Micro Financing Sector - Pakistan

Poverty has been a major development problem of Pakistan. Micro-financing seems to

be one of the effective solutions to support the individual and MSEs (Micro & Small
Enterprises) and therefore give impetus to the poverty alleviation efforts. It can help the
communities develop means to sustainable source of income through business
establishment and thus and decrease their vulnerability. It also works as an instrument
of self-employment for men and women to bring about change. People with low income
having limited access to formal financial institutions, are the main beneficiaries of micro-
financing.

Micro financing success of Bangladesh

The growth of microfinance institutions (MFIs) in countries worldwide continues however

there is also this debate over whether such programs truly benefit the poor. Proponents
emphasize the need for innovative ways to provide poor populations access to financial
services. Critics argue any successes may be temporary because microfinance
programs require training and entrepreneurship skills, which many poor populations
lack. In addition, some fear that beneficiaries may be charged high interest rates or
become dependent on MFIs, borrowing more than they can pay back and becoming
further trapped in poverty.

Studies show that in Bangladesh microfinance institutions have had sustained benefits
over two decades in reducing poverty and increasing incomes. Microcredit accounted
for a 10 percent reduction in rural poverty in Bangladesh over that time lifting over 2.6
million Bangladeshis out of poverty.

The main objective of Bangladesh’s microfinance sector when it was established was
reducing rural poverty by providing microcredit loans for off farm activities such as
trading, livestock and poultry. The loans were funded mainly by the government and
bilateral donors through group-based savings and lending programs.

As per latest reports Bangladesh’s MFIs benefits some 33 million members and
distributes more than $7.4 billion annually. Moreover instead of relying on the savings of
borrowers, MFIs now have access to institutional funds including commercial banks. In
addition microfinance in Bangladesh has expanded its scope from home-based
activities and self-employment to include savings and insurance, microenterprises and
productive employment. It has also helped to diversify the economic activity of the
borrowers boosting incomes in the process. Household income has grown steadily over
the period, driven by rising non-farm income. The income growth of the households
diversifying into non-farm activities was almost 29 percent higher than that of their
counterparts focused exclusively on farming. The reduction in moderate to extreme
poverty for this group was almost 8 percent higher. Improvement in mechanisms of
access to credit was found to be a key factor in achieving this shift.

Micro Financing Institutions despite their focus on non-farm activities have also aided
farmers. Borrowing from an MFI raised farm income and reduced reliance on wage
income, producing significant positive effects for women and marginal farmers. A 10
percent increase in women’s credit use was found to increase crop income by 3.5
percent, non-crop income by 2.8 percent, and total farm income by 0.7 percent.
Moreover borrowing by both males & females has had important impacts on income,
labor supply, household assets and net worth, and children’s schooling.

Situation in Pakistan

Pakistan though making substantial development in microfinance sector having than 40

accredited institutions operating in the sector lags well behind its peers – such as India,
Bangladesh, Vietnam and Sri Lanka in terms of offering private-sector credit. Micro
financing institutions in Pakistan serving 6.3 million borrowers with a loan portfolio of
PKR197bn ranges widely in strategy, capacity and outreach. Interestingly over half of
loans are made to women borrowers and 55% focused on rural areas. The loan sizes
have also been increasing, with the current average size being PKR 52,000 (US$325).
There is a growing reliance on smartphones as a mechanism for payments and to reach
out to Pakistan’s 220 million population. According to GSMA intelligence, mobile phone
subscriptions outnumber bank accounts by two to one.

Role of Government In Pakistan to Promote Micr0-financing

State Bank of Pakistan (SBP) has been playing a key role in the development of microfi
nance sector. Pakistan’s  microfinance  sector  is  globally  recognized  for  well‐
developed  legal,  regulatory,  and  strategic  framework.  In order to stimulate  growth 
of  the  sector  on  sustainable  basis,  SBP  formulated national  microfinance  strategy 
in  2007. The strategy achieved a number of key targets as under: 

 Enabling  regulations  to  support  alternative  delivery  channels,  access  to 

foreign  and  local  currency 
funding, upscaling loan limits, microfinance borrower’s eligibility criteria, and acce
ss  to MFB’s clearing house.   
 Innovative models/partnerships were adopted to deploy Branchless Banking solu
tions.
 Mainstreaming of the two largest MFIs (Kashf, NRSP) was completed
  Funding mechanisms were set up to better manage the
funding and institutional capacity constraints 
 Reforms in key institutions (Khushhali Bank, NRSP and PPAF) 
 New players such as ASA and BRAC, established operations in Pakistan

The previous government under its National Financial Inclusion Strategy created the
Pakistan Microfinance Investment Company (PMIC), providing finance direct to target
sectors as well as offering funding and support to other microfinance lenders. PMIC
established in 2016 is registered as an investment finance company operating under the
country’s non-finance banking company regulations administered by the Securities and
Exchange Commission of Pakistan. The company was established as a joint initiative
through the support of Pakistan Poverty Alleviation Fund (PPAF) and the UK’s
Department for International Development, through the non-profit organization
Karandaaz Pakistan and the German development bank KfW. Initiatives financed so far
include renewable energy, crops and livestock, micro-insurance, digital finance, low-
cost private schools and housing and women led MSEs (Micro & small enterprises).

The main objective of PMIC is to offer a wide range of financial services to microfinance
institutions and microfinance banks to promote financial inclusion in Pakistan, alleviating
poverty and catalyzing broad-based development. It has targeted microfinance banks
and other non-bank microfinance institutions as borrowers and almost 44% of loans
have been extended for agriculture and related business, while another 46% have been
granted to small entrepreneurs for their micro businesses. 

Constraints in Micro-financing spread

I. Funding:
MFIs depend mainly on subsidized funding from Pakistan Poverty Alleviation
Fund for lending operations which is limited. They have yet to create a
sustainable internal fund generating mechanism. The commercial banks have
always been reluctant in funding MFIs in the past. However pro-active approach
of SBP through its microfinance credit guarantee facility has been effective in
improving the spread of lending through MFIs.

II. High Operating Costs:

 The sectors high operating costs to loan ratio (approximately 23%) points to the
lack of viability of MFI as a business model.

III. Credit Risk:

The overall portfolio quality of the sector remains satisfactory however the quality
of the spread by the MFIs has still to be effective. Moreover high inflationary
trends over the last few years have affected the repayment capacity of the
borrowers and increased the risk of default.

IV. Organizational Development:

There is still a lot to be achieved in having a strong and effective organizational
system in place for MFIs reflected through quality of governance, management
teams, technology and internal control systems.

V. Macro-Economic Situation:
Moreover macro-economic challenges facing the country are also preventing
substantial growth of micro-financing sector.

Suggestions to strengthen Micro-financing Sector and improve the outreach

Improve skills and marketing opportunities for the poor. 

Mere credit disbursement is not enough to boost productivity, sustain rising

incomes and reduce poverty. Vulnerable populations need skills training and
better marketing networks to expand their non-farm activities and earn a
sustainable income.
 

Rationale interest rates 

The MFI interest rates are lower than those charged by informal moneylenders
however they still need to be on the lower side while realizing sufficient returns.

Competition among MFIs

State Bank of Pakistan through its policies needs to facilitate establishment of

new MFIs and protect smaller ones operating in the market to prevent
monopolization of the sector by established MFIs and thereby encourage
competition.  

Diversity 

The government needs to stay committed to greater financial

inclusion to promote inclusive economic growth. It  will  be  important  to 
continue  implementation  of  policy  approaches  providing  the  incentives  for 
sustainable  financial  access  and  utilization of  a  broad  range  of  services 
(including savings,  credit,  payments  &  transfers,  insurance). 

Innovation 

The policy makers and microfinance players need to promote technological and

institutional innovation as a means to expand financial system access and utilizat
ion. Greater emphasis on digital platform and initiatives such as challenge funds
is expected to strengthen the mechanism and encourage the people to utilize
micro financing services.

Consumer protection and empowerment

SBP needs to review and strengthen its regulatory and supervisory mechanisms

to ensure protection of rights of microfinance clients.