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Microfinance: cutting costs

Updated Apr 17, 2017 07:27am


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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


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Comments (12) Closed

Capt S A pathan Apr 17, 2017 08:05am

Micro finance is the need of the hour, not terror finance. Please keep this in mind.

Uday Kulkarni Apr 17, 2017 08:35am

Continued ... Micro financing will work best when left to smaller financial institutions run by philanthropists . I am not sure whether it is true what I have been told by my Pakistani friends that while on one hand; Pakistanis are among one of the lowest tax paying citizens in the world ; on the other hand, they are also one of the highest charities paying citizens in the world . I am sure there will be lot of people in Pakistan who will come ahead in investing with smaller Micro finance companies because micro finance is a social lending at the end of the day where the credit sizes are low from say Rupees 500 to Rs 5000- 10000 especially to women. These loans are made to the poorest who will never otherwise qualify in a regular bank and contrary to the belief of high defaults; it is these very poor people who will pay on time with lowest default rates in order to be able to re-borrow in future. History has proven it, but the banks will not get involved in this messy business.

TR Apr 17, 2017 08:48am

Microfinance has helped Bangladesh. So why not Pakistan?

Mehdi Raza Apr 17, 2017 11:02am


I blame State Bank for not taking any initiatives on Micro financing in Pakistan.

We are part of a nano-credits venture but due to SBP regulations, lending a micro loan can't be done without a bank license and we are facing challenges partnering with few banks in Pakistan probably because they don't see it commercially viable.


M. Emad Apr 17, 2017 12:09pm

Microfinance, Social Business etc ideas are the brainchild of 2006 Nobel Peace Laureate Muhammad Yunus.

vikas Apr 17, 2017 01:13pm

@TR Because Pakistan's problems are different. It's too feudal a society to finance at micro level and take away the money lenders. Secondly Pakistan's problem is not financing so much as returns. The cost of producing anything in Pakistan is so high that it simply is uncompetitive. Add interest cost to it and you beat the purpose. The cost of all inputs is high primarily because of an inflated Rupee which cannot be rationalised as essential imports will become so expensive and will fuel hyper inflation. So at this point the nation can't borrow and produce anything as the government itself is borrowing to keep afloat. Most of the money dispersed by commercial banks has been to the government.

Just Someone Apr 17, 2017 01:55pm

How about doing things like reducing the interest rates on credit cards. How about reducing the cost of electronic transactions. These will go a long way in not only growing the economy but also in financial inclusion.

salar Apr 17, 2017 02:13pm

Micro finance is a wonderful tool to get money out to individuals who have little other ways to making their dreams come true. However, the model here is heavily usurious, leading to more depravation in the future of the very people these policies will may be looking to help. As some other commentators have mentioned, this model is better left to smaller philanthropic institutes rather than larger banks constantly looking at the bottom line. Maybe a sharia compliant model need further development to make it sustainable and usable for the general Pakistani population.

Zoro Apr 17, 2017 05:45pm

I don't see how microfinance companies giving out loans to poor people without regular income @30% interest will alleviate poverty. Instead of leaving it to the financial institutions whose core objective is the bottom line, why doesn't the government through SBP provide interest free loans especially to working women with no access to regular banking network?

salar Apr 17, 2017 08:42pm

@M. Emad Thanks for contributing 'nothing' through your comment!

Zoro Apr 18, 2017 12:54pm

@TR I think you should read the excellent article by DAWN columnist Rafia Zakaria 'Misery and microfinance' to get insight into who benefits the most from microfinance.

Tamza Apr 18, 2017 08:52pm

Microfinance can sustainably work when 1:it is done with the concept of sadaka-e-jariya, with a reasonable 'interest' rate built in to convey to the beneficiary 'how much' she should pay as sadaka at a future time. 2: time scope should be defined, 3: it should be used only for oroductive purposes - not consumption. That is, if the funds are needed for food, healthcare, weddings, etc there should bevseparate arrangement.