Welcome to Khushhali Bank Limited :: Resource Center

What do Local Microfinance Banks/Institutions (MFBs/MFIs) do?

These front line organizations reach out to the very poor and deliver microfinance services to local clients on a daily basis. They educate local communities about the opportunity to improve their lives with microfinance; make micro loans and provide other financial services such as micro credit, savings accounts and microinsurance; collect loan payments; and assist clients in solving life challenges that they may face. Many also provide social services, such as basic health care for clients and their children.

MFIs differ in size and reach: some serve a few thousand clients in their immediate area, while others serve hundreds of thousands of poor people through a network of branches covering large regions. Khushhali Bank Limited founded in 2000, is Pakistan’s largest and most successful MFB. Khushhali Bank Limited has also made its mark in the international arena and is watched closely to be considered as a progressive model. Khushhali Bank Limited has served more than 1.5 million loans to date.

Where do MFBs/MFIs get the money for loans?

Funding comes from individuals, philanthropists, foundations, government and international institutions such as ADB, World Bank etc.. MFBs/MFIs also borrow funds from traditional banks to provide loan to their clients. In addition, the interest paid by clients on microfinance loans goes back into the program to cover costs and to fund more loans.

One of the most attractive features of microfinance is the goal of self-sufficiency for both microentrepreneurs and MFIs. Khushhali Bank Limited is spearheading several initiatives to give MFIs access to the private market financing options available to traditional banks. By combining access to private market financing with more efficient management and technology, MFBs/MFIs can begin to move from reliance on philanthropy to self-sufficiency. Khushhali Bank Limited has proven that this can be ably accomplished.

Why is this different from other loan programs?

Unlike other loan programs, clients are not required to provide collateral to receive loans. This allows people who would not qualify for loans at traditional financial institutions to receive credit. MFBs/MFIs are also very client-friendly; most of them usually go to their clients to provide loans and receive payments, rather than requiring their clients to come to them. A few of them also use focal centers where clients gather to conduct financial transactions and receive other social services. The peer support system practiced by many microfinance programs is another unique feature. When clients gather monthly at “center meetings” to make loan payments, or informally in smaller support groups, they share successes and discuss ideas for solving business and personal problems. Perhaps significantly, they empower each other to stay on the path out of poverty. This mutual support strengthens their resolve.

In addition, MFB/MFI staff members share vital information and resources to improve their clients’ well being. This might include bringing in local trainers which provide them training or setting up small infrastructure projects for the well-being of the communities, offering scholarships to students from non-bankable territories, etc.

Are these people really poor?

Khushhali Bank Limited serves very poor people – many of whom are in rural areas and live on only a dollar or so a day. While the exact dollar figures for measuring their level of poverty may vary from country to country, one thing is constant: they are literally struggling to live on a day to day basis. We aim to target the grassroots levels and at the same time support those individuals who have come out of the grassroots ranks and are ambitious to attain a higher level. Development is gradual, therefore we intend to bring improvement in living conditions and motivate them to take on challenges, and work with commitment to improve their lives and destinies.

What is the difference between Microcredit and Microfinance?

Microcredit refers specifically to loans and the credit needs of clients, while microfinance covers a broader range of financial services that create a wider range of opportunities for success. Examples of these additional financial services include savings, insurance, housing loans and remittance transfers. The local MFB/MFI might also offer microfinance plus activities such as entrepreneurial and life skills training, advice on topics such as health and nutrition, sanitation, improving living conditions, and the importance of educating children.

Why do MFBs/MFIs focus on women?

	Women have proven to be the best poverty fighters. Experience and studies have shown that they use the profits from their businesses to send their children to school, improve their families’ living conditions and nutrition, and expand their respective businesses.

Can very poor people actually start and run a successful business?

Indeed this is possible as many poor people have skills that can quickly turn into an income-producing activity. With small sums of money, they are able to purchase the inventory, supplies and tools needed to start or expand microbusinesses that range from weaving, sewing, grinding grain, reselling produce, growing and selling vegetables and cash crops, to catching and selling fishing, raising chickens to sell eggs, and breeding livestock, retail outlets, making bangles, handicrafts etc.

These small ventures can grow into vibrant community businesses. One microentrepreneur from Sindh involved in handicrafts, bought extra tools to increase the production of handicrafts and sold them to local urban markets. The demand grew quickly and he hired her neighbors and some young uneducated youth to help. Now, nearly 20 people earn an income from her family business of manufacturing handicrafts, and thus her entire community is benefiting from the same.

Do very poor people repay their loans?

	Yes, microfinance clients are excellent credit risks. The repayment rate is between 95 and 98 percent. In fact, it is higher than the repayment rate of student loans and credit card debts in the United States. They value the opportunity to improve their lives.

Do people really get out of poverty?

Microfinance is not a silver bullet. It will not defeat global poverty by itself. But, it is an important part of the solution. Microfinance provides a stable and sustainable source of income that enables clients to climb steadily out of poverty, while providing better living conditions and opportunities for their families. For some, this progress means moving from a house made of mud to one of bricks and cement. For others, it means better nutrition and the money to finally send their children to school.

I’ve heard that MFBs/MFIs charge a high rate of interest for the loans. Is that so?

Like other financial institutions, microfinance banks and institutions (MFBs/MFIs) charge interest for the loans they make for their clients. The interest covers the high cost of making very small loans and personal servicing towards each client. It also covers the cost of managing the “center meetings”; the peer support group process; and providing information on social services, personal development, health and other critical information that helps clients improve their lives and the future of their families. Their rates are also largely influenced by the rates MFBs/MFIs themselves pay for borrowing the funds that they in turn lend to their clients. Without microfinance programs, the most common alternative for very poor people are the local “money lenders,” who regularly charge between 120 and 300 percent.

Aren't the poor too poor to save?

The poor already save in ways that we may not consider as "normal" savings--- investing in assets, for example, that can be easily exchanged to cash in the future (gold jewelry, domestic animals, building materials, etc.). After all, they face the same series of sudden demands for cash we all face: illness, school fees, need to expand the dwelling, burial, weddings.

These informal ways that people save are not without their problems. It is hard to cut off one leg of a goat that represents a family's savings mechanism when the sudden need for a small amount of cash arises. Or, if a poor woman has loaned her "saved" funds to a family member in order to keep them safe from theft (since the alternative would be to keep the funds stored under her mattress), these may not be readily available when the woman needs them. The poor need savings that are both safe and liquid. They care less about the interest rates that they can earn on the savings, since they are not used to saving in financial instruments and they place such a high premium on having savings readily available to meet emergency needs and accumulate assets.

These savings services must be adapted to meet the poor’s particular demand and their cash flow cycle. Most often, the poor not only have low income, but also irregular income flows. Thus, to maximize the savings propensity of the poor, institutions must provide flexible opportunities--- both in terms of amounts deposited and the frequency of pay ins and pay outs. This represents an important challenge for the microfinance industry that has not yet made a concerted attempt to profitably capture tiny deposits.

Are Commercial Banks involved in Microfinance?

	Yes the commercial banks are involved within microfinance in an increasing way. Formal financial institutions are recognizing the benefits of serving poorer clients.