ISLAMABAD, Oct 20: The Asian Development Bank has called upon Pakistan to bring reform programme for microfinance, an investment to provide microfinance services to the poor, institutional strengthening, and promotion of technology to achieve wider outreach of microfinance services.

“There was lack of stated policy, legal and regulatory frameworks for microfinance; fewer microfinance institutions (MFIs) operating and absence of a mechanism to integrate social capital formation with micro finance services,” notes ADB in its just-published special study, ‘Microfinance Development Strategy 2000: Sector Performance and Client Welfare’.

In Pakistan, a downturn trend was experienced by MFIs with operational self-sufficiency (OSS) falling below 100 per cent starting in 2008.

Pakistan lagged behind, with financial self-sufficiency (FSS) below 100 per cent for most years. This was mainly due to the MFIs’ heavy reliance on subsidized debt and a high inflation rate, particularly in the late 2000s, which constrained expansion of loan portfolios necessary to meet the large demand for loans.

Overdependence on external funds was a key issue, but this was not adequately addressed in the programme for Pakistan, notes the study.

The ADB study included six case countries in region, inluding Cambodia, Pakistan, Papua New Guinea, Philippines, Uzbekistan and Viet Nam.

These countries represent 33 per cent of ADB’s total microfinance portfolio during the study period. Pakistan was chosen as an example of an underdeveloped microfinance sector prior to ADB support.

In Pakistan programme, the average loan was $195 but reached substantially more borrowers living below the national poverty line than in the Viet Nam programme, where the average loan was $1,972.

The study found more positive direct and indirect welfare benefits in the Viet Nam programme than in the Pakistan programme.

On a positive note, the study says that the Pakistani micro-financing institutions have appeared to be the best in targeting poor and low-income clients, and 90 per cent of them both measures entering poverty levels and tracked changes.

However, the evaluation found no direct credit impacts in Pakistan except some modest impacts on household savings and education expenditure per enrolled child. However, there were some modest positive spillover effects on household enterprise employment.

The study notes that Pakistan displayed a generally improving trend until 2007. Portfolio at risk (PAR) then rose to 5.9 per cent in 2008 and 23.6 per cent in 2009, and then dropped to 16 per cent in 2010.

The economic situation was difficult for microfinance industry during 2009-2010 because of the security situation, inflation, food security, and flood diverted a large part of household funds towards consumption. Also, internal controls of MFIs were not able to keep up with the rapid growth in portfolio, resulting in deterioration of portfolio quality.

According to the study, despite the increasing popularity of microfinance in recent years, the gap in access to financial services of poor and low-income households remains a great challenge to governments and development agencies.

About 2.7 billion people or 70 per cent of the adult population in developing countries has no access to formal financial services such as savings or checking accounts. The working poor who live below $2 a day comprise more than 60 per cent of the total labour force in emerging markets. They represent a key and still largely untapped market segment for financial inclusion.

The study concludes that microfinance needs to reach more of the poor in Asia and the Pacific, but do so in a financially sustainable way by emphasising the twin goals of microfinance — reaching the poor and being financially sustainable.


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