The microfinance sector in Pakistan has made significant progress in the last few years. The sector has grown rapidly, it has changed its orientation to one which is moving towards sustainability and it is operating within a policy and regulatory environment which is supportive.
While microfinance is advocated as a strategy for poverty alleviation, the lending methodologies and client screening systems exclude the poor from many programs. Some MFIs suffer from pangs of consciousness about charging high interest rates to poor clients and prefer not to charge any interest rate (for example Akhuwat) or keep their interest rates at levels lower than those required for sustainability. There are very few programs, which have developed a strategy for the ultra-poor or one of cross subsidization of poor clients. Thus there is great ambivalence in the sector about interest rate policy and targeting strategy.
Pakistan is estimated to have a population of around 220.70 million, which is 2.83% of world population, with an annual growth rate of 2.00%. The country’s economy has grown at an average rate of over 3.29% in 2019. The annual inflation rate in Pakistan eased to 10.7 percent in March of 2020 from 12 percent in the previous month, reaching its lowest level since July of last year. The national poverty ratio, which was 31.3% in June 2018, would sharply jump to over 40% by June 2020. In absolute terms, people living in poverty will increase from 69 million in June 2018 to 87 million by June 2020, indicating 26% increase in poverty or an addition of 18 million people.
The poor of Pakistan have generally relied on informal sources for meeting most of their credit requirements. Informal providers serve a predominantly lower income group who are perceived by the financial institutions as “un-bankable” due to their inability to comply with conventional loan collateral requirements. The informal credit market is served by a wide variety of providers including predominantly family and friends, landlords, money lenders, traders, or commission agents. Large landlords usually provide credit to their tenants or sharecroppers for the purchase of agriculture inputs and consumption purposes. This is most common in Sindh and Southern Punjab.
Commission agents favor interlinked transactions providing, for example, inputs to farmers and undertaking to sell their produce. It is difficult to properly assess the actual price of credit in these interlinked transactions. Suppliers’ credit is common in established markets such as textile, and informal finance is common in the transport sector as well as in the shoemaking, dairy and livestock industries. It is estimated that 65% of outstanding debt of all rural households was provided by non-institutional or informal sources. A Financial Markets Survey found that 82 percent of individuals borrowed 69 percent of the total amount of funds at very low or no interest payments with flexible repayment schedules from friends and relatives.
Distinct advantages are offered by informal credit, as it imposes no restriction on the purpose of its use, can be provided in small amounts, is characterized by low transaction costs, high interest rates by commission agents but no interest rate when provided by friends and family and rapid disbursement of credit. Although, its share in total credit has declined, it still remains a major source of credit in rural areas. The close familiarity of borrowers with informal lenders, inability of formal institutions to reach the poor explain why there is a heavy dependency of the rural population especially farmers on the informal market. Most informal lenders have, however, limited loan portfolios and operate within a narrow area of their influence.
There is widespread use of Rotating Savings and Credit Associations at all levels in Pakistan. These are called Committees and are especially popular among women from all socio-economic backgrounds to establish private savings committees which people trust. The members of a Committee know each other well and deposit a fixed amount in a pool which is then distributed by rotation to each member on a monthly basis. This helps to meet the savings need in an informal manner in a system which enjoys a high degree of trust. The funds are generally used for a large financial outlay such as a marriage, house building, consumer durables, education, etc.
The provision of Micro FinanceServices was initiated on a small scale by several NGOs running development programs when they realized that credit was an essential input for enhancing productivity and incomes. The Aga Khan Rural Support Programs (AKRSP) in the Northern Areas and the Orangi Pilot Program in urban Karachi were among the first to initiate a microfinance program. When AKRSP first started its operations, loans were not part of its portfolio. At this stage, savings was the only component of the AKRSP model due to its basic premise that social capital, human capital development and capital formation constituted key elements for rural development. Its strategy for capital formation was to insist that its members save during their weekly Village Organization meetings. The savings program generated considerable interest among both men and women and, in fact, provided the main motivation for the first women’s organizations established in the Northern Areas. AKRSP’s savings program provided the first opportunity to small savers to save with the formal sector through its intermediation with the banks. The savings were deposited with commercial banks as the NGO was not allowed to take deposits.
When AKRSP first initiated its operations in 1982, it had not systematically planned a credit program for its clients. AKRSP entered the credit market when it realized that its clients needed loans for investment purposes and that the loans available from the formal sector could not be easily tapped due to cumbersome disbursement procedures and high transactions costs. AKRSP’s credit chronology illustrates its dynamic nature and the inexperience of its financial managers. AKRSP experimented with short and long-term loan products and individual and group loans as well as developing a village banking model. In later years, AKRSP developed a package of Village Banking which allowed the VOs and WOs to assume much of the responsibility for micro-level banking operations and laid the cornerstone for the financial autonomy, which the VOs and WOs later wrested for themselves and initiated a program of internal lending under, which the members on lent their members money from their own savings on terms and conditions determined by them.
Finally AKRSP separated microfinance from its operations and transferred all its resources and staff to the First Micro Finance Bank and completely divested itself of Micro Finance Operations. However, some of its stronger VOs and WOs continue the village banking operations on their own even today.
The Orangi Pilot Program which had used the improvement of sanitation in one of the urban slums in Karachi initiated a credit program when it realized a critical need for financial services. However, OPP did not have a model either and under the guidance of Dr. Akhtar Hameed Khan experimented with several different approaches. These program continued to grow gradually and spawn other rural development initiatives across the country such as the National Rural Support Program in Islamabad, the Punjab Rural Support Program in Lahore and the Sarhad Rural Support Program in Peshawar. These were all patterned on the line of AKRSP. These programs were not designed to run as sustainable programs and were managed by social organizers with no experience of managing such programs. In fact in the early years there was no estimation of how much it cost to actually deliver these credit services and the interest rates were fixed on an ad hoc basis to reflect what the program managers felt the poor could afford to pay.
The year 1996 is viewed as a turning point in the history of the microfinance sector in Pakistan. This was the year that Kashf Foundation was initiated as the first specialized microfinance organization in the country with a grant from Grameen Foundation. Kashf’s approach is based on targeting women from low-income communities. The women are asked to form into centers comprising of core groups of five, who then take responsibility for each other’s repayments. The entire center ensures both the timely repayment of loans and provides a key resource for managing businesses and sharing information. The strategy also relies on setting up decentralized operations through a network of local branches, which are staffed by women from the local area. This ensures confidence building, trust and the ability to cater to women’s economic needs on an on-going basis. DAMEN (Development Action for Mobilization and Emancipation) has in many based on the Kashf model of group-lending.
Some of the NGOs decided to collaborate and form an association of Microfinance providers in Pakistan in 1998, called the Micro Finance Group-Pakistan, which later evolved into a formal organization in 2001 in the form of the Pakistan Microfinance Network (PMN). The establishment of PMN spurred a focus on transparency, performance reporting, capacity building and tracking progress in the microfinance sector.
Despite the wide variety of microfinance providers in Pakistan, the lending methodology is surprisingly uniform. About 92% of the borrowers and 89% of the funds have been provided through the group lending methodology. The group lending methodology uses both the community group and the solidarity group approach. While the RSPs use the broad based village, community or women’s 20 organization as the group through which they provide financial services, the MFIs generally use the solidarity group lending model. Kashf Foundation, in particular, follows the Grameen approach of solidarity group lending. The difference between the community approach and the solidarity group approach mainly is that the community approach focuses on reducing the transaction costs of loan screening, disbursement and repayment whereas the solidarity group approach is more focused on using the group for guarantee purposes and ensuring that the social collateral become operative. While the community organization also exerts peer pressure for the return of the loan the collateral aspects of the community group are not always as well defined as the solidarity group model.
Despite the economic conditions, microfinance flourish in 2018. Data for the year ended December 31, 2018 by the microfinance sector’s representative body, the Pakistan Microfinance Network (PMN), show a continuation of healthy year-on-year growth in all three key areas – credit, savings and insurance.
PMN’s year-end data is an aggregation of 42 Micro Finance Providers (MFPs). As per the PMN, these MFPs are a sum of 12 Microfinance banks (MFBs), 16 Microfinance institutions providing specialized microfinance services, 4 rural support programs that are running microfinance operations as well, and 10 social sector organizations that provide microfinance as part of a multi-dimensional service offering.
As for savings, a tremendous growth was recorded as MFBs offered competitive savings rate to the general public. An addition of 4.3 million new savers were added i.e. 14% year-on-year to 35.3 million. Savings portfolio attracted Rs53 billion more in deposits i.e. 28% growth on year-on-year basis. By December 2018 the total saving was Rs240 billion.
On the borrowing front, in 2018, the gross loan portfolio grew by 36 percent year-on-year to Rs. 275 billion. There was an increase of Rs72 billion active borrowers (i.e. 20% year-on-year) i.e. addition of 1.1 million users. At 6.9 million users, about a third of the potential market for microfinance is reported as covered. The average loan size grew from 48,695 in 2017 to Rs. 55,173 in 2018. The gross loan portfolio grew by 36%, which comes to Rs. 275 billion, an increase of Rs.72 billion. This aggressive deposit generation helps MFBs finance their credit operations without relying too much on borrowings from commercial banks.
The potential market size is said to be of 20 million borrowers. By the end of 2018 end, the MFPs expanded the microfinance system to 135 districts, with a network of 4,239 branches. As the one-third of potential market is already covered so as to capture the remaining one, the gross loan portfolio would have to be expanded by over Rs. 500 billion, which would require the MFPs to increase their capital in accordance with prudential regulations.With this stride, MFPs would require another 15 years to capture un-served market. (see table)
|Table: Micro Finance Banking Indicators (Rupees in billions)|
|Indicators||FY18||FY19||Annual Growth (Percentage)|
|No. of Borrowers||2,893,994||3,485,757||20.4|
|Gross Loan Portfolio||162.590||207.500||27.6|
|No. of Depositors||22,669,333||34,327,968||51.4|
|Source: Agricultural Credit&Micro Finance Department, SBP.|
The roots of microfinance lie in a social mission of enhancing outreach to alleviate poverty. The new focus of microfinance involves a trade-off between outreach and efficiency. One implication of this changed focus is that microfinance institutions will have to be financially self-sufficient to meet the objective of enhanced outreach. The microfinance sector in Pakistan is also faced with the challenge of enhancing outreach on a sustainable basis. One way to minimize the trade-off is to improve efficiency and productivity through intensive growth strategy of the sector itself.