By Fehmeen Khan
Pakistan’s microfinance sector has grown out of infancy stage slowly during the last few years; a mobile banking product (EasyPaisa) was introduced last year in alliance with a microfinance bank, the central bank announced a multiyear strategic framework to promote the growth and development of the microfinance sector, a microfinance credit information bureau was setup this year and over two dozen microfinance institutions now serve around 1 million clients .
A CGAP report revealed the country’s microfinance sector grew at the breakneck speed of 67% CAGR between 2004 and 2008, at which point it was hit by a repayment crisis. Thankfully, the cause was more managerial and less structural in nature as the problem was attributed to management hurdles faced as a result of high portfolio growth.
However, this was not much of a relief because as the country was hit by devastating floods a few months ago, which cost microfinance institutions over $125 million in losses (MFI’s branches were destroyed, livestock of clients have drowned, small-scale industries funded by MFIs have been damaged, etc.).
As if the task of rebuilding lives is not hard enough, the microfinance sector has to deal with some other issues too, as explained below.
Exorbitant Interest Rates That Go beyond 28-30%
One of the many reasons MFIs charge high rates is the cost of funds borrowed from commercial banks, which are particularly high in Pakistan as evident from the one year interbank rate of around 14% .To help address this issue, Pakistan Poverty Alleviation Fund (a project of World Bank) has begun lending to partner MFIs at almost half the rate, so savings in cost are passed down to the borrower.
Poor Client Assessment Criteria
Some microfinance institutions follow rudimentary approval processes as part of a client-friendly outreach strategy, which poses a severe threat from the risk management perspective. A discussion with an acquaintance at a local microfinance bank revealed that loans were approved through a simple three-step process:
- Submission of a national ID card copy
- Compulsory deposit of PKR 2,000
- Attribution to a five-member group (chosen by the microfinance bank from the same community).
All microfinance banks are required to comply with Know Your Customer procedures to prevent the misuse of the funding channel;however, the above example shows some structural changes are needed first.
Small Role of Islamic Microfinance
Oddly enough, the central bank is encouraging the development of Islamic banking in the financial sector, yet there are very few slamic microfinance projects in Pakistan. Logic suggests that credit extended on the basis of Islamic tenets (partnership-based) would prosper quicker compared to conventional finance (interest-based)in rural areas where religion influences people’s lives in more than one way; however, progress in this area is slow.
Increasing Outreach of Mobile Banking Services for the Poor
EasyPaisa is one of three mobile banking solutions in Pakistan, but it seems to be the only one geared to serve the poor considering it was jointly launched by a cellular network provider and microfinance bank.The unique positioning seemed to have succeeded as EasyPaisa announced the processing of 6 million transactions (which was wrongly stated as 6 million customers in their print ad) during their first year.
Based on their ads, one can determine the company’s marketing strategy has been focused more on the urban than rural population, where it can quickly serve the unbanked masses with mobile phones. Of course, the company may have their reasons for leaving a large market segment almost unattended during the first year.
Despite these hurdles, the microfinance sector has progressed rapidly over the last decade, primarily driven by the demand of the poor and ambition of microfinance providers. It will be interesting to see what the future holds for us all.