There are two schools of thoughts on the effect microfinance has had on poverty and financial inclusion. One says that there is no empirical evidence to support the claim that microfinance reduces poverty. They argue that the loan size is too small and, in fact, the high interest rate leads to a cycle of institutional indebtedness, let alone a reduction in poverty.The other school of thought is led by Dr. Muhammad Younus, who was awarded the Nobel Peace Prize in 2006, jointly with Grameen, the bank he founded in Bangladesh. Dr. Younus asserts microfinance is not just about lending. It’s about providing the full range of financial services that traditional bank customers take for granted.
Pakistan has a growing and vibrant microfinance industry. While it has been in existence over the past 15 years, the real growth has come in the past 10 years. Unlike Bangladesh and India, Pakistan has been able to use the branchless banking route to harness deposits. Pakistan has been ranked by the Economist Intelligence Unit as having one of the top three regulatory mechanisms in the world. Recently, the Securities and Exchange Commission of Pakistan (SECP) has also created regulations for the unregulated segment of the industry, further enhancing it.
Although the Pakistani microfinance industry has experienced rapid growth in the past five years, it is growing off a relatively small number, given the size of the target market. It is estimated that there is a potential of 30 million active customers, and we currently have only 4.5 million active customers with gross loans of Rs.135 billion. Relative to the commercial banks’ consumer and customer base of 1.8 million, it is a high number, but as a percentage of total lending stock, it is less than one per cent. The Pakistan Microfinance Network is committed to increase this number to 10 million customers by 2020. However, in a country of 200 million people, this is not enough to impact poverty. This number will need to increase to at least 30 million to have the desired effect. The industry, however, has been quite successful in managing the gender divide (55 per cent female borrowers) and its rural-urban divide (51 per cent rural).
Unlike other countries, the industry has been very successful in harnessing the branchless banking network. Pakistan is one of the few countries where there is a specific license for microfinance banks. Consequently, it is also one of the few countries where telecomeven courier companies have invested in microfinance banks (Telenor MF Bank, TCS Bank etc.). The principal benefit of this is the ‘one minute account.’ Telco-owned microfinance banks can open a level zero mobile wallet, based on just a single SMS. A level zero mobile wallet is a bank account which allows a customer Rs.50,000 transaction value and is accessed through a phone. The commercial banking industry has managed to open 32 million bank accounts. The microfinance industry, in the past three years, has been able to open 9.1 million mobile wallets with Rs.103 billion in savings. Female savers amount to 27 per cent.
The challenge is to create a friendly and scalable user base. The ability to make digital payments at the local stores for something as little as a cup of tea is the answer. The introduction of new technology, like the QR code, has now made this possible. The industry expects the number of merchants to increase to 100,000 from the current 30,000. The creation of this addition to our ecosystem will help reduce financial exclusion.
The first challenge that the industry faces to achieve its goal of growth is funding. Assuming an average loan size of Rs. 40,000, an incremental 5.5 million customers means an additional funding of Rs.220 billion. Breaking down this number would imply an equity injection of Rs.33 billion and debt of Rs.187 billion. This challenge is accentuated by the fact that currently 50 per cent of the industry players are non-banks, and consequently, are not allowed to take deposits from their customer base. The burden of growth will fall on well-capitalized microfinance banks and a handful of microfinance institutions, which have the required governance to access the capital markets. Microfinance banks will have no choice but to embrace branchless banking. Mobile wallets are the longer-term solution.
The second biggest challenge is that of human resources. An incremental 5.5 million loan customers means additional relationship officers, middle management as well as experienced senior management. This is a relatively new industry. Trained human resource is non-existent. If planning for these incremental human resources does not take place, the growth will simply not happen.
The third challenge is that of technology. Other than a handful, the industry has not invested in technology. Basic automation, scorecards for underwriting and predicting default, and automation of customer acquisition, either do not exist or are limited to a handful. As the industry scales up, this problem will become more acute, and the lack of automation will mean that the operations’ cost of the industry will not come down, and the benefits of economies of scale will not be harvested.
The microfinance industry has had healthy growth in Pakistan, but now needs to grow exponentially if it is to become a major player in addressing financial exclusion and poverty. The industry must embrace the technological revolution taking place in Pakistan. It must harness the benefits of branchless banking. It must use the smartphone and data that exists in the smartphone, to provide solutions to those at the bottom of the pyramid.