Fact 1: conventional banks have about 3.5 million borrowers despite being in the loan-generating business for decades.

Fact 2: the number of active borrowers of microfinance providers, a fairly new kid on the access-to-finance block, has already surpassed the 8m mark.

Now take a closer look at the disaggregated data from the microfinance industry, and it’ll reveal a very specific reason for the recent surge in the number of microfinance borrowers: the unmistakable rise in the users of nano-credit in Pakistan.

Nano-credit refers to the teeny-tiny loans amounting to as low as Rs50 that the poorest of the poor can obtain for days or weeks through their phones. Artificial intelligence determines their creditworthiness and the loan provider disburses the sanctioned amount to the borrower’s account within a couple of minutes without any human involvement.

Nano-credit was just another fancy term that CEOs liked to toss around until recently. But this segment appears to have become materially significant during the last year alone.

For example, Mobilink Microfinance Bank managed to increase its number of active borrowers by almost 250 per cent in just one year. The bank is a subsidiary of multinational VEON and a sister concern of local telecom operator Jazz that has 60m subscribers.

‘Jazz customers should not simply stay on as phone customers — they should be encouraged to turn their phones into bank accounts,’ says Ghazanfar Azzam

Mobilink Microfinance Bank became the largest provider of micro-credit in terms of the number of active borrowers, recently surpassing Khushhali Microfinance Bank, one of the oldest players. By the end of June, the market share of Mobilink Microfinance Bank was 22.1pc as opposed to 7.4pc a year ago.

“We started offering nano-loans of Rs500 a while back. Its uptake was slow initially as we were also learning and improving our algorithms. As of the last quarter, as many as 1.7m people used nano-credit,” said Mobilink Microfinance Bank CEO Ghazanfar Azzam.

For context, the number of its total active borrowers in the April-June quarter was higher than the corresponding figure for the second and third largest microfinance providers combined.

Telenor Microfinance Bank, another player with a telecom operator as its sister concern, is also actively engaged in the nano segment, although its number of borrowers is lower than that of Mobilink Microfinance Bank.

“The idea was that 60m Jazz customers should not simply stay on as phone customers. They should also be encouraged to turn their phones into bank accounts,” he told Dawn.

As for the interest rate, Mr Azzam insisted that it shouldn’t be seen in annual terms because of its small tenor. So a four-week loan of Rs50 will have a “total fee charged” of Rs12 at a weekly rate of Rs3. This translates into a monthly interest rate of 24pc.

For a loan of Rs4,400 of the same tenor, the total fee will be Rs880 charged at a monthly interest rate of 20pc. The annual percentage rate, a measure often used for loans that are paid back in instalments, comes to 261pc in this case.

Mr Azzam brushed aside the charge of loan sharking, saying a number of reasons compel the industry to issue loans at rates that are still lower than the ones charged on credit cards by commercial banks. Foremost among those reasons is the fact that a basic microloan is “absolutely unsecured,” he said. Sec­ondly, the average ticket size is too small, which makes its processing lengthy and expensive. Most microfinance providers employ a large workforce that takes the total cost of service delivery to 15-18pc of the average loan size.

Then the cost of fund mobilisation for microfinance providers is 8-10pc, which is “significantly higher” than that of their commercial banking counterparts, he says. That’s because microfinance providers operate primarily on a lending model, unlike traditional banks. Hardly 15 of the 100 branches of Mobilink Microfinance Bank “actively mobilise” deposits, he said, as the potential for deposits is low in the rural market.

“That’s why no microfinance bank is making exorbitant profits,” he said.

The net profit of Mobilink Microfinance Bank in 2020 went down 42.4pc year-on-year to Rs530.3m — a drop in profitability that the CEO attributed to the economic impact of Covid-19.

Going forward, Mr Azzam expects a massive jump in digital lending. The bank is now targeting hundreds of thousands of merchants that work with big companies like Daraz, Engro and Nestle for its digital lending products involving zero human interaction.

“These merchants have recurring cash flow problems. They keep waiting for payments after despatching orders, although they must replenish their inventories immediately. We’ll offer them merchant credit or business finance through digital means,” he said.

This means a small merchant will need to only push a button on their phone to arrange running finance to be paid back within weeks or even days. “We’ll make the loan approval and disbursement process as quick as that of a nano-loan,” he said.

Published in Dawn, The Business and Finance Weekly, September 20th, 2021