MICRO financing has now reached the stage where it can claim it is contributing to financial inclusion, though much below the country’s potential need for micro credit.

In the second quarter of this year (2QCY14), microfinance banks (MFBs) reported several achievements, including a huge quarterly 25pc increase in the overall number of depositors — from about 5.855m at end-March to around 7.324m at the end of June. The value of total savings also rose by 10pc during this period, from Rs34.45bn to Rs37.88bn.

This encouraged MFBs to disburse 34.7pc more microloans in April-June than in January-March.

The number of fresh microloan receivers rose 17pc to more than 897,000, and the average value of a microloan went up 15pc to about Rs28,300, from a little less than Rs24,600. A moderate 5pc increase was recorded in the number of overall active microfinance borrowers—from 2.9m in March to 3.1m in June 2014.

The challenge for microfinance banks is to now penetrate deeper into micro enterprises and the SME market. That’s where it can contribute extensively towards financial inclusion and play its part in accelerating economic growth

During 2QCY14, less-banked districts like Nasirabad in Balochistan, Bhimber in AJK, Skardu in Gilgit-Baltistan, Peshawar and Mansehra in KP, Larkana in Sindh and Rahimyar Khan in Punjab saw the fastest growth in the number of active borrowers.

“But even the current number of microfinance borrowers in these areas forms a fraction of the number of potential borrowers identified back in 2007,” points out a central banker. One example is that of Nasirabad, where MFBs reported a huge 450pc rise in the number of borrowers, but that still “captures only 15pc of the potential”.

The signing of an agreement between the State Bank of Pakistan and the World Bank earlier this month for developing a broad strategy to promote financial inclusion is expected to strengthen the role of microfinance institutions. The central bank will coordinate and implement the strategy from early next year.

To help MFBs tap the full potential of the microfinance market, the SBP has made microfinance an attached division of its agriculture credit department, which provides elaborate guidelines on micro financing. The central bank has involved MFBs in supervised agriculture credit disbursement, assisting them to become more organised and expand their credit outreach.

The promotion of branchless and mobile banking and distribution of public aid under the Benazir Income Support Programme and other schemes have also provided MFBs more business.

Now, the number of people with savings in MFBs account for roughly 20pc of the number of overall bank depositors in the country.

The volume of quarterly micro financing makes up 20-25pc of net fresh loans of the entire banking sector. This ratio, however, keeps changing due to the varying demand pattern.

If these trends are sustained over time, they can help promote financial inclusion and contain informal credit.

Meanwhile, MFBs are better placed to reach out to a larger number of women. On this count, things are not bad but there is certainly enough room for improvement.

By the end of last year, 26pc of MFB borrowers were female — double the banking industry’s average of 13pc. Borrowings made by women constituted 19pc of the gross loan portfolios of MFBs, which too was almost four times the banking industry’s average of 5pc.

Micro financing has covered many milestones over the last decade, and has, by and large, catered to the financing and savings requirements of individuals and small groups of individuals.

Now, the challenge for MFBs is to penetrate deeper into micro enterprises and the SME market. “That’s where it can contribute extensively towards financial inclusion and play its part in accelerating economic growth,” says a former head of the state-run National Bank.

In a recent report, the UK’s department for international development (DFID) identified low-cost private schools as a potential business area that MFBs can profitably tap into. According to the report, at least 70,000 such schools are operating across the country, with their funding requirement exceeding Rs77bn.

The amount and sources of initial investment for these existing schools are typical of the SME sector, with a substantial number of such schools having initial investments of less than Rs300,000, “sourced usually from personal savings and loans from family and friends,” says the report. It points out that the amount falls within the range of MFBs’ per-party lending of Rs500,000.

Published in Dawn, Economic & Business, September 22nd, 2014