CASE STUDY

A STUDY OF KASHF FOUNDATION WITH RESPECT TO THE MICROFINANCE

INDUSTRY IN PAKISTAN

Ali Khalid 12L-5845

Hassaan Ahmad 12L-4971

Advisor: Nayab Tabassum

30th December, 2016

“This project is solely the work of the author and is submitted in partial fulfillment of the

requirements of the Degree of Bachelor of Accounting and Finance”

FAST School of Management

National University of Computer & Emerging Sciences
ACKNOWLEDGEMENTS
First of all, we would like to thank Allah Almighty who has given us the opportunity to conduct

this research in the best of our interests. We would like to thank our FYP advisor Ms. Nayab

Tabassum who has guided us throughout the project and helped us to learn and excel in our field.

We would also like to thank our evaluation committee members, Mr. Aamer Allauddin, Mr.

Farukh Jamil and Ms. Nayab Tabassum who gave us their valuable time and feedback.

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TABLE OF CONTENTS

INTRODUCTION .......................................................................................................................... 6

Objective of the study ................................................................................................................. 6

Introduction to Microfinance ...................................................................................................... 6

Microfinance institutions (MFIs) ............................................................................................... 7

Types of MFIs ............................................................................................................................ 8

Benefits of Microfinance ............................................................................................................. 8

Accessibility ............................................................................................................................... 9

Better repayment rates................................................................................................................ 9

Education.................................................................................................................................... 9

Health and welfare ..................................................................................................................... 9

Sustainability .............................................................................................................................. 9

Job creation ................................................................................................................................ 9

Microfinance in Pakistan ........................................................................................................... 10

Risks to microfinance in Pakistan ............................................................................................. 10

PEST analysis of the microfinance industry ............................................................................. 11

Political-legal ........................................................................................................................... 11

Economic.................................................................................................................................. 12

Socio cultural ........................................................................................................................... 13

Technological ........................................................................................................................... 13
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KASHF FOUNDATION .............................................................................................................. 14

Acquisitions of KMBL by FINCA ............................................................................................ 14

Who they are and what they do ................................................................................................. 15

Why did we choose Kashf? ....................................................................................................... 15

Key initiatives ........................................................................................................................... 15

Kashf Foundation Operations ................................................................................................... 16

Solidarity group lending model................................................................................................ 16

Kashf’s Methodology ................................................................................................................ 16

Services offered ......................................................................................................................... 17

Kashf Karobar Karza................................................................................................................ 17

Kashf Aitebar Karza................................................................................................................. 17

Kashf Zindagi Bima ................................................................................................................. 18

Kashf Financial Literacy Programs .......................................................................................... 18

Outreach .................................................................................................................................... 18

Interest rates .............................................................................................................................. 19

Analyzing Kashf Foundation using Porter’s model .................................................................. 19

Threat of new entrants .............................................................................................................. 19

Substitute .................................................................................................................................. 20

Suppliers................................................................................................................................... 20

Competitors .............................................................................................................................. 21

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DATA COLLECTION ................................................................................................................. 21

Secondary data .......................................................................................................................... 21

Primary data .............................................................................................................................. 21

Limitations ................................................................................................................................ 21

RESEARCH QUESTION ............................................................................................................. 22

PROBLEM STATEMENT ........................................................................................................... 22

MICROFINANCE PERFORMANCE INDICATORS ................................................................ 23

Financial sustainability.............................................................................................................. 23

Outreach .................................................................................................................................... 24

Impact ........................................................................................................................................ 24

FACTORS AFFECTING OUTREACH ....................................................................................... 25

Strategic issues .......................................................................................................................... 26

Operational issues ..................................................................................................................... 26

Marketing issues ........................................................................................................................ 28

Regulatory framework............................................................................................................... 29

ANALYSIS OF THE FINDINGS ................................................................................................ 30

Marketing issues ........................................................................................................................ 31

Lack of information about clients ............................................................................................ 31

Client focus .............................................................................................................................. 31

Educational level of clients ...................................................................................................... 32

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 Operational issues ..................................................................................................................... 33

Low population density ............................................................................................................ 33

Skilled staff .............................................................................................................................. 33

High operational costs .............................................................................................................. 34

Strategic issues .......................................................................................................................... 35

Regulatory and Legislative framework .................................................................................... 35

CORRELATION OF PROBLEMS .............................................................................................. 36

Marketing issues ........................................................................................................................ 36

Operational issues ..................................................................................................................... 37

Strategic issues .......................................................................................................................... 37

CONCLUSION AND RECOMMENDATIONS ......................................................................... 37

Conclusion................................................................................................................................. 37

Recommendations ..................................................................................................................... 40

REFERENCES ............................................................................................................................. 42

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INTRODUCTION

We are conducting a case study on an organization known as Kashf foundation and we will study

this organization with respect to its relative industry in Pakistan. This study will give you the

detailed information about the organization, what this organization does and what its operations

are. This study will also show you the overall industry dynamics and situation analysis of the

organization with respect to the industry.

Objective of the study

The microfinance system in Pakistan has not yet progressed as much as compared to the

microfinance industry in the world. Even the microfinance industry in the countries of the

subcontinent are far ahead of the microfinance industry in Pakistan. In this case, this research

will identify key problems that the industry faces and study it with respect to the microfinance

organization that we have chosen because we are not only going to identify and analyze the key

problems of the microfinance industry in Pakistan but we are also going to evaluate its effects

and causes with respect to the organization. This research will also identify and study different

problematic aspects and recommend solutions in this case study.

Introduction to Microfinance

Before going further, it is important to know what microfinance is as it is the basic element of

this case study.

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Definition

“It is a type of financial assistance which is provided to people who have no income or

they have insufficient income to fulfill their basic household needs. In other words, the aim of

microfinance is to give such individuals a chance by assisting and giving means of saving

income, getting insurance and borrowing money.” (Maanen 2004)

The concept of microfinance is not new. Small operations of lending money in such a way have

existed since 1700s. In the modern world, the trend of micro financing has grown a lot and now

there are many microfinance institutions working in different parts of the world. Compared to

conventional banking microfinance banks also charge interests on loans.

The enhancement of today’s microfinance is accredited to Dr. Muhammad Younus, who began

to lend to poor women as a trial in a village in Bangladesh while he taught economics at

University of Chittagong in the 1970s. Later he went on to be the founder of Grameen Bank in

1983 and won the Nobel Peace Prize in 2006.

Microfinance continues to evolve and innovation has enhanced. The World Bank states that in

developing countries about 150 million people are assisted by microfinance.

Microfinance institutions (MFIs)

A microfinance institution (MFI) is an institution that gives micro-loans and microfinance

services to the individuals with little or no assets. MFIs can be small non-profit organizations or

they can also be in the form of commercial banks. MFIs are registered under a variety of

regulations such as the societies act, the Trust act etc.

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Types of MFIs

Rural Support Program (RSP)

A RSP is an institution that operates using the concept of microfinance with a goal of ‘Rural

Development’. Under the Companies Ordinance an NGO is registered as a non-profit entity. An

RSP is different from the Microfinance Institution group because it is purely focused on rural

development. Rural Support Programs are registered and supervised by the Securities and

Exchange Commission of Pakistan (SECP).

Commercial Financial Institutions (CFI)

CFIs are commercial banks that provide financial services to various types of entities and in this

case, there are many microfinance CFIs working internationally and nationally in Pakistan. For

example, FINCA, Waseela Microfinance Bank and Ubank etc.

Microfinance NGO

A Non-Governmental Organization (NGO) is an organization which is formed by a group of

voluntary individuals for a particular cause or a common objective on national or international

level. There are many microfinance NGOs working nationally and internationally. For example,

Kashf Foundation.

Benefits of Microfinance

The microfinance system has helped the poor in a number of ways. There are researches that

show how microfinance has assisted people who could not even get basic needs can now get

them because of microfinance. Following are some perspectives that show how micro financing

improves the lives of poor people and families.

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Accessibility

Generally, conventional banks do not provide micro-loans to individuals with little or no

assets. These banks generally do not provide any sort of micro-loan. Microfinance banks are

based on the concept of providing such loans and are accessible to people who have little or no

assets.

Better repayment rates

Compared to conventional banks, microcredit banks have lower interest rate which

results in smaller number of defaulters. Hence there is little risk for individuals to become

bankrupt.

Education

Individuals who have benefitted from micro-loans are less likely to pull their children out

of school and are encouraged to send their children to schools.

Health and welfare

People who are provided with such loans can get better health facilities and better access

to clean water and food.

Sustainability

Even a small loan of Rs. 10,000 is enough for a person to start a small business and

generate income which is a great benefactor for drawing a family out of poverty.

Job creation

Micro-credit loans can help create new job opportunities in society.

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Microfinance in Pakistan

Exhibit 1.1 shows the movement of average discount rate of all the MFIs in Pakistan.

Risks to microfinance in Pakistan

A survey was conducted by PMN (Pakistan Microfinance Network) in which 58 respondents

who were stakeholders were selected as a sample to identify the top risks faced by MF in

Pakistan. The respondents ranked those risks as top ten biggest risks of microfinance industry in

Pakistan.

The findings of the survey were as follows.

1. Natural disasters

2. Profitability

3. Macro-economic trends

4. Credit risk

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5. Competition

6. Interest rates

7. Political interference

8. Liquidity

9. Security

10. Managing technology

PEST analysis of the microfinance industry

Political-legal

The political conditions of any country play an important role in affecting any single firm or the

sector as a whole and same is the situation with the microfinance sector in Pakistan. The banking

sector as a whole is being affected by the regulations that are a set of government rules that apply

to the overall financial system of a country. The aim of these regulations is to ensure the

solvency of MFIs that lend money in order to prevent their clients from losses. If a MFI fails to

collect savings from its clients and becomes insolvent, then it would no longer be credible for the

whole financial system. The financial system will also face a loss because of this. These

regulations also help in preventing fraud in the financial system.

Prudential measures protect the financial system from insolvencies such as described above.

These measures involve monitoring and investigation of MFIs to keep them from destabilizing

and keep them financially sound. Prudential measures being justified for a commercial bank can

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have disadvantages for MFIs because many countries do not distinguish commercial banks from

MFIs. The prominent factors affecting the microfinance market include; the minimum capital

requirement. Many MFIs find it difficult or unable to fulfill the minimum capital requirement

and even if they do gather enough equity, then the MFIs find it difficult to find investors to

leverage it. Capital adequacy requirements measured by means of capital/asset ratio directly

affects the capacity of an MFI to repay its debts.

Non-prudential measures define the business operations of MFIs that prevent clients and

customers from frauds or financial crimes.

The government can pass laws that can limit the interest rates set by the MFIs which makes it

difficult for MFIs to be sustainable.

Economic

The economic environment greatly affects how a MFI functions and operates. The poverty level,

economic growth rate and inflation are the key factors in this respect. Inflation is present in all

economies. In some cases, it can reach very high levels and has diverse consequences. It affects

the behavior of borrowers and the perception of lenders, influencing the rates of interest they

charge these lenders, including MFIs.

The GDP of a country also affects the whole financial system including MFIs. A positive GDP

growth encourages people to invest and entrepreneurs to start businesses while a falling GDP

might also be favorable but it has more risks involved for borrowers and lenders.

The level of poverty enables the MFIs to change their target market in accordance with the

potential market by analyzing the target customers.

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The recent fall in the interest rates are one of the main factors that are effecting the microfinance

industry and the related banking sector and its effect can be seen in the sense that the current

KIBOR is at its sustainable points.

Socio cultural

Socio cultural points like norms, demographics etc. also affect the microfinance industry.

Because of these values and religious beliefs some individuals do not want to be a part of this

sector, and some individuals do not want to keep their money in banks. This phenomenon is

assisting microfinance industry to produce new products and services that are Islamic based.

A successful microfinance network requires close relationships with clients, the adaption of the

client’s culture is also important which includes values and norms also mentioned above.

Another factor in this category is the assistance of health insurance services provided by the

government hence MFIs find it difficult to provide competitive health insurance services. The

government also provides subsidized loans to poor people as a part of social welfare programs

which affects the products and services of local MFIs to provide cheaper loans to their clients.

Transport infrastructure affects the level of accessibility of customers to MFI branches and also

the costs of clients to frequently access that institution.

Technological

Technology is being emphasized as an increasingly major issue in microfinance industry.

The implementation costs of ATMs, oracle financial systems and other related applications are

some of the technical factors that currently affect the microfinance banking system. Many new

different ways of online banking in this sector are being introduced. However, the clients need to

be trained to use this method of banking which is another challenge for the firms in this industry.

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KASHF FOUNDATION

Registered under section 42 of Companies Ordinance 1984 and founded in 1996, Kashf

Foundation is one of the first microfinance institutions in Pakistan. Its vision is to provide

financial services to all poor people specially women. Kashf offers overall, emergency,

commercial and home improvement loans, as well as insurance services. The organization allows

for carefully managed growth and sustainability through a franchise model with branches in both

rural and urban areas.

Roshaneh Zafar founded Kashf foundation after she met Professor Mohammad Younus of the

Grameen Bank in a chance meeting in 1993 and that meeting led to the birth of Kashf foundation

as an action research program in 1996.

The initial phase of two years was spent in understanding the industry. In the years 1999 – 2001

a more focused approach to manage growth took place after this phase. The main objective

during this period was to make the network structure more effective and efficient. The main

focus was to improve outreach and come up with enhanced products to offer. In the years 2001-

2004 through cost effective and sustainable Kashf network Kashf had a horizontal growth path

by managing scattered units and entering new markets. By 2004, over 68,000 individuals and

households through a network of only 30 branches were being provided with financial assistance.

Acquisitions of KMBL by FINCA

FINCA (Foundation for International Community Assistance) is an international NGO and

microfinance institution that works in different countries all over the world. KMBL (Kashf

Microfinance Bank Ltd.) was a subsidiary of Kashf Holdings Private Ltd. In 2013 FINCA

acquired majority of shares of KMBL and now owns KMBL. The name of KMBL changed to

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FINCA Pakistan and it is now a separate entity while Kashf Holdings Pvt. Ltd. also known as

Kashf Foundation operates as a separate entity as a microfinance institution and in this case we

will only be studying Kashf Foundation.

Who they are and what they do

Kashf Foundation was founded with the aim to alleviate poverty. It is not just a microfinance

institution but also a wealth management company for households that have low income. Kashf

Foundation provides its clients, especially women with tangible and intangible financial

assistance in order to enhance their lifestyle and economic contribution to the society.

Why did we choose Kashf?

Kashf currently operates 150+ branches across Pakistan. Kashf has developed into one of the

best microfinance institutions in Pakistan and is classified in the uppermost quartile of the local

and regional microfinance segment. On its way to success Kashf Foundation has earned many

achievement awards such as Fatima Jinnah Award 2014, Community Services Award 2013, The

Social Entrepreneur of the year Award by Skoll Foundation USA and in 2008 Kashf Foundation

was ranked 34th out of 50 MFIs in the world by Forbes.

Key initiatives

 Micro-credit

 Capacity building

 Social responsibility

 Equality and rights

 Micro-insurance

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Kashf Foundation Operations

The main business department of Kashf Foundation is its operations which is comprised of a

specialized team at the head office that is strategically located and assists the decentralized field

working teams. The field working teams are divided geographically into 5 different regions

which are controlled by a regional manager and these regions are sub-divided into many

branches and sub-branches strategically with respect to the areas of interest.

In Pakistan Kashf Foundation is known as the most successful replication of the Solidarity Group

Lending approach.

Solidarity group lending model

It is a group lending model in which small groups are given loans collectively and the members

of the group assist one another to repay. (Berenbach 1999)

Kashf’s Methodology

Loan officers select clients who then select beneficiaries from the lowest level. After the

selection of members on the basis of a strict poverty criteria groups of 5 female members are

formed, the requirement being that the members of the group are geographically close and are

not blood related to one another. They are provided with micro-loans on the basis of their

capacity. The payback of loan is based on the assumption that all the members will be

responsible for one another in case of being unable to pay or emergency. The dates of recovery

of loans in installments are predetermined and all the group members are informed about details

of their work and loans. A loan officer is assigned to each group who is responsible for the loan

collection and in every group there is a group leader who provide information and ensure group

discipline. 4 to 5 groups form a center and before every loan cycle the center conducts a meeting

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which the designated loan officer attends. Under the supervision of branch management which is

controlled by area offices the centers are monitored and information update is collected from

them.

Services offered

 General loans

 Saving services

 Life insurance

 Emergency loan

Kashf Karobar Karza

It is the flagship product of Kashf Foundation. It is a customized loan which Is tailored to the

client’s needs and the business of the client. In the initial loan cycle clients can draw amounts

from Rs. 10,000 to Rs. 20,000 based on the necessity and volume of their business. Clients are

eligible for higher loans based on the improvement of their business.

Kashf Aitebar Karza

This product is for clients that are in their second loan cycle. Due to economic downfall the

clients of Kashf Foundation face losses and were really stressed with the loss in their business.

For this reason, Kashf introduced this loan for its clients who had potential to get profits back in

their business. This allowed clients to regain confidence.

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Kashf Zindagi Bima

Low income households are prone to risks such as health therefore Kashf Foundation introduced

a new type of loan on the concept of life insurance. Kashf Zindagi Bima cover up the payable

installments of its client who suffers a loss of family. After being removed from the burden of

debt the client can start her business again, free from burden.

Kashf Financial Literacy Programs

The aim of this program is to educate the clients of Kashf about overall benefits of financial

education training which allow the them to be more aware about investments, savings,

borrowing, and expense and to improve the capacity of clients and to enhance utilization of

resources by concentrating on negotiation and budgeting.

Outreach

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Interest rates

The interest rate of Kashf Foundation is criticized by many, but is said to be necessary to manage

indirect costs. Kashf offers a flat interest rate of 20% while the interest rate period is yearly.

Regardless of the criticism the high interest rate of Kashf is expressed by the contributors and

overall observers alike.

Analyzing Kashf Foundation using Porter’s model

Threat of new entrants

The increasing competition in the microfinance sector can be put down to the fact that countless

MFIs have arrived in the market in the previous few years and this trend is not displaying any

signs of fading. Because of the diversity of the market exposure, big local markets still exist for

new competitors. Markets that yield high profits tend to attract new entrants in that market which

then decreases the profitability of existing firms. In this case entrance of new firms is possible

because of the increasing trend of microfinance in the whole world. Thus the market shares

distribution increases.

However, there are still barriers to the entrants that exist such as, increase in use of technology

and also the field of microfinance requires intense research and specialization in the field.

Customers

Small firms take loans from banks depending on the changes in interest rates. Due to availability

of greater number of banks the clients can bargain the spread with the relationship managers

while the number of corporations in Pakistan is limited. Now because of the fact that clients now

have choices has made them more powerful. As the market becomes more saturated the

bargaining power of clients tend to become more.

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Substitute

There are many other MFIs working in Pakistan that offer a variety of products and services that

may or may not be beneficial for the clients but this threat of substitute still exists because the

clients tend to approach the firm whose products or services suits them more so there is always

of threat of substitute. Substitutes in this case can also be from outside the microfinance industry

i.e. the informal market. For example:

Social arrangements: Friends or relatives who do not charge any interest rates and lend money.

This sort of substitute is not very common and requires trust among the individuals.

Commercial arrangements: It is common in rural areas that there are traders and commission

agents who lend money on the basis of supply of input and purchase of output to the people on a

very high interest rate.

Land-based arrangements: Landlord lend money to tenants and farmers for consumption and

supply of inputs. The interest rates charged are more than twice than the rates of financial

institutions.

Suppliers

Capital is the major tangible resource used in microfinance and in modern days it is a key factor

of progression of microfinance. Subsidies are becoming insufficient for microfinance institutions

that experience high portfolio growth which is making them turn to external equity funding.

International financial institutions are avoiding to fund the Pakistani microfinance industry

because of international rating of Pakistani microfinance and liquidity crisis. The bargaining

power of the depositors changes accordingly with the markup rate given by different banks in

Pakistan.

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Competitors

The focused environment is comprised of different MFIs or business banks, casual specialist co-

ops, moneylenders that shape the commercial center (macroeconomic variables). By

concentrating on the opposition, the MFI can be educated about the sorts of money related

administrations that are offered by its rivals; how these items contrast with its own particular

items as far as costs, conveyance channels, and so forth.; and the sorts of customers who are

getting to these administrations. The quantity of direct contenders, and the way of the opposition

will influence how the MFI chooses to position itself deliberately in the market and the

subsequent moves that it will make.

DATA COLLECTION

Secondary data

Secondary data was collected from reports, publications and books. The type of data collected

consisted of information related to outreach and its factors and indicators for analyzing the

outreach performance.

Primary data

The first-hand data or primary data was collected from direct sources in the MFI and the type of

data collected mainly consisted of client information that covered the socio-economic conditions

of the clients that support the factors affecting the outreach performance of the MFI.

Limitations

There was difficulty in getting the recent up to date financial information due to lagging record

keeping methods and confidentiality issues. This study might not only be limited to one MFI i.e.

Kashf Foundation and the problem statement and suggestions also might not be limited to it.

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RESEARCH QUESTION

From the problem statement, we derive a research question which is:

“What are the key problems hindering the growth and sustainability of Kashf foundation?”

PROBLEM STATEMENT

Microfinance has been present in Pakistan for more than 20 years now, this segment has fallen

short on attaining extensive outreach and sustainability, hence compromising on client influence.

Furthermore, poverty levels have deepened as a consequence of the growing status of

redundancy. One of the defenses of the development of microfinance is that, a microfinance

sector that is both sustainable and profitable can eventually positively impact on the standards of

the poor. The existence and the flourishing of MFIs in Pakistan have implications for

sustainability in achieving poverty reduction.

After getting detailed information from the secondary data we gathered and also the primary data

from the sources in the MFI, we got to know that the most common problem that hinders the

performance of MFIs to alleviate poverty is outreach. The problem of outreach arises due to a

number of factors that we will discuss later on.

According to the primary data, 70-80% of the outreach of Kashf foundation is in the non-rural

areas while the rest is barely making its affects in the rural areas. This is due because the

informal financial institutions generally have limited outreach primarily due to opportunity cost

associated with it and the availability of loanable funds. The issue is that to alleviate poverty

effectively the rural areas should be targeted more but there are a number of challenges and

factors that cause difficulties in doing so. There is therefore a need to put outreach on the agenda.

The MFI should be clear who they want to serve and why. Funding decisions should be made

22
based on clear statements as to who that funding is designed to reach and whether that funding is

effective or not. For this, outreach should be the significant aspect. This study seeks to

investigate in order to find solutions and recommendations to the above problems.

MICROFINANCE PERFORMANCE INDICATORS

The microfinance notion is based on the fundamental principles that are impact, financial

sustainability, and outreach which make the base for microfinance performance estimation.

(Meyer 2002)

Each principle has a performance measure which would then form a base for evaluation of

micro-finance efficiency. However, it should be noted that microfinance performance valuation

is multi-perspective because these principles cannot be measured in isolation as they all together

symbolize effective microfinance programs.

Financial sustainability

The concept of financial sustainability puts to note the importance of microfinance institutions to

function without direct aid from donors or any other external sponsor. Only independently,

commercially sustainable and financially-oriented microfinance organizations in the formal

sector can handle the development of loan and saving portfolios essential to get widespread

outreach to the wanted target group and improve their livelihoods to a great extent.

Building economically sustainable institutes is the lone means to reach substantial impact and

scale beyond what the funding agencies can give. Additionally, the microfinance providers must

charge the target group rate of interest that allow the microfinance institution to break even

without the funding and risk, and still make a profit. In addition to the application of suitable

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interest, effective administration and portfolio quality to regulate employee expenditures are vital

for attainment of sustainability.

Microfinance was an intrusion that could reduce poverty, sustain itself and make profits. Without

financial sustainability, there would be no sustainable social.

Furthermore, sustainable establishment of financial services, mainly savings and loan services,

can possibly alleviate poverty by virtue of being a part of the income progression and stability of

the economy.

Outreach

The number of clients served is referred as Outreach. Outreach is a significant part of

microfinance in terms that the primary goal of microfinance is to attain the most number of

unattended poor population who lack access to financial services. Inadequate outreach can

influence sustainability in respect of advantages linked to economies of scale. It is possible to

gain numerous of the financially active successfully, thereby empowering them to contribute in

the mainstream of the economy as a means to poverty alleviation.

For microfinance to achieve greater outreach, adequate funding is necessary. Funding would

generally be essential to cover the cost of reaching the rural areas where poverty is prevalent.

The aspect of funding however challenges particularly for sponsor reliant MFIs because of the

lack of funds. As such, lack of adequate outreach exposes the MFIs to retard growth.

Impact

Microfinance was established with the goal of improving societal and economic conditions of the

poor. Assessment of impact needs to be conducted in line with planned outcomes to confirm the

effectiveness of the microfinance programs. Evaluating the impact of microfinance interventions

24
is vital especially if the microfinance program focuses on poverty alleviation in the long run.

Failure to assess the level of impact on provision of microfinance on the poor population, makes

it tough to justify microfinance as a tool for poverty alleviation.

In view of the lack of meaningful indicators to conduct a social impact assessment, notes that

impact assessment can be done by:

i) Assessing the coverage of micro-finance interventions to determine impact. This can be

obtained by assessing the volume of transaction, movement on a lengthy time period and the

value of services presented.

ii) Secondly, impact can be observed on the client's quality of life. This approach assesses

changes in health, income, quality of food consumed, education, women empowerment, etc.

There is sufficient evidence to show that microfinance contributes towards increased income,

diminish weakness and help in women empowerment, however practically, a need to be realistic

exists about changes that can be produced solely by microfinance (Anton Simanowitz 2002).

FACTORS AFFECTING OUTREACH

In line with the above, the aspects following are faced as limitations for MFIs:

i) A few MFIs target a population segment that face limited access to opportunities to business

due to absence of inputs, demand and markets, consequential to credit that is counterproductive

because of the insufficient inputs.

ii) Many MFIs tend to face policy frameworks that are unsupportive and unsettling, economic

physical and social challenges.

25
iii) Some MFIs manage their resources inadequately and do not meet cash requirements and as a

consequence, they face liquidity issues.

iv) Duplication of models that are successful on occasions have proven tough, due to differences

in social backgrounds and lack of native adaptation.

The poor performance of some MFIs was mainly because of incomplete outreach, default rates,

low profitability and productivity. (Mulunga 2010)

Strategic issues

Staff efficiency and productivity are significant features in microfinance service distribution. The

key obligation for effective loan payment and outreach keeps with the loan agent. Provision of

timely administration data is valued in effective fraud management. In addition, the schooling

level of employees and administration is of importance in the sense that it places better into the

viewpoint the essential marketing circumstances that interpret into cost-effectiveness, financial

sustainability, improved quality service to appeal customers, minimal scam, savings

mobilization, supervisory obedience and shareholder accountability.

Also, lack of information can result in ineffective application of the microfinance programs.

Application encounters can occur specifically in duplication of models that are effective

somewhere else, due to variances in the social setting and absence of local adaptation (Mulunga

2010).

Operational issues

The key purpose of MFIs is to offer economic intermediation services to the deprived segment of

the population at maintainable levels. As noted before, operational cost is one of the main drivers

of microfinance expenditures.

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Interest rates and savings mobilization are amongst the difficulties that cause the deficiency of

sustainability and ultimate failure of such financial structures.

The cost factor of measuring and processing of loan claims as being the identical irrespective of

the magnitude of the loan. The minor loan quantities lead to high operational expenses

specifically in opinion of the element that micro-enterprises need comparatively minor loans than

bigger enterprises to start or expand their business.

The issue of non-biased exchange costs contrarily effect on productivity and manageability,

particularly on account of little markets, for example, rural areas where the microfinance target

assemble requires moderately little sums. While it may be contended that the point of

microfinance is to give money related administrations to the unserved individuals and have

positive effect on society, the contention for the high loan fee charged is that, with the goal for

MFIs to be sustainable, they should apply financing costs that will bring about profit to the

original investment and improve the capacity of the organizations to cover its operational and

association costs. Moreover, sustainability as an outcome of high intrigue advances the

likelihood of the MFIs to accomplish more prominent effort. A few customers are set up to pay

the high financing costs required to guarantee nonstop access to credit (Adongo 2005).

MFIs applying the highest interest rates are best performers because of the improvement in the

capacity of the MFI to shield costs, henceforth achieve cost-effectiveness.

Another cost driver of MFI operations is the problem of the risk perception of loaning to people

without guarantee and reference of loan since MFIs find it necessary to contemplate the risk in

the lent funds. The issue of perceived risk of lending to people without adequate collateral and

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credit references as challenges to the MFIs operations because of possible moral risk and adverse

selection. Adverse selection and moral risks mostly arise from data irregularity.

Moral risk denotes to issues of defaults and repayments whereas adverse selection refers to the

incapability to filter out those possible to default. Moral risk arises due to the incapability of the

MFIs to assure that clients are trying to completely make their venture effective or when the

debtor defaults with the money while adverse selection arises due to inability of MFIs to simply

govern clients loan worthiness.

Though, to avoid the above stated problems, group loaning with conjoined liability can be an

efficient instrument to administer repayment. Because of the combined liability, monitoring in

cluster loaning with combined liability lessens the ethical risk of the group member.

Finally, the issue for MFIs is to decrease the loan risk by fitting in place operative actions that

would guarantee constant microfinance service distribution. The issue in this case would

consequently be to charge interest that is profitable without damaging the poor. Then again, the

applied method would be to offer subsidized loans to make lending to the poor more affordable.

Though, in that case, the organization would need to be contingent on lasting funding and would

in all probably not attain sustainability that is self-financial. Programs dependent on subsidy are

to fail in the event of donor assisted withdrawal. As a consequence, the programs may refrain

from existence resultant in decreasing access by the poor to financial services.

Marketing issues

Advertising for microfinance foundations is an imperative tool to be educated about the

customer. It handles questions identifying to who the MFI customers are, what number of

customers there are, the objective market, and the piece of the pie it plans to catch.

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An objective market speaks to a characterized showcase portion that contains identifiable

customers who request or speak to a potential interest for microfinance administrations. Target

markets are characterized by the attributes of the customers, for example, neediness level, gender

orientation, ethnicity and religion. In selecting an objective market for microfinance

administrations, MFIs need to explain their own goals, comprehend what rouses the customers,

and evaluate whether the objective market is reachable in a fiscally feasible manner (Kwon

2010).

Organizations that don't characterize their objective, and subsequently their objective market, or

neglect to plan their items to address the issues of their market, frequently experience issues

dealing with their operations and remaining centered.

Productive microfinance concentrates on both investments and loaning terms since that is the

thing that the customers require. Moreover, these projects require funds as a precondition for

acquiring.

It is of good significance for MFIs to tailor their administration in accordance with the

requirements of the customers. MFIs that participate in full intermediation accomplish quick

effort and improve budgetary returns than those gaining practical experience in credit as it were.

(Wrenn 2005)

Regulatory framework

A helpful strategy enactment, administrative environment and institutional limit are essentials to

a thriving microfinance sector advancement. The dependability of budgetary and different

markets empowers smaller scale undertakings and consequently microfinance administrations to

end up distinctly suitable (Mulunga 2010).

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The monetary approaches combined with a casual administrative environment for microfinance

have brought about enormous development and spread of microfinance in Pakistan.

Regulatory approaches of microfinance range from self-direction in which the business builds up

its own particular supervisory and administration bodies to full control through existing laws

particular to MFIs. The part of control of the microfinance division ought to be seen inside the

more extensive

Formative agenda that perceives the significance of the area in decrease of poverty and

commitment to wealth creation.

The essential obligation of government in encouraging effective microfinance is to:

i) Establish proper controls that allow foundations to change intrigue and charges expected to

take care of all expenses and to return benefits.

ii) Provide compelling, proper supervision of organizations providing microfinance.

iii) Educate the administration and the general population about the new microfinance and its

significance for the economy and for advancement.

ANALYSIS OF THE FINDINGS

Despite the availability of microfinance services, the study revealed that the extent of outreach

remains low, compared to the potential demand for financial services. Women account for more

than 50 percent of borrowers, particularly in rural based co-operatives. This phenomenon is in

line with experiences in other nations for instance Bangladesh where females largely tend to be

decent debtors.

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The analysis of the findings includes different issues and perspectives disused that affect the

microfinance performance and outreach of Kashf Foundation and the microfinance sector of

Pakistan.

Marketing issues

Lack of information about clients

The study uncovered absence of data about the customers as one of the difficulties experienced

by MFIs. This is an imperative especially in light of the fact that the MFIs would not have the

capacity to give the truly necessary service and administrations without knowing the preferences

of their market. This issue is triggered by the absence of market investigation and focus on

customers regarding demographics, to decide the necessities of every fragment of potential MFIs

recipients. Arrangement of products/services that are not required by the customers will prompt

to a befuddle between the demand(customer) and supply (MFIs), rendering the MFIs to be

ineffective.

Client focus

Customers center involves the arrangement of administrations that are required by the

microfinance customers. The MFIs don't offer enhanced items and administrations. Credit was

observed to be the primary monetary item advertised. Triggering reserve funds from general

society is disallowed by administrative limitations. Absence of funds items is an imperative to

Kashf Foundation's productivity in light of the fact that as noted before, poor individuals require

an range of services. The significance of reserve funds can't be over-stressed as investment funds

empower poor people and the non-poor alike to secure a wellbeing net in times of monetary

needs. All the more significantly, accessibility of reserve funds items can manage the cost of the

poor a chance to amass stores.

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By concentrating on customers' needs, Kashf Foundation will have the capacity to give the

products required by the customers prompting to an increased state of fulfillment.

At long last, giving monetary services without considering the necessities of the objective market

is identical to disappointment in light of the fact that MFIs ought to be customer driven. This

requirement will in this way restrain the Kashf Foundation in accomplishing its goals.

Educational level of clients

The schooling level of customers, particularly regarding budgetary proficiency and business

administration, was another testing angle to development of Kashf Foundation. By and large the

customers don't have earlier introduction to the formal money related part. They need vital

abilities and know-how imperative in working a business.

Issues of significance are to guarantee that customers comprehend the monetary risk and advance

contract to guarantee reimbursement. Expanding repayments of credits will in the end prompt to

development of the MFIs on the grounds that the reimbursed assets can serve as capital for future

loaning.

An extra limitation to the development of Kashf Foundation in the perspective of the analyst, is

the absence of innovation among the customers. The credits attained from the MFI are

fundamentally used for utilization and wage producing exercises, for example, hair salons, fitting

and other little exchanging exercises. This does not by any stretch of the imagination decipher in

genuine business development.

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Operational issues

Low population density

Most of the population lives in rural areas where poverty is predominant. The low populace

density and the geographic distances are restrictive to supportable microfinance conveyance

since it requires the administration to bring about extra expenses to cover the distance with a

specific end goal to reach and serve the poor. The incremental cost acquired to travel long

separations amongst country and urban enormously add to microfinance hole, consequently

constraining effort and effect.

Besides, the low population density unfavorably influences the development of the MFI because

of the absence of economies of scale and low grouping of customers, since achieving gainful

volumes in respect to potential customers won't be achievable. Then again, absence of MFIs

nearness in the provincial zone likewise prompts to the absence of consciousness of

microfinance administrations by poor people.

Kashf Foundation ought not be dissuaded by separation to achieve poor people, they ought to

rather investigate the likelihood of outsourcing the capacity of microfinance conveyance. The

cost of heading out to these remote territories will be incredibly lessened in light of the fact that

the arrangement of administration will be near the MFIs' demographic's place of financial action.

This will improve outreach levels.

Skilled staff

In spite of the fact that the educational level of staff is not referred to as a noteworthy issue, there

are a couple of areas that require change, especially in the zone of advance portfolio

administration and the comprehension of the idea of microfinance as a rule. Talented staffs are

basic to the achievement of the MFI on the grounds that they ought to guarantee that, firstly, the
33
borrowers completely comprehend the terms of the advance and in addition the budgetary items

offered to them. Also, the loan officer ought to have the capacity to offer the fundamental

mentorship and other help required by customers to furnish them with the important essential

aptitudes relating to business administration. At long last, the MFI staff ought to screen the credit

execution to guarantee that the advance conditions are clung to.

High operational costs

Fixed and indirect expenses were referred to as one of the difficulties in accomplishing

productive operational levels. The cost of operations was particularly determined by the

exchange and organization expenses of credit which are for the most part little in respect to the

handling costs. Loan fee charged is another cost driver in light of the fact that MFI is not ready to

charge sufficient financing costs to equal the initial investment in perspective of the loan fee

roof. Interest rate cap rates put restraints on the MFI in cases where interest required to break

even surpasses the provided limits.

The loan amounts are small, pushing the operational cost high especially in cases where

numerous smaller loans are advanced.

High cost was primarily determined by the cost of handling the loans in light of the fact that the

rate is connected consistently to all credit sums. The issue of high cost is further intensified by

the way that the poor are essentially rustic based, subsequently the cost of transport puts a

substantial weight on the expenses of the MFIs.

Absence of formal track records of the microfinance customer base the majority of whom are

first time clients of financial organizations likewise prompted to high operational cost. This

happens in light of the fact that restricted data about the customers makes it hard to evaluate the

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credit value of the customers. Absence of data about the customers may prompt to unfavorable

choice and good risk prompting to loan default. With a specific end goal to moderate the credit

chance, the MFI ought to in a perfect world embrace the Grameen Bank solidarity assemble

display adequately, which have been compelling in the lessening of loan default.

Group lending approach served as deterrent to moral hazard, especially in the absence of

collateral because each member acts as co-members' collateral.

Strategic issues

Regulatory and Legislative framework

Absence of particular approach and administrative structure for the microfinance segment is

referred as one of the primary difficulties confronting the Kashf Foundation.

Controls are essential since weakness in the institutional structure adversely influence the

productivity of the microfinance specialist co-ops, on the grounds that without the MFI

administrative body, it is hard to screen and order different directions to guarantee proficiency in

the microfinance division.

The microfinance sector currently operates in a vacuum because there is no specific dedicated

body to supervise its activities. Lack of standardized business observes constrain the capacity of

the segment due to lack of harmony amongst the microfinance institutions.

It is creditable, that on regulatory view, effort is made to develop the charter for microfinance

activities. The SECP has filled up the regulatory vacuum in the microfinance sector by

introducing nonbanking microfinance regulatory framework. The MFIs can directly apply for

nonbanking regulatory framework now. It has committed itself to developing microfinance

activities. Some of the issues outlined are as follows:

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 i) To address the situation of individuals who don't have customary guarantee.

ii) To utilize a base up approach so that the recipients turn into the proprietors and

supervisors of the MFIs.

iii) To utilize a group based approach for the arrangement of microfinance.

iv) To give loan as per borrower dependability and not as per credit use for utilization or

as interest underway.

v) To utilize social pressure (peer pressure as a way to uphold reimbursement since

lawful activity is not recommended). This ought to be finished by guaranteeing the

most extreme interest by individuals through possession and reserve funds, which

ought to be appealing, sheltered and necessary.

vi) Self-help associations should be tended to. These self-improvement associations

ought to be framed willfully and assume liability for their advancement.

vii) To separate obligation regarding money related and non-budgetary administrations

keeping in mind the end goal to secure and manage exercises. The expenses of

monetary administrations should be completely secured by the intrigue salary.

CORRELATION OF PROBLEMS

A correlation exists between the problems experienced by Kashf Foundation. Most problems

experienced by it are consistent with problems faced by MFIs elsewhere.

Marketing issues

There is a positive relationship between the absence of data about the customers and customer

center. Without data about customers, there will be a mismatch between what the customers

require and what is offered to them in light of the absence of information about the customer's

36
preferences. This will prompt to lessened nature of administration and inability to hold existing

customers and to attract new ones.

Operational issues

There is a positive relationship between high cost and profit performance in light of the fact that

the MFI strive to earn back the principal investment, thus affecting on the fulfillment of

productivity. Besides, high expenses additionally prompt to absence of funding to loan to

customers since all credit reimbursements are furrowed once again into business to take care of

the operational expenses.

Strategic issues

The relationship between the administrative system and the Kashf Foundation's accessibility of

cash-flow to loan to customers can be explained by the restrictions of MFIs to mobilize savings

which could assist as a basis for loaning activities. Furthermore, regulatory constraints limit

focus on clients since though the MFI is conscious of the customers necessity for savings, they

cannot respond to the needs because of the restrictions to mobilize savings from the public.

CONCLUSION AND RECOMMENDATIONS

Conclusion

The primary goal of Kashf Foundation is to alleviate poverty in Pakistan and for this purpose the

rural areas should be their key concern because they lack financial services and a large

population of Pakistan comprises of rural areas which have the potential to play a huge role in

improving the economy of Pakistan and simultaneously improve their own living standards. This

concludes to the fact that Kashf Foundation has low outreach in rural areas and has been unable

to expand its outreach. There have been discussed a number of factors in this study that include

37
strategic, marketing, social and operational issues that affect the outreach of Kashf Foundation in

a negative way. Hence outreach is the key problem that this study identifies.

Lack of aim is a concern toward the microfinance suppliers. Regulation is important to give a

reasonable key course and guarantee a helpful domain for microfinance sector advancement.

High operational cost affected contrarily on the effectiveness of Kashf Foundation. Cost

recovery was especially compelled by the interest fee roof. This represents a test that Kashf

Foundation is not ready to charge loan costs that empower it to recoup cost and accomplish

gainful levels prompting to less effort in provincial ranges because of the open-door costs

connected with it. High operational costs added to the absence of manageability. The MFI ought

to investigate and actualize successful cost recuperation measures.

The foundation of the Microfinance Banks is a positive improvement in that an assortment of

items and administrations will be offered, particularly to the monetarily dynamic poor. In light of

the capitalization issue, the MFI needs to embrace judicious money related standards to lure

commercial banks and different financial specialists into sharing in microfinance exercises since

banks are risk averse.

Despite the fact that microfinance may minorly affect the economy overall, it has any kind of

effect in the lives of the recipients. The administration and different partners ought to in this way

reinforce the association with the MFI by helping the MFI to defeat issues, particularly those

identifying with subsidizing and directions keeping in mind the end goal to contribute towards

microfinance advancement.

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The factors faced by not only Kashf Foundation but also the whole microfinance industry in

Pakistan lead to outreach of the FIs in rural areas. These problems are summarized into a list

below:

 Profitability

 Increasing competition

 Operational issues

 Marketing issues

 Social issues

 Opportunity cost of lending to the rural

 Geographic issues

 Improper regulations

The goal is to alleviate poverty and for that purpose the outreach in rural areas should be the aim

& focus. Pakistani microfinance division is achieving its potential target market with access

focused in the reachable areas and for all intents and purposes no or exceptionally constrained

access in difficult to reach rural regions. Along these lines, the development and expansion of

microfinance administrations to countless served and un-served small scale businesses and poor

family units living in such remote areas is yet a major test. Though MFIs are very effective in

penetrating in urban areas.

Around 90 percent of population living in developing nations still needs access of having

monetary services from establishments, that triggers the "vicious cycle of poverty". The poor

have limited or no abilities and training and for them small scale ventures are a method for

monetary open door as entrepreneurs and workers. Microfinance promotes business and wage

generation and it additionally serves as an intend to enable the poor in turning out to be

39
monetarily independent. It gives practical and long haul advantages to low salary people in

Pakistan, empowering them to earn adequate to escape poverty in the long run.

Recommendations

A number of recommendations could be made as far as Kashf Foundation is concerned. In order

to improve the effectiveness of the microfinance segment, it is of importance to address the

issues identified as impacting harmfully on their operations.

Government must frame and apply a strategic and regulatory framework critical in the booming

of microfinance segment.

Restrictions on mobilization of savings should be reassigned in light of the fact that reserves can

be a basis of capital for loaning to customers.

Microfinance institutions must be situated within range to guarantee convenience to the poor and

ought to target customers with commercial ideas to be lent for revenue making projects.

Microfinance institutions and donors should have withdrawal strategies in place to guarantee the

program sustainability post withdrawal; or else subsidy of the initial processes will be inefficient.

Lastly, in order for microfinance to be efficient, following are a few of suggested important

principles crucial to microfinance institutions to achieve.

i) The need for microfinance services given by Kashf Foundation to fit the needs and

preferences of its client.

ii) In order to reach a significant number of poor people sustainability is necessary.

iii) Rural areas should be the key focus of Kashf Foundation as their goal is to alleviate

poverty.

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iv) Skilled staff with the knowledge of blending in with the clients to communicate with

them better and do effective marketing .

v) The role of government as an enabler for provision of financial services, by setting a

supportive policy environment for microfinance activities. These principles must be

followed strictly to improve the situation.

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REFERENCES

Adongo, J. & Stork, C. 2005. "Factors Influencing the Financial Sustainability of Selected

Microfinance Institutions." Assessing the relationship between group lending and

financial sustainability 44.

Anton Simanowitz, Alice Walter. 2002. Improving the Impact of Microfinance on Poverty.

University of Sussex.

Berenbach, S. & Guzman, D. 1999. Are solidarity groups successful in poverty outreach?

Accion International.

Kwon, W. Jean. 2010. "An Analysis of Organizational, Market and Socio-cultural Factors

Affecting the Supply of Insurance and Other Financial Services by Microfinance

Institutions in Developing Economies."

Maanen, Gert van. 2004. Microcredit: Sound Business or Development Instrument. Oikocredit .

Meyer, Richard L. 2002. The triangle of microfinance : financial sustainability, outreach, and

impact. Johns Hopkins University Press.

Mulunga, Anna Magano. 2010. "Factors Affecting the Growth of Microfinance Institutions."

Wrenn, Eoin. 2005. "MICRO-FINANCE."

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Other references

http://investopedia.com

http://acumen.org

http://dawnnews.com

http://globalenvision.com

http://kashf.org

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