empowerment approaches Since the poor may not be engaged in formal financial services, therefore, emergence of microfinance institutions took place dealing with micro credit schemes, savings and insurance plans to uplift the economic lifestyles of the lower income groups Brau & Woller (2004) comprehensively reviewed over 350 articles and compiled the available literature on microfinance They defined microfinance as the term that “refers generally to such informal and formal arrangements offering financial services to the poor” (p.4) They emphasized that the motivation behind the microfinance movement was poverty alleviation Not only that, but microfinance offered the potential to alleviate poverty while paying for itself and perhaps even turning a profit—“doing well by doing good.” This phenomenon formed the basis for the emergence of microfinance in the globalized arena According to the authors, the last four decades have seen serious efforts worldwide to formalize financial service provision to the poor, specifically in the 1980s Today, the microfinance industry has turned to a global movement of poverty alleviation informed increasingly by a commercial/finance paradigm Mutua et al (1996) discussed that the emergence of microfinance industry has revamped the historical stereotyped image of poor from non-consumers to consumers of financial services as June 27-28, 2012 Cambridge, UK 2012 Cambridge Business & Economics Conference ISBN : 9780974211428 it has evolved effective ways of cost-effective services resulting in huge “social investment” for the poor Khandker (2005) examined the impact of microfinance activities on poverty reduction in remote areas of Bangladesh The results revealed that micro financing increasingly helps in poverty reduction with an emphasis of increased entrepreneurial activities amongst females in rural areas, thus, improving the overall economic situation of the country The products of Microfinance Institutions (MFIs) are quite similar to those of formal financial sector institutions, however, methodologies may vary, but the fundamental services of savings, loans, and insurance are the same Nourse (2001) observed that project lending to small business enterprises and development has been the mainstay of MFIs He argued that MFIs should not limit their services to credit products but may expand their horizon of financial services to include savings and insurance services for the lower classes He further discussed that MFIs should offer flexible and customized lending services for the lower income groups rather than strict and uniform loan products for all income levels Endorsing this concluding assertion of Nourse (2001), Eyiah (2001) developed a model of small manufacturer contractors and MFIs in developing countries that provides a customized lending pattern for small enterprises In order to evaluate the impact of microfinance institutions in developing countries, various studies have been undertaken using Bangladesh as a role model The massive microfinance program launched by Grameen Bank gained a lot of popularity worldwide because of its economic impact and female empowerment in rural areas McKernan (1996) found that such a microfinance initiative resulted in a strong positive impact on entrepreneurship and female empowerment, while Pitt and Khandker (1998) find that it had an enormous influence on the welfare and economic uplift of lower income groups, especially June 27-28, 2012 Cambridge, UK 2012 Cambridge Business & Economics Conference ISBN : 9780974211428 women in villages One interesting study on impact of MFIs on female empowerment in Bangladesh was conducted by Goetz & Gupta (1996) They found that microfinance program participation did not have a statistically major impact on female empowerment, rather, the conclusion disclosed that major fractions of females’ loans were controlled by male relatives, thus, restricting females’ capacity manage their micro financing activities Mosley (2001) analyzed four programs in Bolivia and proved that assets and income increased subsequent to the poverty levels, but micro financing may also enhance susceptibility in case of over-leveraging by borrowers Bolnick and Nelson (1990) observed that MFIs have an encouraging influence on small and labor intensive businesses, but it may vary across different sectors Copestake et al (2001) assessed the impact of microcredit schemes in Zambia He found that borrowers who were offered two loans witnessed high income and profitability scales, as compared to the ones with single loans, who actually suffered because of collection mechanisms of MFIs Wydick (1999a) studied that borrowers belonging to high income level benefit with the credit services of MFIs In another study, Wydick (1999b) formulated a theoretical framework to evaluate the economic transaction between future returns to schooling and the current return to child labor in Guatemalan household enterprises He found that micro credit enhances the possibility that children will attend school; however, in situations of moral risk, the cost of schooling may over shadow the benefits of child labor Using the same Guatemala data set in a subsequent study (2002), Wydick also studied that speedy improvements in job creation after initial credit access were followed by extended intervals of inactive job creation Anderson et al (2002) analyzed 147 MFIs and concluded that microfinance initiatives promote environmental June 27-28, 2012 Cambridge, UK 2012 Cambridge Business & Economics Conference ISBN : 9780974211428 awareness and common pool resource stewardship Woller & Parsons (2002) estimated that a microfinance program in Portoviejo, Ecuador contributes $480,000 per year in direct and induced economic benefits to the local economy Mosely & Hulme (1998) studied 13 MFIs in seven countries (Bolivia, Indonesia, Bangladesh, Sri Lanka, Kenya, India, and Malawi) and developed an "impact frontier" defining the inverse relationship between outreach (depth of poverty reached) and impact Kevane & Wydick (2001) evaluated that attracting poor females to small business financing seems to acts as a substitute in favor of poverty reduction and child welfare Specifically, female entrepreneurs create lesser employment opportunities than male entrepreneurs Majority of the impact assessment studies cited above, with one noted exception, provide ample evidence of positive impacts of microfinance Thus, it can be said that micro financing can be viewed as a useful mechanism for cost-effective financial services to low income groups aiming towards poverty alleviation and creating a positive economic impact Pakistan, being a developing country having an important strategic position in the region and possessing innumerable natural resources is still struggling in terms of poverty alleviation measures A nation, whose major population lives below the poverty line, can be empowered using microfinance tools and enhancing its awareness amongst the poor people It is however, imperative that MFI products must take into consideration the perspective of borrowers while developing a product and ensure a successful MFI model State Bank of Pakistan (SBP report, 2011) reveals that there are a total of Micro finance banks having 737,343 borrowers with almost 34% market share Specialized MFI borrowers are 524,163 having the market share of 27%, whereas, 553,993 borrowers are under rural support June 27-28, 2012 Cambridge, UK 2012 Cambridge Business & Economics Conference ISBN : 9780974211428 program having 31% market share Other NGOs enjoy the remaining market share in micro financing After reviewing the literature on the positive impact of micro financing in developing countries like Bangladesh, Zambia and Bolivia, it can be inferred that such initiatives can also encourage small and medium sized profitable business establishments in the rural and remote areas of Pakistan The phenomenon of micro finance is yet to attract the attention from the low income groups, mainly because of lack of its awareness and non existence of such products which provides relief to the borrowers Unfortunately, the researches on social, communal and cultural aspects of borrowers in Pakistan have not been undertaken extensively The MFIs in Pakistan need to extensively explore the borrowers’ dynamics for realizing their needs and matching their expectations The academia in Pakistan may facilitate the MFIs in producing relevant research work in understanding the broader social paradigms of borrowers, which may actually lead to the success of micro financing in a huge untapped target market of micro financing in Pakistan METHODOLOGY In order to achieve the desired objectives, qualitative research method will be used to investigate the significance of borrowers’ behavior in the success of MFI model Within the framework of qualitative research, case study approach is adopted to conduct the research Yin (1984) defines the case study research method as an empirical inquiry that investigates a contemporary phenomenon within its real life context, when the boundaries between phenomenon and context are not clearly evident, and in which multiple sources of evidence are used (p.23) The case study method is adopted in exploratory topics to signify a specific issue, which is to investigate the significance of borrowers’ behavior in the success of MFI model The Case Study Research approach was adopted because the research was conducted in the specific remote areas June 27-28, 2012 Cambridge, UK 2012 Cambridge Business & Economics Conference ISBN : 9780974211428 representing lower income groups in the most populated and largest metropolitan city of Pakistan, Karachi The city of Karachi comprises a diverse The sample size was drawn from three towns of Karachi, which included Landhi, Korangi, and Orangi Town These towns mainly comprise lower income populations with a diverse mix of sub populations having different culture, political, ethnic as well as strong communal background, whereby; each community has their own sources of obtaining funds The aforementioned areas are distributed among different cultures having dominance of different ethnic and political groups within the three localities, mainly dominated by Urdu speaking (migrants from Indian subcontinent) and Pukhtoons from the province of Khyber Pukhtoonkhwa Based on such cultural diversity, the three selected towns were further classified into two cultural segments having major population, that is, classified group A and B Classified group ‘A’ has the dominance of Urdu Speaking community Urdu speaking community is referred to those families which migrated from different parts of India and opted Pakistan as their homeland after independence Although, all the families migrated from India are generalized as Urdu speaking community but in the real sense, they are sub classified as the residents of different Indian states including Bihar, Hyderabad Deccan, Lucknow etc, having different and distinct cultural background However, Classified Group ‘B’ has the dominance of Pushto speaking community Pushto speaking community is referred to those families, which migrated from different parts of Khyber Pakhtoonkhwa province Major reason of migration to Karachi was in search of job and business opportunities A sample size of 150 respondents (30 from each town) was selected on the basis of representation from the lower income groups Based on further cultural classifications, 15 respondents each from Urdu and Pushto speaking cultures were selected respectively from each of June 27-28, 2012 Cambridge, UK 2012 Cambridge Business & Economics Conference ISBN : 9780974211428 the three towns It means that 75 respondents each belonging to Urdu speaking and Pushto speaking cultures were selected respectively from the three towns The responses were gathered through closed ended questionnaire with few open ended questions to study the prevailing behavior of population The questionnaire was also translated into Urdu and Pushto languages to ensure respondents’ understanding and to gather maximum input from the respondents The questionnaire probed into five broad social dimensions reflecting the behavioral characteristics and decision making patterns of respondents including educational, communal, cultural, political and economic facets The questionnaire also evaluated the level of awareness about MFIs, availability and accessibility to MFIs, and impact of Government support to MFIs amongst lower income populations The data was tabulated and analyzed through qualitative analysis of the gathered data, which reveal the behaviors and decision making patterns in lower income populations towards regulated microfinance institutions ANALYSIS The analysis is based on different factors influencing the borrower’s behavior towards a successful MFI model These factors are interdependent and have a major impact on decision making of the respondents The borrower’s behavior is derived from their educational, cultural, economic, political and communal facets These facets have a sound influence on behavioral and attitudinal aspects of individuals An in-depth analysis in each of the broad parameters revealed the following: Educational Facet Education plays a vital role in shaping up a personality and enabling an individual to think in a broader perspective with intellect and wisdom It also enables the capacity building of an June 27-28, 2012 Cambridge, UK 10 2012 Cambridge Business & Economics Conference ISBN : 9780974211428 individual, which facilitates in effective decision making While analyzing the educational background of the respondents, it was observed that 88% of the respondents are middle pass (only class five) and are able to read and write Urdu language only Only 54 out of 150 respondents can read some sentences of English It also reflects their lack of intellect to understand the complexity of any micro finance model, which creates skepticism in understanding the phenomenon of repayment based on principal amount, mark up and other hidden charges It was also revealed that rules and regulations set out by the Micro Finance Bank or Micro finance Institution, which is majorly written in English language, is not understandable by the borrowers They are totally dependent on the information provided by the representatives of MFIs or MFBs or unstructured institutions The borrowers are keen to obtain fund in any way to establish their businesses without having in depth information about the compounding rate of interest, schedule of charges, installment framework and redress in case of delinquencies They are only required to sign the undertaking to be eligible for the loan Such a low literacy rate seems to be a major hurdle in spreading the benefits of micro financing across the board to the target market Also, lack of education discourages the potential borrowers to apply for micro financing, as it sounds quite confusing and vague in terms of its implementation from the borrowers’ perspective The MFIs may educate their potential customers about micro financing by realigning their marketing mechanisms and strategies to attract less educated masses through staff trainings and holding open sessions in these localities and persuading them in their respective languages towards micro financing Such an attempt may June 27-28, 2012 Cambridge, UK 11 2012 Cambridge Business & Economics Conference ISBN : 9780974211428 create a positive impact among other individuals to get attracted towards Micro Financing in a more structured way Cultural facet The behavior of individuals is persuaded by cultural factors including religions, nationalities, geographic regions, racial groups etc Culture is an integral part of every society and shapes the wants and behaviors of individuals The influence of culture on behavior varies from country to country; therefore MFIs have to be very careful in analyzing the culture of different groups, regions or even countries Every society possesses some form of social class which is important to the MFIs because the behavior of people in a given social class is similar In this way financing activities could be tailored according to different social classes Karachi, being the cosmopolitan city having cultural mix, makes the city complex in analyzing and very difficult to generalize The successful Micro Finance Models are developed on the basis of group lending, which targets and attracts group lending on the basis of community having similar cultural norms It was found difficult to provide group lending in Classification 1, where sub classifications are evident based on different cultural backgrounds based on migration from different Indian states It was observed that group lending is attracted to Classified Group B, where residents are closely knitted and have a strong impact on the community as a whole Their similar cultural norms and understanding of their family values may facilitate the MFIs in attracting the potential customers in Classified group B towards group lending However, a comparative analysis of both the classified groups shows that Group A has more possibilities for women entrepreneurship, June 27-28, 2012 Cambridge, UK 12 2012 Cambridge Business & Economics Conference ISBN : 9780974211428 because, culturally, women are more encouraged towards education and employment as compared to the classified group B Economic facet Economic facet has a great influence on the behavior of borrowers If the income and savings of the individual is high then he/she is least attracted to debt financing On the other hand, the individual with low income and savings is more attracted towards debt financing The selection of income group and the means of income are very important The main function of the MFIs is to enhance the capacity of the borrowers through entrepreneurship Borrowers, who belong to the labor class and earn their income through wages on daily, weekly or monthly basis, are not encouraged by the MFIs to obtain loan as sustainability of the job is not secured High inflation rate in Pakistan also deepens the misery of the labor class, which has no other alternative to increase their income but to wait for their increment at the end of each year On the other hand, lower income group running their own businesses are encouraged by MFIs to obtain loans as the capacity building of the enterprise and marginal increase in the revenue is expected Entrepreneurs also have the provision to increase the revenue with increasing sales price to counter the inflation It was found that 80% of the respondents in classified group ‘B’ were doing their own small businesses and require the funds for their recurring inventories to manage their working capital requirement and increase their revenues Their major concern is the time limit given for the said financing, that is, 12 months They are of the opinion that the time limit should be extended so that they are comfortable enough to repay the installment The concept of demanding for the relaxation in recovery period is the debt servicing through marginal increase in turn over, which June 27-28, 2012 Cambridge, UK 13 2012 Cambridge Business & Economics Conference ISBN : 9780974211428 says that the principal and the interest are repaid through the marginal increase in the income This ideal situation would not only enable the borrower to repay the debt but at the same time delinquency rate will also be decreased to the possible extent However, a majority of 74% of the respondents in classified group ‘A’ were found to be engaged as employees, mainly in private sector as labor class at worker level positions They can also be attracted towards entrepreneurship by offering customized micro finance models, which may encourage them to turn towards entrepreneurship and enhancing their economic returns Political facet In the city of Karachi, the lower income group is strongly influenced by the political parties representing different ethnic groups Classified group ‘A’ is influenced by major political party in Sindh namely Mutahida Qaumi Movement On the other hand, the Classified Group ‘B’ is influenced by Awami National Party The political influence on the community was found to be so strong that both the communities are forced to raise/provide funds and spare time for their respective political parties This particular factor heavily influence the income generation of the entrepreneurs who can easily repay the loan obtained, provided that forceful attempts by the political parties are being restrained Respondents engaged in small businesses were of the view that they have no choice but to accept the fact that they ought to listen to the political parties to run their businesses smoothly for which they have to allocate a fund on monthly basis as a donation and treat this donation as a part of their fixed expense Moreover, law and order situation created due to rift between different political parties in the same locality also play havoc and disrupt the existing business activities creating considerable June 27-28, 2012 Cambridge, UK 14 2012 Cambridge Business & Economics Conference ISBN : 9780974211428 losses or reduced wages due to absences revenue, thus making it difficult to repay the loan as per the schedule given and discouraging the respondents to turn towards entrepreneurship from their respective employments The political parties should also be educated and motivated to attract their followers towards micro financing, thus using their influence constructively for the economic uplift of the local residents Communal facet In classified group ‘A’, it was witnessed that community elders were not involved in decision making Those respondents are focused on their immediate family only and are loosely connected to their community members and are least active in their community activities, ignoring the idea of business sharing within their respective communities, thus discouraging the notion of group lending, which is termed as the baseline of micro finance model However, the MFIs may approach and attract group ‘A’ community through their political party, which facilitates this particular community in employment opportunities in their respective area offices In the Classified Group ‘B’, decision making is highly dependent on community elders The community elders play a significant role in uniting the community and have a strong influence in their respective communal activities Thus, it can be inferred that families belonging to this community are highly dominated by local jirga system (group of community elders or respectable seniors taking major decisions on the community issues) Such a system implies that Group ‘B’ can be targeted through their communal system towards micro financing, as the acceptability of a certain financial model by the local jirga would persuade and encourage community members towards micro financing The community elders ensure the honor of the commitment made by the borrowers through which confidence of the lenders can also be sustained June 27-28, 2012 Cambridge, UK 15 2012 Cambridge Business & Economics Conference ISBN : 9780974211428 Availability and accessibility to Micro Finance Institutions In Pakistan, the industry players comprise eight micro finance banks, five specialized micro finance institutions and multi sector NGOs sharing the total market capitalization Through a conscious statistics 23 MFIs are operational with more than 1300 branches sharing more than 60% of the market capital Total number of borrowers touched the 1.3 million mark having a loan portfolio of Rs 15 Billion making the average loan size of Rs 11,000 only (State Bank Report, 2011) Looking at these figures, it is evident that there is a dearth of Micro finance Institution in Pakistan As per the information given by the respondents, the availability of MFIs is very limited, where borrowers have limited access to the MFIs Respondents were approached by the MFIs and were shortlisted only on the basis of their financial status, which resulted in a considerable small number of borrowers It seems that MFIs must realign their vision to expand the customer base, which has a strong potential in Pakistan, specifically, in Karachi Awareness level of MFI MFIs generate funds through donors who have their priority Keeping this concept in mind, they have a very weak marketing strategy, due to which the market positioning is very limited Respondents claimed that they have very little information about the existing MFIs The low marketing strategy is not only making the potential borrowers unaware about the lending products but at the same time, the philanthropists are also not attracted to the successful models being implemented by the MFIs June 27-28, 2012 Cambridge, UK 16 2012 Cambridge Business & Economics Conference ISBN : 9780974211428 Funding limits of MFIs It was observed with the facts that loan size is limited by all the MFIs operating in Pakistan The average loan size in Pakistan is ranging from 10,000- 15,000 only Keeping in mind the inflation and ever increasing price in Pakistan, the loan size is not as per the expectation of the borrowers who requires the loan majorly for the inventory storage enhancement of the business Majority of the total respondents in both the groups ‘A’ and ‘B’ emphasized that the loan size provided by the MFIs should be expanded as the provided micro financing limit is not meeting the requirements It is important to note that MFIs are reluctant to provide a big loan size to the borrowers without any collateral due to volatility in the borrowers’ perspective and at the same time a huge loan size is discouraged by the authorities including State Bank of Pakistan (SBP) According to the prudential regulations of SBP the total percentage of the loan size ranging from Rs 100,000 to Rs 150,000 should not exceed 20% of the total portfolio (State Bank Report, 2011) This limit of funding to the borrowers is not fulfilling the burning needs of the borrowers to build their capacity on timely basis They are only eligible to re apply for the loan if the loan is repaid in 12 months without any delay It means that the borrowers have to wait for 12 months without any default to apply for the further loan Governmental support and its potential impact on borrower’s behavior In Pakistan, the concept of micro financing is still emerging and it requires a complete support of the State Apart from the Micro Finance Banks, the major share holders, that is, Micro Finance Institutions are not regulated by the Governmental authorities Lack of regulations and non existence of the centralized monitoring provided opportunity to the borrowers to obtain multiple loans from multiple MFIs ultimately increasing the risk of default At the same time it also June 27-28, 2012 Cambridge, UK 17 2012 Cambridge Business & Economics Conference ISBN : 9780974211428 provided the opportunity to the MFIs to exploit the situation by charging high mark ups and charge extra fee to the borrowers In recent times MFIs are mainly dependent upon State Backed Pakistan Poverty Alleviation Fund (PPAF) to finance their lending operations Other rural development programs are being operated on provincial basis But the challenging part is the high operating cost which is making the MFI business less viable The current operating cost is ranging from 22% to 26% It is now imperative that MFI can only be viable if the concept of public private partnership is introduced Majority of the respondents insisted that they are at the mercy of the MFIs and they not have any idea about the merits of the loan products They will have higher satisfaction and confidence if the said MFIs are supported and recognized by the Governmental authorities CONCLUSION AND RECOMMENDATIONS A detailed study on the topic reveals that in order to ensure the success of micro financing models in Pakistan, specifically in Karachi, it is important to understand the factors, which are influencing the borrower’s behavior It was evident that borrowers need to be understood by the MFIs, supported by a flexible approach to provide leverage to the borrowers It is also understandable that MFIs cannot be made commercial without keeping borrowers problems in mind to avoid high rate of default It is a very complex situation when a balance is ensured between the borrowers and the lender because both the entities always strive to safeguard their own interests It was explored that lending and borrowing is balanced if the interests of both the sides are ensured Based on the analysis, following recommendations can be made: June 27-28, 2012 Cambridge, UK 18 2012 Cambridge Business & Economics Conference • ISBN : 9780974211428 The MFIs should reach out to the lower income groups and increase the awareness of micro financing schemes by educating their potential customers considering their cultural values The financial products offered should be designed and promoted within the cultural norms of each community • Group ‘B’ can be attracted towards group lending, due to a strong connection amongst community members and community involvement in decision making related to employment choices However, group ‘A’ can be attracted through their political party affiliations, as it becomes the center for guidance on employment opportunities to their respective communities • The MFIs should redesign their marketing strategies with massive penetration campaigns in the lower income groups and increased availability of branches in areas having lower income populations Moreover, a flexible approach should be adopted to facilitate the borrowers in terms of repayment • The Government and State Bank of Pakistan must support the MFIs by extending their patronage and extending the loan size for MFIs Such an attempt will attract the borrowers and would enhance their confidence to establish their businesses through micro financing • There should be a strategic partnership between borrowers and the lenders to run a business on long term basis The profit should be shared in the pre agreed terms and the losses are shared accordingly Expertise, knowledge of the business, wisdom and long range planning can surely make the probability of success at the highest level The concept of musharika June 27-28, 2012 Cambridge, UK 19 2012 Cambridge Business & Economics Conference ISBN : 9780974211428 arrangement is gaining popularity is Islamic States including Pakistan on macro level by Islamic banks It can also be replicated in the micro financing if it is structured in the same manner Rather go for the benevolence, a financing strategy can create a successful micro finance model, enabling a better economic situation Thus, MFIs can be utilized to turnaround the economic scenario of Pakistan, subjected to their understanding of the borrowers’ behavior and support by the state authorities REFERENCES Anderson, C., L., Locker, L., & Nugent, R (2002) Microcredit, social capital, and common pool resources World Development, 32, 95-105 Bolnick, B R., & Nelson, E R (1990) Evaluating the Economic Impact of a Special Credit Programme: KIK/KMKP in Indonesia The Journal of Development Studies, 26, 299-312 Brau, J., C., & Woller, G M (2004) Microfinance: A comprehensive review of the existing literature Journal of entrepreneurial finance and business ventures, (1), 1-26 Copestake, J., Bhalotra, S and Johnson, S (2001) Assessing the impact of microcredit: A Zambian case study The Journal of Development Studies, 37, 81-100 Eyiah, A K (2001) An integrated approach to financing small contractors in developing countries: A conceptual model Construction Management and Economics, 19, 511-518 June 27-28, 2012 Cambridge, UK 20 2012 Cambridge Business & Economics Conference ISBN : 9780974211428 Goetz, A M., & Gupta, R S (1996) Who Takes the Credit? Gender, Power, and Control Over Loan Use in Rural Credit Programs in Bangladesh World Development, (24), 4563 Kevane, M & Wydick, B (2001) Microenterprise Lending to Female Entrepreneurs: Sacrificing Economic Growth for Poverty Alleviation? World Development, 29, 12251236 Khandker, S., R (2005) Microfinance and poverty: evidence using panel data from Bangladesh World Bank Economic Review, 19 (2), 263-286 doi: 10.1093/wber/lhi008 Mc Kernan, S (1996) The impact of microcredit programs on self-employment profits: Do noncredit program matter? The Review of Economics and Statistics,84, 93-115 Mosley, P (2001) Microfinance and poverty in Bolivia The Journal of Development Studies, 37, 101-132 Mosley, P., & Hulme, D (1998) Microenterprise finance: Is there a conflict between growth and poverty alleviation? World Development, 26, 783-790 Mutua, K., Nataradol, P., Otero, M., & Chung, B (1996) The view from the field: Perspectives from managers of microfinance institutions Journal of International Development,8, 179-193 June 27-28, 2012 Cambridge, UK 21 2012 Cambridge Business & Economics Conference ISBN : 9780974211428 Nourse, T., H (2001) The missing parts of microfinance: Services for consumption and Insurance SAIS Review, 21, 61-70 Pitt, M., & Khandker, S (1998) The impact of group-based credit programs on poor households in Bangladesh: Does the gender of participants matter? The Journal of Political Economy, 106, 958-996 Woller, G and Parsons, R (2002) Assessing the community economic impact of microfinance institutions Journal of Developmental Entrepreneurship, 7, 133-150 Wydick, W (1999a) Credit access, human capital, and class structure mobility The Journal of Development Studies, 55, 131-152 Wydick, W (1999b) The effect of microenterprise lending on child schooling in Guatemala Economic Development and Cultural Change, 47, 853-869 Wydick, W Bruce (2002) Microfinance among the Maya: Tracking the progress of borrowers, Development and Change, 33, 489-509 June 27-28, 2012 Cambridge, UK 22 ... MFIs amongst lower income populations The data was tabulated and analyzed through qualitative analysis of the gathered data, which reveal the behaviors and decision making patterns in lower income... sound influence on behavioral and attitudinal aspects of individuals An in- depth analysis in each of the broad parameters revealed the following: Educational Facet Education plays a vital role in. .. populations towards regulated microfinance institutions ANALYSIS The analysis is based on different factors influencing the borrower’s behavior towards a successful MFI model These factors are interdependent