THE microfinance sector in Pakistan is on a rapid growth. The figures quoted by Pakistan Microfinance Report 2016 show that the sector is progressively becoming an industry. It appears to be a healthy sign that microfinance is cogitated to be closely associated with poverty alleviation in the country.
This approach has worked in some regions of the world, but not everywhere. Nevertheless, in countries like Indonesia, Bolivia and Bangladesh, microfinance sectors have developed into big industries, helping their respective governments in their poverty alleviations goals.
In the context of Pakistan, a combination of financial inclusion and a correct social development strategy has mostly been successful.
In the context of Pakistan, a combination of financial inclusion and social development strategy has mostly been successful
But recent changes in the regulatory framework for microfinance institutions (MFIs) have put a part of the sector at a disadvantage. Decades-long financial and capacity-building investment in transforming not-for-profit organisations (NPOs) into MFIs may be negatively affected, defeating the development agenda in favour of commercial interests.
Small and mid-sized MFIs, which have played a pivotal role thus far in the development of the sector, are expected to bear the brunt.
The new non-banking microfinance regulatory framework for MFIs, introduced by the Securities and Exchange Commission of Pakistan (SECP) in 2015-16, makes it mandatory for the organisations working in the sector to acquire the licence of a non-banking microfinance company (NBMFC) to operate in the sector.
Only companies registered with the SECP and having equity worth Rs50 million can apply. This law has an inherent bias in favour of large-scale MFIs at the cost of small and medium enterprises.
The arrangement has also created a dual regulatory environment where microfinance banks (MFBs) and MFIs, despite doing the same business, fall under different legal regimes. The minimum equity requirement excludes many NPOs working in the field for years.
The framework also makes no distinction between NPOs in the field and companies working on pure commercial terms. Thus the sector, which had been mostly dominated by NPOs since its inception in 1982, may have to divorce social agenda.
In Pakistan, the Orangi Pilot Project (OPP) and the Aga Khan Rural Support Programme (AKRSP) were pioneers in the sector, providing small loans to financially excluded segment of society, which had no access to mainstream financial institutions.
The objective of both the organisations was poverty alleviation by providing the poor with micro-credit.
Starting their operations almost simultaneously in 1982, the OPP’s area of operation was Karachi’s urban, low-income area of Orangi while the AKRSP started its operations in the northern areas of Pakistan. Until early 1990s, the sector remained dominated by these two players, keeping the number of active borrowers to a few thousand.
In 1991, another big player, the National Rural Support Programme, entered the fray, and about the same time the OPP decided to expand by training and enabling small organisations throughout Pakistan, creating a network of small-scale NPOs. This helped in increasing the number of active borrowers.
In 1998, the Pakistan Microfinance Network (PMN) was established to represent this growing sector. Till that time, the sector consisted of only NPOs aiming at strengthening communities by enterprise and social development through their micro-credit programmes being complemented by social initiatives. This was how a local model was developed and successfully run by these NPOs.
In 2000, the government took two bold initiatives. First, it set up the Pakistan Poverty Alleviation Fund (PPAF) as an apex organisation with support from the World Bank. The Fund’s agenda included supporting and facilitating organisations working for reduction of poverty.
The PPAF has successfully remained one of the leading sources for pro-poor spending in Pakistan. It has been providing technical, financial and administrative help to its partner NPOs in both financial and non-financial sectors.
This leading role created many a success story where small organisations became large-scale MFIs and reached a wider borrower base.
The face of microfinance sector has been changed for better since. The PPAF retained this leadership role till the beginning of this year when the legal regime was changed for organisations working in microfinance sector.
The second initiative by the government was laying the foundation of Khushali Bank as part of its poverty-reduction strategy and a microfinance sector development programme with the facilitation of the Asian Development Bank.
The State Bank of Pakistan (SBP) regulated the bank. This paved way for others to follow, and many microfinance banks, owned by both NPOs and public sector, started operations in subsequent years. Today, more than 10 MFBs are present in the market with around 50pc market share.
In the last four years, the growth of the sector has been impressive. The number of active borrowers has more than doubled from 2m in 2012 to 4.2m in 2016 and 5.2m at present.
Similarly, the sector’s gross loan portfolio (GLP) has reached Rs132 billion from Rs34bn, and it now employs about 30,000 people.
In preparation of the transition into new regulatory framework, it was decided that the PPAF would provide for the shortfall of equity to the NPOs in field. They supported some of these organisations with subordinated loans to meet the equity requirement, but still many were left out.
On Oct 17, the SECP made a draft change in the regulations, waiving the condition of acquiring licence for the organisations having fewer than 5,000 active borrowers or less than Rs50m gross loan portfolio.
But even with this amendment, projections for affected organisations are anything but bleak.
Firstly, the law guarantees a no-growth for affected organisations, almost all of which are NPOs and mostly working in far-off rural areas. With a cap on their portfolio size, keeping in view the operating costs of small-scale microfinance operations, these organisations will hardly be able to accumulate the amount of equity through their savings, which they will require to get the NBMFC licence and go in expansion.
Secondly, the direct competitor of such organisations is the unregulated sector that caters the same clientele by giving household products on instalments.
While banks and large MFIs can grow at their will, small MFIs are restricted or even dying out because of the new legal regime. Even the PPAF or the newly established Pakistan Microfinance Investment Company Ltd are unable to help owing to regulatory restrictions.
It is of utmost importance to consider the role of these affected NPOs in developing the sector in right direction, ie towards poverty alleviation and social and economic uplifting of the underprivileged.
The writer is CEO of OPD Support Programme, a microfinance institution working since the 1990s
Published in Dawn, The Business and Finance Weekly, December 4th, 2017