The State Bank of Pakistan has revamped the microfinance credit guarantee facility for microfinance banks and institutions so that they get inexpensive funds from banks for onward lending.

Now, the MFBs and MFIs can borrow from banks and development finance institutions at a maximum interest rate of 2pc plus Kibor of the relevant tenure. That is, in the current scenario, they will have to pay up to 10.52pc (six-month Kibor of 8.52pc plus the 2pc premium) if they get a six-month loan. The MFBs and MFIs will then add up their own margins before lending to their micro-borrowers.

The credit guarantee facility is good for MFBs and MFIs because it won’t affect their lending operations in case of liquidity problems. And, it opens up an additional opportunity for profitable lending for banks and DFIs. The facility is designed so that banks and DFIs would lend to only those MFBs and MFIs that measure up to certain standards set by the SBP. Besides, the SBP itself would provide up to 60pc risk coverage of the loans.

The microfinance credit guarantee facility isn’t entirely new. Many of its provisions have been in practice for some time. But this time, the SBP has laid down a comprehensive set of guidelines for it, enabling the stakeholders to refer to just one document instead of several periodically updated set of regulations.

Increasing competition, limited management capacity, shallow product-base and high transaction costs are some key challenges facing the microfinance sector. But there are also multiple opportunities that the sector can exploit for its sustainable expansion. These include poverty reduction, women empowerment, rural development, financial inclusion and going green.

Between 2009 and 2013, the number of active microfinance borrowers increased from 1.4m to 2.4m, and the percentage of female borrowers rose from less than 43pc to over 58pc

How the microfinance sector makes the most of these opportunities depends largely on how they cope up with their challenges. Central bankers say the regulatory regime for microfinance banks and institutions provides them an enabling environment for this purpose.

That is perhaps why these institutions have done consistently well in last five years. Between 2009 and 2013, the number of active microfinance borrowers increased from 1.4m to 2.4m; the percentage of female borrowers rose from less than 43pc to over 58pc; the gross loan portfolio expanded from Rs16.8bn to Rs46.6bn; the deposit base grew from Rs7.2bn to Rs32.9bn; and the number of MFB and MFI branches went up from 1,221 to 1,606, reveal official statistics.

The involvement of MFBs and MFIs in the current government’s interest-free loan and the youth loan schemes helped them consolidate their previous gains in 2014. Their total loan portfolio, for example, crossed the Rs50bn mark by end-September, according to data compiled by Pakistan microfinance network.

The latest available statistics show that between July and September 2014, about 8,800-17,500 new microfinance borrowers were registered in Layyah, Bhakkar, Shikarpur, Nawabshah and Matiari. During this time, MFBs and MFIs registered about 14,600-18,700 new savers in Muzaffarabad, Bahawalnagar, Gwadar and Bahawalpur.

These are not just cold statistics. Behind them are stories of success that have had a real impact on all stakeholders. MFBs and MFIs themselves have been making profits, while their depositors — including the poor men and women in rural areas who were mostly out of the financial system — now have a chance to save money. And microfinance borrowers are running small businesses close to their abode.

Besides, the involvement of MFBs and MFIs in the SBP-supervised agricultural credit scheme is helping farmers obtain more bank finance. Meanwhile, competition in agricultural credit with MFBs and MFIs is encouraging greater operational efficiency of conventional and Islamic banks.

The involvement of microfinance banks in branchless banking, in coordination with a number of cellular companies, has also benefited lots of individuals and small- and medium-sized businesses, besides helping the overall banking system in reaching out to customers in the remotest areas of the country.

And high service charges of branchless banking have helped microfinance banks earn handsome profits and led cellular companies to expand their client base and revenues as well.

Published in Dawn, Economic & Business, February 9th, 2015

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