KARACHI, Aug 20: The concept of microfinancing or making very small loans is gaining currency and in the years to come microfinance may shape up further, performance record of this sector suggests.

In 2002 the number of people who borrowed micro loans from the then operative single microfinance bank namely Khushhali Bank stood around 57,000; in two years to 2004 the number shot up to 178,000.

This happened as the number of microfinance bank branches rose from 39 in 2002 to 75 in 2004. Two microfinance banks — Khushhali Bank and First Microfinance Bank — were operating in 2002. The number of such banks doubled in 2004 as Network Microfinance Bank and Rozgar Microfinance Bank also got the permission to start operations.

The last two banks, however, went into operation only this year, the first one from January and the second one from April.

So, the review on the performance of microfinance banks in the last two years actually covers the operations of Khushhali Bank and First Microfinance Bank. Both banks have country-wide operations unlike Network Microfinance Bank and Rozgar Microfinance Bank that operate in Karachi only.

Statistics obtained from the State Bank show that in 2003 more than 38,000 new borrowers accessed microfinancing facilities and in 2004 the number of fresh borrowers more than doubled to 82,000 plus. The number of people maintaining deposits with microfinance banks shot up from more than 2,770 in 2002 to 10,150 in 2003 and to about 18,600 in 2004.

This means that in 2003 more than 7,370 new depositors put their savings in microfinance banks and in 2004 these banks attracted over 8,400 fresh depositors.

The average size of micro loans that stood at Rs6,200 plus rose to about Rs7,970 in 2003 and then to Rs7,340 in 2004. The average size of deposits grew from Rs23,230 in 2002 to Rs38,625 in 2003 but then fell to about Rs25,230 in 2004.

Behind these cold statistics, there are lively stories of how micro loans transformed small businesses giving a ray of hope for better living to thousands of poor people. The Khushhali Bank has one such story to tell.

Liaqat Ali, 26, had been working as a helper in a bicycle repair shop since his teens and helping his family make both ends meet.

A resident of Sarhad, a tiny town of 1,500 households near Ghotki district of Sindh, Liaqat worked 10-12 hours a day. His ambition was to gain enough experience to set up his own shop. Finally, with skill and experience under his belt, he decided to take the initiative. His savings and borrowings from family members gave him Rs20,000 to make a start.

Liaqat rented a shop for Rs500 per month and bought an air-filling tank, a table, two chairs and other necessary tools and equipment for the bicycle repair shop. The business took some time to establish and after some time he was making a net income of Rs2,500 a month.

Then Liaqat married — and realizing his growing financial needs, he sought a loan from Khushhali Bank to expand his business. The bank provided him a collateral free loan of Rs10,000 repayable in 12 equal instalments.

The loan enabled Liaqat to purchase fifty bicycle tyres and tubes and other necessary tools, equipment and bicycle accessories. With this, his business grew to an extent that he had to hire a helper. Now with an average monthly income of Rs7,000 a month, Liaqat is not just paying monthly instalment of Rs926 to the bank; he is also making some savings.

The two smaller microfinance banks that started Karachi-bound operations earlier this year are also making their presence felt.

The CEO of Rozgar Microfinance Bank Badaruddin Khan says his bank is providing micro loans of Rs5,000 to Rs25,000 to a vast variety of borrowers through five services centres. He says his bank has still not started deposit taking but is hopeful to get the State Bank permission for this purpose very soon. Lending has, however, started and he says that the bank has so far made 600-700 micro loans.

Under the SBP rules, micro loans cannot exceed Rs100,000 per party. Executives of microfinance bank says this cap on micro loans does not impede growth of microfinance market because the most demanded micro loans are those that fall between Rs20,000 and Rs25,000. Microfinance banks are offering loans to a vast variety of borrowers including those running or planning to set up small shops; push-cart holders; road-side vendors; very small farmers and cattle raisers etc. The rate of interest charged on micro loans is, however, in double digits and looks set to rise further, instead of falling, in the backdrop of an overall interest rate tightening by the SBP to check inflation.

Even in the success story of a bicycle repair shop owner whose fortunes multiplied after seeking a micro loan, the rate of interest charged on the loan was more than 11 per cent per annum.