InternationalVolume 14 Issue # 16

Microfinance is new growth industry

In a cash-strapped economy like ours, microfinance has an important role to play. Big banks do not lend to small commercial units due to which their working and growth is hampered. Here in comes the role of microfinance. In advanced economies special measures are adopted to encourage microfinance activities.

It is gratifying to note that in the last few years, the microfinance industry in Pakistan has expanded fast. The latest data released by the microfinance sector’s representative body, Pakistan Microfinance Network (PMN), shows a positive year-on-year growth for the year ended December 31, 2018. The PMN is a collection of 42 microfinance providers (MFPs). As per the PMN, these MFPs are a sum of 12 microfinance banks (MFBs), 16 microfinance institutions providing specialized microfinance services, four rural support programmes that are running microfinance operations as well, and 10 social sector organisations that provide microfinance to small commercial ventures.

According to available figures, good progress was registered in all three key areas – credit, savings, and insurance. On the borrowing side, the number of active borrowers grew by 20 percent year-on-year – an addition of 1.1 million users in 2018. With 6.9 million users, a third of the potential market for microfinance is reportedly covered. The gross loan portfolio grew by 36 percent year-on-year to Rs275 billion, an increase of Rs72 billion. At the same time, average loan size grew to over Rs55000 by 2018 end, up from 48500 in 2017 end. At the same time, the number of savers grew by 14 percent to 35.3 million – an addition of 4.3 million new savers. Savings portfolio attracted Rs53 billion more in deposits, or a growth of 28 percent year-on-year with the final tally of Rs240 billion by December 2018.

An encouraging development is that MFBs have increasingly reduced their dependence on borrowings from commercial banks. But the entire deposit portfolio cannot be classified as “micro”. This is because MFBs also offer attractive deposit schemes to corporate as well as well-to-do individuals. The third product, micro insurance, also continues to grow at a healthy rate. The number of policy holders stood at 8.5 million by 2018 end, up 16 percent, or one million more, as compared to the previous year. The sum insured jumped by Rs50 billion to stand at Rs249 billion, displaying a healthy growth of 25 percent year-on-year. Micro insurance is linked with growth in micro-credit, as MFBs tend to sell it alongside their loans.

The latest figures show that the microfinance providers now cover 135 districts in Pakistan, with a total of 4,239 branches or units. The potential market size is estimated at 20 million borrowers – with a third already covered. To reach the remaining two-thirds, the gross loan portfolio will have to expand by over Rs500 billion. The recent launch of the Pakistan Microfinance Investment Company, which is a PPAF spin-off that is also funded by donors, can be instrumental in bridging the gap. According to the SBP, a Line of Credit (LoC) is being established with the funding support of the government of Pakistan under the World Bank’s Financial Inclusion Infrastructure Project. The new scheme will allow MFBs to improve microenterprises’ access to credit. Commercial banks will need to play a role, too. To help increase microfinance activity and the needed credit, a new law needs to be passed making it mandatory for commercial banks to allocate a certain portion of their deposit funds to micro credit.

According to the State Bank of Pakistan, the microcredit portfolio posted an increase of 53.5 percent to reach Rs 111.9 billion as at end of FY17 compared to Rs 72.86 billion end of FY16. Similarly, the number of borrowers of Microfinance banks (MFBs) grew by 29.9 percent to 2.209 million during FY17. Asset base grew by 52.5 percent to Rs203.3 billion, by the end of the last fiscal year compared to Rs133.324 billion, by the end of the previous year. The latest figures show that there was a double-digit growth in key sector indicators. The borrowing side picked up significantly in the first six months of the calendar year, and the number of active borrowers reached 5.2 million, a growth of 14 percent since December 2016. The gross loan portfolio increased to Rs171 billion, up 25 percent from Rs137 billion reported six months ago.

The latest data based on reports from 39 microfinance providers (MFPs) – 11 microfinance banks, 12 microfinance institutions, four rural support programmes, and 12 social sector organisations – shows that microfinance is expanding its penetration across Pakistan. The sector was able to extend micro-credit services to over 5.202 million low-income borrowers by June 30, 2017, registering an increase of 25 percent from 4.161 million in the previous year. Concurrently, a growth of 57 percent or Rs 62.127 billion was also registered in the gross loan micro-credit portfolio that increased to Rs 171 billion from Rs 108.8 billion during the preceding year. The average loan balances also increased by Rs6,703 to reach Rs32,868.

To serve the credit demand of 10 million borrowers, the microfinance entities need to disburse additional Rs220 billion over the existing loan-book size. The recent launch of the Pakistan Microfinance Investment Company can be instrumental in bridging the gap. Commercial banks will need to play a role, too. According to SBP, a Line of Credit (LoC) is being established with the funding support of the government of Pakistan under the World Bank’s Financial Inclusion Infrastructure Project. The new scheme will allow MFBs to improve microenterprises’ access to credit.

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