Capital constraints and security concerns in parts of the country are limiting the outreach of microfinance providers to the poor and impeding their geographic spread.
Managerial and staff weaknesses of microfinance providers and worsening economic conditions are other major factors hampering efforts to bring finance to the millions of urban and rural poor and micro enterprises without access to thecountry’s financial sector. The microfinance institutions — microfinance banks, non-profit organisations, rural support programmes and others — had attained a penetration rate of just 7.5 per cent in the potential microfinance market of over 27mn (economically active) poor (having repayment capacity) in spite of posting a robust growth of 13 per cent in credit and 40 per cent savings outreach, according to the finance ministry’s latest review of anti-poverty expenditure for the first half of the last financial year to December 2010.
While the number of active borrowers rose to over 2mn in 2010 from 1.8mn in 2009 and of savers to 3.3mn from 2.3mn, the gross loan portfolio swelled to Rs25.5bn from Rs21.7bn and savings to Rs11.9bn from Rs8.5bn.
“The increase in the gross loan portfolio size shows a remarkable growth (from Rs2.5bn in 2004) over the years, but the small number of active borrowers and savers remain a matter concern and the biggest challenge for the microfinance providers, the government and the central bank,” says an executive of the State Bank of Pakistan (SBP) on the condition of anonymity as he lists a number of initiatives the bank has taken in the last 10 years or so to encourage expansion of microfinance industry in Pakistan.
“It means that millions of people who need access to (micro) finance still remain outside of the formal sector and dependent upon informal lenders.”
The limited number of micro credit borrowers and savers is not the only challenge for the microfinance providers or the government and the central bank. The skewed geographic spread of microfinance providers, who are mainly concentrated in Punjab and Sindh, has led to a virtual ‘exclusion’ of the poor from Balochistan and Khyber-Pakhtunkhwa from their network.
In Balochistan’s potential market of 1.86mn people less than 20,000 had access to micro loans. The number of borrowers in Khyber-Pakhtunkhwa stood at just below 90000 borrowers out of a target market of 4mn. This compares with 1.4mn borrowers from Punjab and 469,000 from Sindh.
Even in Punjab and Sindh, the microfinance providers barring rural support programmes are expanding in urban areas because of better infrastructure, availability of human resource, etc. Little wonder then that urban lending expanded in 2010 to 48 per cent from 45 per cent a year earlier, according to MicroWatch, a quarterly update on microfinance outreach in Pakistan.
Roshaneh Zafar of Kashf, the internationally recognized and award-winning microfinance institution, lists fund shortages, social and security turmoil in different parts of the country, lack of managerial capacity and sliding economy as major reasons constraining the outreach of the microfinance providers.
“If the capital constraints are restricting the ability of the microfinance institutions to reach out to the target populations, the political and social unrest and security concerns, particularly in Khyber-Pakhtunkhwa and Balochistan, are the major barriers to their expansion in different areas,” she says.
“The efforts of the microfinance institutions to increase their outreach — both in terms of number of borrowers and savers as well as geographic spread — are also impeded by shortage of trained staff and lack management capacity,” she says.
Yasir Arafat, a senior official at the Pakistan Poverty Alleviation Fund, which provides for 45 per cent of the total funding needs of existing non-profit organisations, agrees with Roshaneh.
“The economic slowdown and rising prices have not only raised fears of default (by microfinance borrowers), it is also keeping commercial banks from lending to the microfinance institutions as the government’s deficit borrowings have sucked liquidity from the market. Donor money has also been delayed (affecting the capacity of microfinance providers to lend to a larger body of borrowers),” he says.
He says the constraints facing the microfinance institutions raise the cost of their delivery Roshaneh says the poor economic conditions have spurred the demand for consumption loans rather than for enterprise loans that help income and job generation.
“It is not prudent or responsible to give loans for consumption. We cannot throw money away. Microfinance should be used for income and job generation,” she says, implying that the decrease in demand from small and micro enterprises is also affecting rate growth in the microfinance market.
Akhuwat’s Dr Amjad Saqib says banks and new institutions should be encouraged to venture into microfinance market in order to expand the outreach to remoter areas to tap the target market.
He agrees that burdened by rising price inflation the poor are more interested in loans for consumption rather than enterprises, but does not see any “harm in giving some space to the poor”. “Our own organisation, a non-profit body which provides interest-free micro loans, gives 20 per cent loans for consumption and the rest for small enterprises.
Consumption loans are not a bad thing per se,” he says.
Like many other places, microfinance in Pakistan is also seen as a “vehicle for social change and poverty alleviation”. It is difficult to assess the impact of microfinance credit on poverty in the absence of an independent study, but the microfinance providers claim that it is bringing about a major socio-economic change.
“Our studies on social impact of microfinance show that 35 per cent of microfinance users were able to move out of the poverty as the income of borrower rose 40-50 per cent,” says Roshaneh who contends that the advocacy by microfinance providers has also helped more parents to send their children to school and enhanced women’s decision-making capacity.