THE MICROFINANCE sector is making its mark, but with penetration rate still low and distribution of micro credit uneven. From the borrowers’ point of view, interest rates are high, processing of loans still cumbersome and the quality of service wanting on several counts.

At end-March 2016, the total number of active micro loan borrowers topped 4m; the outstanding amount of micro loans touched Rs105bn; micro savings stood at Rs68bn and the number of micro insurance policy holders exceeded 5.5m, according to the latest stats of the Pakistan Microcredit Network (PMN), a platform of microfinance providers.

But the penetration of micro financing in an estimated potential market of 20.5m borrowers stood at 19.5pc, a PMN report reveals. The potential market size estimated by PMN is based on some local and foreign surveys.

Microfinance providers cite factors for this low penetration rate such as the lack of supportive government policies and a deep-rooted culture of rural informal financing.

But borrowers say if finance providers can take care of just three things, they can extend their outreach. First, the procedure for the grant of loans should be made simpler; interest rates should be eased further and the quality of service must be improved.

“You get this impression, the gist of it, if you travel to any rural area and talk to 10-20 people who’ve actually borrowed money from any microfinance provider,” says Saeed Baloch, a small vegetable grower who lives in Malir, Karachi and borrows from microfinance.

Borrowers say if the finance providers can take care of three things, they can extend their outreach. First, the procedure for the grant of loans should be made simpler; interest rates should be eased and the quality of service must be improved

Over the years, the microfinance sector has contributed to poverty reduction, women empowerment, rural development and financial inclusion. No less than 54pc of all micro loan borrowers were female as of March 2016. Finance has been directed to small-scale cattle breeding and poultry farming. Similarly, micro financing for installation of solar panels in rural Sindh and Punjab has eased daily working lives of rural folk.

But to assume that the 4m active borrowers of micro loans don’t have problems with lenders isn’t realistic. They often complain of high interest rates, while microfinance providers say their cost of funds and cost of operations are high. After a much-awaited revamping of the microfinance credit guarantee scheme by the State Bank of Pakistan last year, this issue seems to have been partly resolved.

Eligible microfinance banks and institutions borrow money from commercial banks at low interest rates — 6-month KIBOR+2pc — for onward lending to their clients.

But micro loan borrowers continue to complain about high interest rates being charged by some of the lenders. “I’m still paying 20pc plus financial charges on a small loan I had gotten from a leading microfinance bank for improving rice crop yield,” complains Deen Muhammad, a grower based in district Badin.

As for the quality of service, borrowers have more complaints about that than they have about the financing rate. These complaints range from unavailability of loan documents in simple Urdu to concealment or ambiguous mentions of loan conditions and from infrequent updates on loaning criteria to delays in response from branch-level officials of microfinance banks and institutions.

“The problem here is that the Banking Ombudsman’s office is mandated to attend to the complaints of big bank borrowers. It’s not clear whether complaints against microfinance banks or institutions can also be brought to us,” says an official of the said institution. “But it’s not that complaints of microfinance banks reach us and we turn them down. Frankly speaking, we don’t get any.”

Central bankers say that complainants of micro loan borrowers can turn to the agriculture credit and microfinance department of the SBP that has a mechanism in place for consumer protection and grievance resolution. But they also claim that so far there have been too little or no lodging of such complaints.

This absence of complaints to the Banking Ombudsman’s office and the SBP is assumed to mean that micro loan borrowers apparently have no serious issues with the lender.

“But I guess, that these borrowers being mostly less-educated and poor just can’t get involved in complaints’ lodging anywhere except at the branches of microfinance banks and institutions,” says a former SBP executive director.

There are 3,005 branches and units of microfinance banks and institutions but micro loans are also disbursed through branchless banking. The branches and units are located unevenly, mostly in Punjab and Sindh where the penetration rate is 24pc and 33pc respectively. Balochistan and KP with a penetration rate of 1pc and 2.2pc remain under-served with a disbursement of less than Rs131m and Rs2.2bn respectively.

Published in Dawn, Business & Finance weekly, August 1st, 2016