Factors influencing borrower’s behavior and decision making patterns in the success of a micro finance model

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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
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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
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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 8 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
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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
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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 sub-
continent) 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
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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
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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
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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,
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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
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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
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