Ghalib Nishtar, President and CEO of Khushhalibank, talks to Marylou Andrew about the factors facilitating the growth and development of the microfinance industry in Pakistan.

MARYLOU ANDREW: What is Pakistan’s current microfinance penetration rate and what have the major drivers of growth been?
GHALIB NISHTAR: The microfinance industry witnessed continued growth and expansion in outreach in the year 2015 and the first two quarters of 2016. In the first quarter of 2016, microfinance penetration reached 13.7%. However, the total number of branches increased by 200 (primarily in Punjab and Sindh). The improving security situation, low inflation and subsequent reduction in the policy rate by the State Bank have been good for the industry.

MLA: What role has Khushhalibank (KMBL) played in the development of microfinance in Pakistan?
GN: Founded in 2000, KMBL was the first bank in Pakistan designed to work with low income, bottom-of-the-pyramid markets. The idea was that if we are successful in putting the right frameworks in place, then the private sector will invest in microfinance. This was the challenge, and I think we have done well. Today, there are about 10 banks operating in microfinance. All the banks in this sector have brought foreign direct investment into it and this shows the confidence by international investors in the bottom of the pyramid markets in Pakistan and in microfinance banking. This is what I believe we have been able to demonstrate.

MA: How has KMBL developed since it was established in 2000?
GN: In less than three years the bank went from having zero to 100,000 clients, after which there was a period of stability. Then in the last three years after we were privatised, the growth has again been very fast. We are growing at about 30 to 40% per annum. There has also been a phenomenal growth in our profit over the last three years, so whether it is growth, revenues or outreach, we are the market leader. Today we are the largest microfinance bank in Pakistan with over a million clients. When we started we had only one product, and that was the solidarity group model, where you form a community of a group of people. Since then, we saw that the needs of the market were diverse. You cannot do the same thing for everybody. We have gone from group loans to individual loans, and over the last two years moved into micro-enterprise lending, so we are moving segments from very small loans to higher value, from loans that were initially a maximum of Rs 50,000 and are now a maximum of Rs 500,000.

“Pakistan’s microfinance industry has evolved a great deal. Specialised products are now being developed, piloted and rolled out at the commercial level.”

MLA: How is the establishment of the Pakistan Microfinance Investment Company (PMIC) likely to impact the microfinance sector in Pakistan?
GN: According to forecasts given in the Microfinance Growth Strategy 2020, in order to reach up to 10 million borrowers, the sector will require an additional debt for on-lending of up to Rs 300 billion. PMIC has been established to cater to the funding needs of the sector. The major objective of the new entity is to attract commercial funding to serve increasing demand from people who are financially excluded and further improve the capacity of the sector to absorb these funds.

MLA: The target of reaching 10 million borrowers by 2020 is quite ambitious. Is it achievable and what is required to make it happen?
GN: It may seem over ambitious but with the enabling regulatory environment and growing use of technologically advanced alternate delivery channels, I am confident that 10 million borrowers by 2020 is an achievable target. A lack of funding lines had a stunting effect on the microfinance sector in the past, but with the creation of PMIC we feel that this challenge will be addressed to a great extent.

MLA: How does the process of microcredit work and what are some of the challenges?
GN: In microcredit, people from the same area come together in financial support groups called group lending; individuals borrow working capital for their microenterprises, and because they have little to offer for collateral, the group guarantees those loans. The aim of microcredit is to boost socially and economically vulnerable members of society and give them the means to attain dignity and economic independence. These services help beneficiaries attain a better and more regular source of income, enabling them to save and set aside money for health insurance, home improvements, their children’s education and so on. As they gain independence, they become the agents of their own development. Khushhalibank operates on a sustainable model which has enabled it to flourish while providing financial services to the poor and unbanked in Pakistan. One of the challenges that we face in the banking sector is the fact that the financial penetration is very low. We may have a large banking sector, but it reaches only about 15% of the bankable population, which is a very low figure. If the economy is to grow, it requires the participation of everyone in society, and the banking sector has to play a much larger and deeper role. This is a realisation which has been taken into account by policy makers and the State Bank, and with that in mind, the focus changed 16 years ago, when it was visualised that the banking sector must reach out to the unbanked people. There is a very large proportion of our economy that still remains outside of the formal system. Those people are contributing, but we need to start recognising the need for them to be given access to financial services. Financial inclusion is required in order to have a stable economy and a stable banking system.

MLA: Is microfinancing a viable way to reduce poverty, and does it take into account that there are political, feudal and structural problems in Pakistan that need to be overcome?
GN: It depends on how you define poverty. In my opinion, poverty is a multidimensional concept and impacts all aspects of life, be it health, education, employability and socio-economic mobility, among many other factors. Pakistan’s microfinance industry has evolved a great deal over the last decade. Specialised products, including various forms of insurance products, education loans, solar energy loans, etc, are now being developed, piloted and rolled out at the commercial level to ensure that we are catering to the wide spectrum of our clients’ needs. I would not say that microfinance offers a panacea to the issue of poverty, but exciting things are happening in the sector and slowly but surely we are working towards improving the life standards of our clients.

MLA: What are some of the risks of operating in the microfinance segment?
GN: The danger of client over-indebtedness is an ever looming risk in microfinance, but with the introduction of MF-CIB [Microfinance Credit Information Bureau], this has been mitigated to a great extent. Also, considering that a great chunk of our members’ loan portfolio consists of agricultural loans, artificially repressed prices of agricultural commodities tend to have a debilitating effect on the players working in rural areas.

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