Research Analyst
Aug 20 - Sep 2, 2012

Pakistan's microfinance sector has yet to make major breakthroughs to reach millions of underserved people who require a wide variety financial service. Pakistan has one of the lowest financial penetration levels in the world with 56 per cent adult population totally excluded, and another 32 per cent informally served.

The Government of Pakistan and SBP are promoting microfinance as a long term strategy to broaden access to financial services by the low income segments, thus improving their livelihood and income generating opportunities. The donor funded programs are managed by SBP and the government with the objective of enhancing the provision of financial services to unbanked segments especially to the poor and marginalized population through sustainable models. The updates on government programs and SBP market interventions are: financial inclusion program (FIP) and improving access to financial services fund (IAFSF).

However, despite considerable support from the government, donors and SBP, the microfinance sector has only been able to tap a small fraction of the potential market, with current active borrowers standing at approximately 2 million, is only 7 per cent of the potential market.

While the strategy set out a target of three million borrowers to be achieved by the end of 2012 and 10 million by 2012 provided a commercial and sustainable orientation to the sector. From 2007 to 2010, key reforms were implemented under the expanding outreach of microfinance (EMO) strategy and the sector experienced high annual growth of almost 43 per cent in 2007 and 2008.

Eight microfinance banks (MFBs) have been established, including transformation of three leading microfinance institutions (MFIs), and two of the world's largest MFIs have started operations in Pakistan, reflecting private sector participation and institutional diversity.

During the quarter ended in December 2011, the overall microfinance sector witnessed loan portfolio growth of 13 per cent over the year. Its gross loan portfolio stood at Rs. 28.84 billion 2.07 million active borrowers. On the deposit side, the number of depositors of MFBs increased to 1.44 million with a deposit base of Rs. 13.6 billion as of March 31, 2012. The overall performance of the sector remained positive in spite of the various challenges including the heavy floods/rains that adversely affected various parts of the country especially Sindh, for the second consecutive year. The NPLs of microfinance banks have also dropped to 2 per cent as the quarter ended in March 2012 against 5.29 per cent in March 2011 depicting effectiveness of the credit process. The sector was able to expand its retail network to 1,739 business locations across the country.

It was estimated that, during the past two consecutive years Pakistan was globally ranked first in terms of microfinance regulatory framework in 2010 and 2011. In September, 2011 the Waseela microfinance bank was granted a license under the microfinance institutions ordinance, 2001 to operate nationwide. In addition, the Auriga group acquired the district wide network microfinance bank with the intent of upscaling its operations as a nation wise MFBs. Also in the same month, the general provisioning requirement for MFBs was withdrawn in cases where loans were backed by liquid securities, gold, or other cash collateral with appropriate margin. However, in case of all other loans, microfinance banks shall maintain general provision of 1.00 per cent.

In March 2012, SBP has revised prudential regulations to facilitate lending to microenterprise segment. For these purposes, the term microenterprise shall mean projects or businesses in trading, manufacturing, services, and agriculture sectors that lead to livelihood improvement and income generation. The revisions will facilitate lending of up to Rs. 500,000 to eligible microenterprises. Moreover, MFBs that previously were unable to tap the microenterprise market constraints of lending up to Rs. 150,000 under the general loans category will now be able to upscale their credit operations.

Unluckily, this sector is facing multiple internal and external challenges, despite due importance from the government. The common misconception found among people is that microfinance is the modern shape of charity. However, both belong to a completely different type. While microfinance facilities are given to the active poor to undertake or upgrade businesses and generate personal source of income in order to become economically independent.

One of the challenges that MFBs face is lack of funds to increase the outreach. In order to meet this scarcity, they have to develop attractive deposit products, bearing cost of capital. It has been revealed that microfinance practitioners have been offering high mark ups, both in TDRs and saving accounts compared to commercial banks. The two private banks, Tameer bank and Kashf microfinance bank offer maximum 16 per cent and 13.7 per cent mark-up, respectively, with similar features.

On the contrary, commercial banks average markup in fixed deposits is 9.0 per cent. On the other hand, they have captured the existing current account market, though it is not extremely expensive. Conventional banks have many alternative sources for investment or they exponentially prefer indirect financing using MFBs as an effective channel. As far as direct financing is concerned, in this sector, a well known commercial bank has been experiencing high default rate in Karachi; as a result it has shut down microfinance operations.

In addition, productive human resources in microfinance sector work constantly, to pursue opportunities provided by commercial banks, resulting in a brain drain from the institutions. Furthermore, in the country salaried population is comparatively less than self-employed individuals, thus there is a vast ground to access SME class with economy of scale.