PROMOTING MICRO-FINANCING IN PAKISTAN

FARAZ UDDIN AMJAD
Aug 20 - 26, 2007

A large number of people, subjectively those living on low incomes, cannot access middle-of-the-road financial products such as bank accounts and low cost loans. This financial exclusion imposes real costs on individuals and their families - often the most exposed people in our society. It also has costs for the communities in which they live.

Households that operate exclusively on a cash account are powerless to make savings via direct debits on utility bills, are more susceptible to loss or theft and they are far more likely to use the substitute credit market - and pay interest many times that of a standard personal loan, often contributing to amplification of debt. In addition, for those who do get into debt or who tussle to make payments, the supply of free face-to-face money advice falls far short of demand.

There is a strong need to set out the strategy to confront financial exclusion in promoting the financial inclusion. The precedent areas are access to banking, access to affordable credit, and access to free face to-face money advice.

Good news for Pakistan's microfinance sector; it appears that the regulator is currently reviewing a handful of microfinance bank applications to be permitted to operate at least in the near future. Currently there are six microfinance banks operating in Pakistan; Khushhali Bank, The First Microfinance Bank Ltd., Pak Oman, Tameer, Rozgar and Network microfinance bank. The topical proliferation in activity in the Pakistani microfinance sector, is due to both government initiatives & recent funding from foreign donors.

Also, though not surprisingly, Muhammed Yunus' recent visit to Pakistan has also helped Microfinance remains at the top of the agenda for the Pakistani government.

Since a long time, there has been much discussion & advice from the industry players that the government should review the maximum interest rate currently being charged (20 to 43 per cent) by many Pakistani microfinance institutions. The government fully supports microfinance as a factor in relieving poverty & claims a double digit reduction in poverty in last year. The World Bank however, responds by emphasizing a far below single digit reduction in poverty has been witnessed. Looking at the Pakistani environment, the question still is whether microfinance has had, and can have, an effect on reducing poverty, which many people believe is on the rise.

Continuing his quest to encourage & support the importance of poverty alleviation & real promotion of micro enterprise micro enterprise activities, the Noble Peace Prize winner discussed items with President Pervez Musharraf. During discussions, the president requested the launch of the famous Grameen Bank in Pakistan & sought support and technical advice from him for making the poverty-alleviation movement a success. Some people have a view that legislative framework developed in Pakistan for micro-finance credit is a pioneering step and this will help in making progress in the microfinance sector.

Reportedly, one of the leading microfinance banks in Pakistan has received a large grant from a private non-profit foundation created to fight global poverty and aid in international development. The bank is a private, commercial microfinance bank operating since early 2006 & is the fastest growing in Pakistan with 17 branches and an outstanding portfolio of USD $11 million. It's unique from other microfinance banks being one of the first nation-wide, private sector, non-NGO transformed, commercially sustainable micro-finance institutions in Pakistan. This funding will help launch the bank into the national ATM system, allowing outreach & better service.

Coming out of isolation and looking at the experiences of some of the developing countries in Eastern Europe, the issues suggests that blanket reforms such as generic SME support, commercial-oriented microfinance lending, and the liberalization of business environments, are too often pursued without paying proper attention to local and global conditions. An interesting view suggests that usually, the informal sector serves as the final destination of almost all micro enterprises supported by microfinance. However, it is fundamentally wrong to assume that the informal sector has unlimited abilities to elastically expand and absorb all new micro enterprises. Globalization-driven conditions of an unlimited labor supply and dramatically reduced formal sector (especially public sector) employment opportunities have combined to saturate economies with informal-sector micro enterprises almost everywhere, also in the form of declines in incomes and wages. Also, many sectors are increasingly under pressure from an influx of new entrants, all desperate to survive in conditions of flat demand. Coupled with these, one of the major impediments in flourishing microfinance industry is the standard commercial microfinance business model high interest rates and short repayment periods.

While the data point to rapid growth of microfinance, they also demonstrate the failure of microfinance institutions to reach low-income groups on a large scale. This underscores the importance of non-financial services (including basic business & financial education) in helping the poor to absorb and manage family and micro enterprise, to properly use financial services, and to develop business skills. These market gaps create opportunities for designing microfinance strategies and products to respond to these unmet needs. This means combining existing microfinance knowledge and experience with new technologies and private capital to create the new business models needed to reach more poor people. It also requires policies to level the playing field for different institutional models, and strengthen incentives for private sector investment in microfinance

Looking at a regional comparison of South Asian countries, Bangladesh seems far ahead not just in terms of number of borrowers which is almost ten folds to Pakistan, but also in terms of profitability. Interestingly, as compared to Pakistan and Afghanistan, India is coping with its high costs per borrower by keeping a low density of staff per borrower and significantly low operating expense ratio (See Annexure-I). Pakistan has been remained a single product market for microfinance with a major focus on agriculture and livestock sector. However, many microfinance institutions are increasingly diversifying their products and adding deposits, insurance and remittance service to their portfolio. On the other hand, entrepreneurship development efforts, especially for the overlooked gender, may be augmented by concrete developments in microfinance sector. Reportedly, women borrowers for the microfinance in Pakistan are less than half as compared to Bangladesh and India, and even below Afghanistan. One of the key success factors of microfinance in Bangladesh is the ensured high repayment behavior in absence of collateral by capitalizing on social networks through group liability and making it mandatory for the borrowers to deposit a portion of their loan in the form of compulsory savings. Apart from conventional working capital loans, diversity is available in the form of individual loans, housing and education loans, micro savings and micro insurance. Remittances and money transfer services have also been started, thus filling the gaps of financial exclusion.

To address these concerns, recently, Center for International Private Enterprise (CIPE), an affiliate of US Chamber of Commerce, organized a roundtable on microfinance in Karachi. It was discussed that microfinance programs in Pakistan have reached a point that warrants consolidation, if outreach has to be increased within a short period of time to meet the stiff challenge of multiplying it to three folds. Simultaneously, issues such as deepening the microfinance system into the MSE sector; deepening the microfinance system into the MSE sector; creating an enabling environment both for the enterprises and microfinance banks and institutions; developing home grown models for microfinance institutions to suite Pakistan's norms microfinance banks and institutions framework, processes, and products to achieve higher organizational and financial stability; and strengthening coordination (value chains) between various stakeholders for higher synergy for all are ought to be addressed to ensure the wider impact of microfinance in the country, and the success of this sector is based on the financial viability and commercial sustainability of microfinance institutions. It is strongly anticipated that collaborative efforts are required to facilitate the informal sector so that it may directly contribute in the economy and gradually become part of the formal economy.

COMPARATIVE ANALYSIS OF GROWTH POINTERS

SOUTH ASIAN REGION

 

BANGLADESH

INDIA

PAKISTAN

AFGHANISTAN

No. of Active Borrowers

221099

44031

24179

15489

Percent of Women Borrowers

94%

90%

48%

67%

Profitability (ROA)

-4%

-2%

-8%

-67%

Profitability (ROE)

-17%

-10%

-32%

-223%

Profit Margin

15%

-8%

-91%

-319%

Operating Expense Ratio

12%

12%

15%

82%

Cost per Borrower (US$)

10

14

67

152

Borrowers per staff member

131

439

171

54

Write off Ratio

0%

1%

1%

0%

Source: Five year aggregates (2002~2007): CGAP