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Microfinance: A game changer

Published on 3rd June, Edition 23, 2013


Microfinance in Pakistan has had a significant shift from the days when microfinance was being discussed as the next big innovation to address the poverty issues in Pakistan to being discussed in terms of the next big investment opportunity. The perception of microfinance in Pakistan has undergone a fundamental change in more than a decade of its evolution. The microfinance sector in Pakistan has developed a successful and sustainable business model, which has been able to overcome challenges traditionally faced by the financial services sector in servicing the low income population by catering to its specific needs, capacities and leveraging pre-existing community support networks.

Microfinance in Pakistan was started when the Aga Khan Rural Support Program (AKRSP) launched its credit operations in the Northern areas of Pakistan in mid eighties. Until year 2000, the main providers of microfinance were NGOs and government sponsored rural support networks. To reach un-served households, in 2001 the Government of Pakistan established a regulatory framework to promote the rapid expansion of microfinance throughout the country.

The last few years have seen significant advances in understanding and providing financial services for better development and eradication of poverty. It is said that microfinance is not a panacea for poverty and related development challenges, but rather an important tool in the mission of poverty eradication. Microfinance was started with the recognition that poor people also had the capability to lift themselves out of poverty if they had access to affordable loans. High repayment rate of loans in the industry have changed the perception that the poor are not credit worthy. With the right opportunities, poor have proved themselves to be productive and capable of borrowing, saving and repaying loans, even without collateral.

This type of financing has a darker side too. Most of studies are qualitative, which tell that more than 90 percent of the people who receive micro credit are poor and most of them succeed in businesses started with these loans. Due to the sheer size of the population living under poverty line, Pakistan is strategically significant in the global efforts to alleviate poverty and to achieve the Millennium Development Goal of halving the world’s poverty by 2015. Microfinance has been present in Pakistan in one form or another since the 80s and is now widely accepted as an effective poverty alleviation strategy.

Over the last eight years, the microfinance industry has achieved significant growth in part due to the participation of commercial banks and multinational mobile companies. Despite this growth, the poverty situation in Pakistan continues to be challenging.

Sector experts believe that MF sector of Pakistan is ahead in certain aspects from other institutions in the region. Despite this, there are certain issues which need attention for example sustainability and efficiency. Many believe that the biggest issue MF sector in Pakistan is facing is the financial sustainability. Microfinance model is comparatively costlier in terms of delivery of financial services. Most of the microfinance banks and NGOs’ are not able to cover more than 80 percent of their costs. This is partly explained by the fact that while the cost of supervision of credit is high, the loan volumes and loan size is low. It is, therefore, necessary for these institutions to develop strategies for increasing the range and volume of their financial services.


The second area of concern for microfinance companies, which are on the growth path, is that they face a shortage of owned funds. This is a critical constraint in their being able to scale up. Many of these institutions are socially-oriented institutions and do not have adequate access to financial capital. As a result they have high debt equity ratios. There are no two opinions that poor requires regular rather reliable financing but the matter of fact is that most of the MFIs’ are unable to generate sufficient revenues to cover their cost of operations.

In addition to this, most of the MFIs’ are not using their assets effectively and efficiently. There are various reasons attributable to this non-efficiency of assets management but one reason, which is regarded as single most concern is that MFIs in Pakistan are considered as charitable institutions and labeled for such activities. This perception further cemented with the fact that these Institutions charge exceptionally high interest rates and regard their credit operations as a significant means to raise revenue. Independent analysts think that due to charity mood discernment micro-financing is hampering the relevant institution’s product pricing, asset allocation and credit risk.

As MF is disbursed to the poor people, therefore it is apt to presume that most of them seldom have any security to offer as collateral. Thus mostly money is advanced on the basis of reputation. The matter of concern is that exorbitantly high rate of interest ranging from 20-25 percent is being charged on these loans. However, since most of the poor people in Pakistan do not own immovable property, therefore, it is hard for them to get financing from commercial banks for their micro projects and activities. Here comes the role of the MF institutions. That is why microfinance is so important – without it the only source of credit is the rapacious local moneylenders who may charge extortionate rates of interest with high volume of security and collateral against loans and beat up clients who do not pay on time.

Though a lot of work is underway in this sector but a lot more can been done. It is said that more than 70 percent of employment in Pakistan can be generated through microfinance system. The number of beneficiaries can be increased manifold in next 10 years as there is a huge margin of growth. To achieve this goal, MFIs need to work more aggressively on the introduction and marketing of new products and services. Moreover, in order to survive and have a reasonable growth it is vital for the sector to ensure that they build low cost structures, bring more products and consider re-pricing their products and services so as to enhance their financial revenues and become self-sufficient.


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