May 17 - 23, 2010

Pakistan's microfinance sector is basically the brainchild of commercial bankers who are always on a lookout for new products of profit maximisation. Like other financial institutions, microfinance banks are also found struggling for cheaper business funds to carry out their operational activities. Aided by international funding programs, SBP has launched a number of schemes-Micro Credit Guarantee Facility, International Support Fund etc.-to enable microfinance banks to solve their resource scarcity problem. But all such facilities are SBP-rate-linked programs.

Normally a few hundred bps over and above the going policy rate are charged for funding of microfinance sector. What we have failed to realise that microfinance is not a commercial activity; basically it is a human-centric activity requiring no linkages with the modern day financial complexities. The commercial bankers will do well to leave this sector alone for the breed of philanthropist-cum-economists to take its control. The commercial bankers will be better off if they invest their time and efforts in designing new financial derivatives to satisfy their profit maximisation goals.

The topic of microfinance can never be covered without making a mention of the Nobel Prize winner Dr Yunus of Grameen Bank, Bangladesh. The following lines from his speeches will always act as a beacon for those sincerely interested in the business of microfinance:

"Let us suppose an entrepreneur, having a single source of motivation (such as maximisation of profit), has now two sources of motivation, which are mutually exclusive, but equally compelling: a) maximization of profit and b) doing good to people and the world. I found it difficult to teach elegant theories of economics in the university classroom, in the backdrop of a terrible famine in Bangladesh. Suddenly, I felt the emptiness of those theories in the face of crushing hunger and poverty. I wanted to do something for people around me, even if it was just one human being, to get through another day with little more ease. That brought me face to face with poor people's struggle to find the tiniest amounts of money to support their effort to eke out a living."

These historic lines explode the myth of "credit worthiness", a paradoxical expression used by the banks to deny the needy a well-deserved monetary assistance. The loaning system of commercial banks that are in the market to earn profits is invariably based on this deceptive expression. On the contrary, the objectives of microfinance should essentially be based on the assumption that one cannot be poor and credit worthy at the same time. The field work force of microfinance banks should not waste its efforts in identifying "credit worthy poor", in the ranks and files of struggling human beings, rather it should start with the conviction that every single needy person, when helped with a tiny amount of credit, is capable of reforming into a changed person, ready to return the amount in some form that may not be tangible.

Many economists believe that cash disbursements to the poor, in place of food subsidies, can contain food inflation. Microfinance should set its objectives on this theory. While identifying its potential customers, it should look for "reform worthiness" instead of credit worthiness. The poor have the greatest urge and ability to change themselves. Invest in them for that change to take place.

In Pakistan, the microfinance segment is the latest addition to the country's banking sector. Under a presidential ordinance promulgated in 2000, the country's leading microfinance bank Khushhali Bank was established. Besides Khushhali Bank, the following microfinance banks are also operating:

- The First Microfinance Bank Limited
- Network Microfinance Bank
- Pak Oman Microfinance Bank
- Rozgar Microfinance Bank, Karachi
- Tameer Microfinance Bank Limited
- National Rural Support Program (NRSP) Microfinance Bank
- Kashf Microfinance Bank

According to the Pakistan Economic Survey 2008-09, there are 40 microfinance providers (MFPs) in Pakistan operating through a network of 1550 branches. A strategy for expanding microfinance outreach has been developed by SBP and approved by the government in 2007. The strategy stresses on the need to commercialise the sector and this is where the strategists seem to have gone astray. The microfinance sector needs socialisation rather than commercialisation.


INSTITUTION 2007-08 JUL-MAR 2007-08 JUL-MAR 2008-09
Khushhali bank 4066 2590 1899
Microfinance banks (others) 3680 2283 2567
Microfinance Institutions 20718 12913 10401
Total 28464 17786 14867

The sector shows a declining trend in microfinance disbursement defying SBP offensive to expand the outreach.


Annual disbursement 366 906 Income generating 20
Deposits of members 171 508 Housing 8
No of members 3.1 7.7 Students 5
No of branches 1195 2539 Struggling members 0
TAKAS IN MN 2009 2008
Total assets 103,005 82,801
Investments (at cost) 37,751 28,730
Loans and advances without collateral 56,359 45,787
Fixed assets 1,334 1,163
Member deposits 45,029 35,121
Non-member deposits 38,302 29,482
Paid up capital 524 358
Capital and other reserves 6,057 5,969
Retained surplus 162 109
Total equity 6,743 6,436

When seen in dollar terms, the disbursements made by the Grameen bank alone in 2008 were more than double the disbursement made by the entire microfinance sector in Pakistan. The growth recorded by the bank during the five-year period is also phenomenal. In one of the SBP reports, the borrowing cost of microfinance sector in Pakistan was quoted at 18 per cent against 30 percent in Bangladesh. The above indicators hardly suggest that Grameen Bank could have operated under a 30 per cent borrowing cost scenario, particularly when its entire loans and advances portfolio has no collateral cover.

Grameen Bank speaks volume how the delicate business of microfinance can be made to grow with a human touch and that how it can fail when subjected to crude commercial tactics of profit maximisation.