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Microfinance: cutting costs

Updated April 17, 2017


A microfinance ecosystem is evolving in Pakistan. The debate regarding mainstreaming poverty and the renewed interest in tools and models amongst stakeholders indicates that the sector is poised to grow at a fast pace over time.

Related professionals in both public and private sectors are particularly motivated by technology based paperless/cash-lite modes that may serve to minimise the service cost of lending and bring down high interest rates of microcredit, making it affordable for those who need it most. It would also facilitate financial inclusion of segments at the bottom of the social pyramid and those living in far flung areas.

A higher loan price for the economically weaker client base increases default risk and de-incentivises potential borrowers. Digitised management can improve service effectiveness with a consolidated data base and real time monitoring.

The service cost of microloans is estimated to be prohibitively high and makes as much as 18pc to 20pc of the price. “The trend is to opt for technological portals for processing, monitoring and efficiently managing microcredit programmes in banks and NBFIs”, an independent advisor involved at multiple related forums told Dawn.

Experts see scope for high growth in the medium term because of the current narrow base of microcredit and the potential for expansion. Only four million of the projected 21m microloan aspirants are served, according to information gathered.

They hammered the need for collective effort by both public and private sectors to pool intellectual capital and develop pragmatic, innovative and futuristic guidelines. Experts advocate inclusion of community based organisations and non banking financial institutions in the strategy despite complexities.

‘The trend is to opt for technological portals for processing, monitoring and efficiently managing microcredit programmes’

“The study of microfinance data in the country shows that despite a greater quantum of lending by banks, non-banking financial institutions served the purpose of such lending more effectively because of better outreach, gender sensitivity and support structures put in place at the community level for better utilisation of acquired funds,” a member of the government economic advisory committee told Dawn.

“In Pakistan banks lend three times that of non-banking financial institutions (NBFI). About 75pc of small loans disbursed by NBFIs landed with women against 25pc by banks. Besides the outreach of NBFIs and CBOs is greater than commercial banks”, an expert commented.

There are 45 institutions lending in this category. Ten are microfinance banks and 25 NBFI’s are licensed by the SECP.

Zubyr Soomro, Chairman, Pakistan Microfinance Investment Company Limited (PMIC), shared his assessment of the sector, its relevance and possible strategies to optimise returns to lenders and targeted beneficiaries. The overarching target of PMIC, launched last year, is to increase the number of microcredit borrowers from the current 4m to 10m by 2020.

He believes that for growth and sustainability, the financial system has to be expanded and deepened.

“We need to understand the value of financial depth for the economy and strive to achieve it. The current 15pc private credit to GDP ratio against 44pc in Bangladesh, 53pc in India and 104pc in developed countries is too low”, he said.

Financial depth indicates the size of the financial sector relative to the economy. The ratio of bank credit to GDP includes credit to the private sector but excludes credit to the government and public enterprises.

“The limited reach of the banking net can also be gauged by looking at the ratio of currency in circulation to GDP. This ratio is highest in the region at 33pc against 11pc in Sri Lanka and 16pc in India”, he argued.

“Naturally the number of account holders as percentage of population of the country is low at 15pc against 83pc in Sri Lanka, 53pc in India and 31pc in Bangladesh”, he added.

“The government and development partners are keen to facilitate growth in the direction. Look at PMIC launched last year with a capital base of $60m. Within the first six months we were able to get support and pledges that expanded the capital base to $250m: double the capital adequacy ratio mandatory for commercial banks in the country”, Soomro said deliberating on future and scope of NBFI.

Another banker said: “It is not an accident that microcredit constitutes a fraction of a bank’s lending operations. Many tried and dumped the strategy because of high risk and cost of such operations. If there is a return on investment in risk free government papers at comparably low cost why would a bank bother? At the end of the day it has commercial interests guiding direction”, she defended banks blaming the policy environment.

The potential poor borrowers struggling to break out of poverty trap do not fare well.

“However, the contracting financial spread presents an opportunity to policymakers to tweak the framework to nudge banks to pay more attention to this long neglected sector. No one contests the fact that microcredit has great social value in countries with a large poor population. The real challenge is to make it commercially attractive for the private sector”, she concluded.

The response to a request for comments from the State Bank did not arrive before the deadline.

Published in Dawn, Economic & Business, April 17th, 2017