ISLAMABAD, Sept 8: The microfinance sector in Pakistan grew ten-fold to 600,000 clients over the last six years, but further growth will be impeded if lending rates continue to remain low, notes a latest United States Agency for International Development (USAID) funded report.

The report titled “Microfinance Performance in Pakistan 1999-2005: Growth -- But a Structural Flaw Persists” released on Friday observes that the microfinance industry is capable of providing financial services to the poor, who traditionally lacked access to commercial banking services.

Various public and private organisations, such as the Pakistan Poverty Alleviation Fund, Khushhali Bank and a range of other microfinance banks and NGOs have invested at least $400 million for providing micro credit services.

This investment has led to remarkable progress, as the microfinance sector has grown from 60,000 active borrowers in 1999 to more than 600,000 in 2005, the report notes.

The study applauds the incredible progress that has been made in country's microfinance sector in terms of rapid expansion, solid repayment rates of loans and low delivery costs.

However, it asserts that microfinance providers need to charge interest rates that meet their costs in order to make microfinance services fully sustainable. “The interest rates, service charges and other fees charged to borrowers are too low for growth to continue” in the microfinance sector.

It says that delivering microfinance loans remains a high cost activity because services are often delivered to the doorsteps of more difficult-to-service poor clients and remote areas. As a result, the interest rates charged on microfinance loans need to be higher than for typical loans from commercial banks, it stressed.

The study, conducted through USAID-funded project, Widening Harmonized Access to Microfinance (WHAM), is being implemented by ShoreBank International Ltd. The report is a joint effort of the ShoreBank and Pakistan Microfinance Network.

According to the report's statistics, most of the Pakistani microfinance lending organizations had a strong track record of recovering their loans.

It also pointed out that the microfinance services had so far reached only six per cent potential clients and 94 per cent of the potential clients still remained without access to the microfinance services.—APP