Micro drivers are beginning to transform economies as well as societies around the globe. Microfinance, microcredit and microenterprises together are driving countries towards achieving feasible and sustainable financial solutions through improvement of human development indicators. These sectors are empowering women to strive for financial independence and overall welfare of the household. In turn, they are also influencing progress in economies on a micro level.
In the words of former UN Secretary General Kofi Annan; “microfinance recognizes that poor people are remarkable reservoirs of energy and knowledge, posing an untapped opportunity to create markets, brings people in from the margins and give them the tools with which to help themselves.” In Pakistan, microfinance is revolutionizing lives of individuals as well as microenterprises that rely on these channels to enhance growth, support everyday operations and cater to other expenses as well.
The role of microenterprises has become imperative in the growth of economies and overall prosperity of developing countries like Pakistan. This sector has a significant contribution in Pakistan’s GDP as well. It caters to 140 million customers in a country where the total population stands at 216 million as of 2019. This translates to more than 64% of the entire country, catering to fields like child education, health, food and a lot more besides. Despite this, the sector remains largely neglected both in terms of regulations as well as research.
Micro, small and medium enterprises (MSMEs) comprise almost 90% of all businesses in Pakistan. Besides the agricultural sector, 80% of the country’s workforce is employed by MSMEs. Microenterprises have had a significant contribution in bringing diverse employment opportunities to the country and looking into the factors that influence their growth can bring enormous benefits to not just the people who run these organizations but also other stakeholders who are involved in the process.
Karandaaz Pakistan in collaboration the United Kingdom’s Department for International Development (DFID), and the Bill and Melinda Gates Foundation (BMGF) initiated a study involving 125 microenterprises. Data collected via questionnaires during the activity were analyzed to extract quantitative information revolving around three key indicators of growth in the sector, i.e. revenue, jobs and affordability of microcredit in the country.
Revenue was the first indicator used to investigate growth in the field. The results extracted from the financial data collected revealed that organizations earn PKR 1.6 million in annual revenue on average. Trading and manufacturing sectors displayed the highest income of all the industries surveyed in the Karandaaz report. Earnings vary considerably across the fields that microenterprises cater to and it is difficult to generalize findings from some of these to justify growth in all the others.
Organizations in various sectors rely on variable elements to generate revenues. For instance, agricultural sector has the highest asset base due to landholding. In Pakistan, annual revenues of microenterprises has grown by 25% since 2017 and the amount of incremental earrings generated against every PKR 1 million loan is estimated at 4.1 times. Revenue alone, however, can’t be denoted as the agent driving growth of microenterprises because it fluctuates extensively even in a sector.
Increase of jobs in a market can provide a sound indication of progress within that field. Therefore, the second factor analyzed in the study was jobs and how the employment profile of microenterprises changes over a year. 12 months is the duration it takes for one loan cycle to complete and this is the time for which microfinance organizations offer credit services. Karandaaz’s study showed that the most effective way to analyze the job market is to consider a head count and number of hours worked by all types of employees.
The final factor is the affordability of microcredit and this one is tricky to determine because it depends on other elements. Costs of microcredit to organizations are generally high because of delivery expenses and small ticket sizes. Microenterprises provide higher returns and the challenge for them is access to loans because any agents besides microfinance institutions charge even higher interest rates. This is why affordability comes into the equation of microenterprises trying to figure out whether or not to use this avenue for financial solutions.
On the basis of these findings furnished by Karandaaz, relevant parties have a better understanding of the current state of microenterprises. It provides a strong foundation for microfinance organizations to extend financing and other digital banking solutions to these entities allowing progress not just on a micro level but eventually on a holistic scale too.