USAID support strengthens Pakistan's microfinance firms and helps small businesses expand

Zahid Husain helps a customer at his brother Shahid's milk shop in Hijrat Colony, Karachi. Sales have more than doubled since a loan allowed Shahid to buy a milk chilling machine

"A higher loan cap gives us the flexibility to finance those cli-ents who are prosper-ing and growing."

- Asif Siddiqi, managing direc-tor of a USAID-funded micro-enterprise firm servicing Ka-rachi, Lahore and Peshawar

Small businesses in Pakistan can find it difficult, sometimes im-possible, to secure a loan. Most regulated banks provide loans above 500,000 rupees ($8,333), while microfinance institutions usually favor loans of less than 30,000 rupees ($500) for home businesses. In between lies the 'missing middle,' a need for mi-crofinance institutions that can help small businesses grow their assets and income until they graduate to become clients of large banks. Such a need was left unfulfilled because the finan-cial sector questioned its long-term viability. "We kept facing one problem, and that was accessing long-term funds in the local markets," said Asif Siddiqi, managing director of a microfi-nance institution based in Karachi. "That's because banks were not sure if this was a sustainable operation."

To strengthen local microfinance institutions and facilitate larger loans to small entrepreneurs, USAID funded a three-year, $6.3 million program with the Pakistan Poverty Alleviation Fund, a government-sponsored private entity. Select microfinance insti-tutions in low-income areas were provided with the funds nec-essary to offer loans of 30,000 to 100,000 rupees ($1,667). Siddiqi, whose Network Leasing Corporation has served low-income neighborhoods in Karachi, Lahore and Peshawar since 1995, embraced the initiative. "The funding from USAID has helped us continue our operations of small- and micro financ-ing," Siddiqi said. In two years, his staff has grown by 25 per-cent to 103 people, with an emphasis on field outreach, and his clients have doubled to 8,000.

"We have been able to go out in the market and tell clients that if they are prospering, they can get higher than their current loan," Siddiqi said. "The majority of our clients are doing better as time goes by." Shahid Husain, who runs a milk shop in Ka-rachi's Hijrat Colony, an area where few residents own refrig-erators, is one example. His 75,000 rupee loan for a chilling machine to store raw milk longer has increased his daily sales from four 40-kg drums of milk to nine drums. And Aleemuddin Khokhar, who makes small metal parts for local factories, has invested several loans into machinery and grown his monthly orders from 5,000 rupees to 1.7 million since 1982. He is now waiting for a 1 million loan from a large bank. Siddiqi's and his clients' success illustrates how USAID is enabling local institutions to grow their clients until larger banks can take them on.

July 2006