THE transformation of a new ecosystem of mirco, small and medium enterprises seems to be underway in the middle class, comprising about 30m people of the 200m population.

As part of a policy reform, the government, Asian Development Bank and the State Bank of Pakistan had introduced a $30m facility in 1999 to make credit available to the middle class and the poor.

It was realised at the time that domestic and foreign commercial banks were unwilling or incapable of reaching out to the majority of the population, whose needs were quite different from those of the minority.

The introduction of fresh prudential regulations led to the establishment of the first microfinance bank — Khushhali Bank — in the public sector in 2000, with contributions also coming in from 16 commercial banks.

Now a totally private entity with majority shareholding of a local and four international investors — from Belgium, the Netherlands, Switzerland the US — Khushhali Bank (KB) is the first microfinance bank among a total of 10 to move into the small and medium enterprise business (MSME).

It was anticipated at the outset that if microfinance banking became sustainable and achieved a reasonable success rate, the private sector would move in with fresh investments.

Now, 10 microfinance institutions are providing services to the hitherto untapped and untouched population, said Ghalib Nishtar, President of Khushhali Bank, who has been part of the new ecosystem from its inception.

“We are the largest institution in terms of branch network in this segment with 120 outlets, mostly in the rural areas, and have more than 800,000 clients,” he told Dawn. Major changes were brought about after the shift in policy and divestment to the private sector two years ago.

Its total deposits are now over Rs8.3bn, after having grown 141pc in 2012 and 77pc in 2013.

The bank has targeted to increase its lending portfolio to Rs38bn by 2017 and expects at least 40pc growth for next year as it plans to expand to central and south Punjab and Sindh from its existing network of Azad Kashmir and irrigated areas of Punjab and Khyber Pakhtunkhwa.

Its total assets are over Rs16bn, up 34pc in 2013 and 22pc so far this year. Its profit-after-tax has risen 77pc to reach Rs641m this year, and had grown 116pc in 2013.

After examining the local environment and the gap in demand and supply of credit for small businesses, KB’s shareholders have decided to enter the small and medium enterprise segment, which is formally being catered to by mostly the SME Bank, and that too on a limited scale.

“The bank is strong, well capitalised and growing in rural and small business areas,” said Mr Nishtar. He added that the central bank had also amended rules for commercial banking by increasing the loan ceiling for micro businesses from Rs150,000 to Rs500,000 to cater to the over 3m potential small businesses, defined as those with at least 10 employees.

“There are tremendous opportunities in the small business segment. So we are expanding our portfolio in agriculture and livestock,” he said, adding that KB is in the process of completing three small business branches in Hasanabdal, Rawalpindi and Haripur.

This would be followed up with opening of small business branches in Lahore, Kasur and Multan.

The bank hopes to open 21 such branches next year by expanding its network in Multan division and Sindh.

He says the new initiative is quite encouraging and attractive in terms of public policy, given its role in creating jobs and reducing poverty, as it caters to ‘the missing middle’ and also provides guidelines for institutional cost effectiveness. Commercial banks seldom go deep to such an extent.

With the advent of microfinance institutions, the policy objective of financial inclusion is also taking new dimensions as these institutions, coupled with cellular companies and some commercial banks, cooperate and compete with new products, channels and modes, like branchless banking.

Services like Omni, U-paisa, Easypaisa etc are making the new business model not only viable but popular as well.

On top of that, the recovery rate in the MSME sector is also attractive, at more than 98pc. This is because the people are generally hard working and only need an opportunity to stand on their feet and grow.

No wonder then, all the 10 microfinance institutions have now attracted foreign direct investment and made the market self-sustainable.

Meanwhile, the mark-up on micro and small business financing has declined from around 30pc to 18-22pc, depending on the type and size of the business. This is despite the fact that the capital adequacy ratio for MSMEs has been set at 15pc by the central bank, against 10pc for commercial banks. And the MESEs have been compelled to offer all banking facilities and products to residents of rural areas.

Mr Nishtar says even consumer rates being offered by microfinance banks are now lower than those of conventional commercial banks as they compete in the rural market. As a result, the overall market is growing, the market share of MSMEs is going up, and interest rates are declining as these institutions become profitable.

Published in Dawn, Economic & Business, December 8th , 2014