Mar 5 - 11, 20

Lack of adequate training, misuse of loans, and common misperception about microfinance products hinder growth of microfinance sector in Pakistan.

A study published in the issue of European Journal of Economics indicates the government in Pakistan has recognized the role of microfinance institutions (MFIs) in the development process.

A survey reveals that without skill development and professional training, those using microfinance could neither be helpful for MFIs nor for the country's economy. Another important factor is inappropriate use of the loan money by clients.

Highlighting key internal challenges, the survey indicates that 74 per cent financial experts believe that availability of cheaper financial resources is the biggest challenge to MFIs and the growth of the sector. The cost of borrowing for small borrowers is exorbitantly high. They stress that consistent efforts are required to make small loans available at competitive cost in comparison to other financial products. About 87 per cent blame limited presence of MFIs as the root cause of low performance and growth of microfinance.

Pakistan's microfinance sector is considered to be a late bloomer, especially from a regional standpoint. However, recognizing the need to increase the depth and outreach of financial markets, policymakers and regulators along with other stakeholders have worked hard for the development of the microfinance in the country.

The government's Microfinance Sector Development Programme (MSDP), establishment of Pakistan Poverty Alleviation Fund (PPAF) and Khushhali Bank, promulgation of the Microfinance Institutions Ordinance 2001, SBP's Financial Inclusion Programme and the recent Microfinance Credit Guarantee Facility - all have catalyzed the sector's growth.

With a growth rate of around 45 percent over the past few years, the microfinance sector emerged as one of the fastest growing sectors globally reaching 1.9 million clients in September 2008. Product diversification has taken root and savings and insurance uptake has surged.

Institutions are moving towards financial sustainability and accessing commercial sources of funding. Thus, despite the late start, and consequent relative youth of the sector, microfinance providers in Pakistan have remained significantly proactive in terms of fostering innovation in and development of microfinance.

One of the key steps in this direction was the establishment of Pakistan Microfinance Network (PMN), which initially emerged informally in 1999 because of the effort of several microfinance practitioners who felt that a platform to share views and experience was needed.

Today, PMN's membership includes 20 members including microfinance banks, specialized microfinance institutions, commercial financial institutions and multi-dimensional micro financing NGOs and rural support programmes. Since its inception, PMN has been consistently working towards its vision of expanding 'the frontiers of formal financial services to all' and its mission of 'supporting the sector, especially retail MFPs, to enhance scale, quality, diversity and sustainability in order to achieve inclusive financial services'.

The past few years have seen the microfinance industry grow to become more complex and more closely linked with the mainstream financial sector in Pakistan. The sector has grown exponentially and the range of financial services being offered has expanded. Competition in the sector has increased which will result in better services and competitive pricing for microfinance clients in the country.

But, sometimes competition can also lead to the use of unethical and illegal practices by organizations in order to gain competitive advantage and such situations often lead to a loss of reputation and government intervention to impose stringent regulations in order to curb such practices as was seen in Andhra Pradesh and Bolivia.

However, in the case of microfinance, regulations of this nature often do more harm than good and invariably detract from the basic goal of microfinance by impeding the creativity and flexibility required for the provision of such services.

Official legislation for the protection of consumer rights either did not exist, or was not enforced. There is little, if any, recourse for consumers to take in case a violation on their rights is committed.

By helping clients understand that they have rights but also responsibilities and increasing their understanding of product pricing will help clients comprehend their true financial liabilities and assets. This could help clients avoid over-indebtedness and thus reduce default risk for the service provider.

Additionally, microfinance providers operate in geographically diverse areas, which sometimes results in a communication gap between senior management and the field staff. Measures to gauge client satisfaction would also provide insight into the working of the field staff.

With awareness about issues of consumer rights increasing day by day, it is now considered essential for any industry to provide a secure and ethical environment for its clients.

Increase in consumer confidence leads to a healthier and more vibrant sector. It is easy to lose focus of the social objectives of microfinance in a competitive environment, which is pushing for outreach growth and financial performance. Initiatives of consumer protection help renew the implicit commitment towards welfare of the microfinance clients and a deep desire to have a positive impact on the lives of the people of Pakistan.