Defining Microfinance is not easy as no proper definition of the term exists. Some say it could mean anything from what a villager provides when handing small items to what state banks offer to their least affluent clients. But a general consensus is that it is the provision of financial services (whether loans, deposit accounts, insurance or otherwise) to poor and low-income individuals and households. International financial Institutions have been providing financial assistance countries like Pakistan since long. These funds mainly allocated for poverty reduction used to be provided to the government but after the false claims and release of official statistics, multilaterals are not very inclined towards funding government. The funds are to be used for providing microfinance through private agencies and reputed non- governmental organizations. It would help develop 100,000 new communities to be offered small loans for poverty reduction, health and education.
As microfinance is disbursed to the low income group people therefore it is apt to presume that most of them seldom have any security to offer as collateral. Thus mostly money is advanced on the basis of reputation and are unsecured loans. The matter of concern is that exorbitantly high rate of interest ranging from 20-25% is being charged on these loans However since most of the poor people in Pakistan do not own immovable property therefore it is hard for them to get financing from commercial banks for their micro projects and activities. Here comes the role of the microfinance institutions. This is why microfinance is so important – without it the only source of credit is the rapacious local moneylenders who may charge extortionate rates of interest and beat up clients who do not pay on time. These people typically charge rates of 60-150 % locking them into a punitive cycle of debt.
The Micro Finance sector in Pakistan though late starter, is almost at par with other countries in South and South East Asia. Most of the current players in Pakistan’s microfinance sector are now 10-15 years old. They have established themselves as credible institutions and are in equilibrium on key benchmarks.
Sector experts believe that microfinance sector of Pakistan is ahead in certain aspects from other institutions in the region. Despite this, there are certain issues which need attention for example sustainability and efficiency. Many believe that the biggest issue microfinance sector in Pakistan is facing is the financial sustainability. Recent studies show that the growth in this sector in the country is highly dependent on the subsidized funds to cover the operating and maintenance costs of the institution. In order to survive and have a reasonable growth it is vital for the sector to ensure that they build low cost structures, bring more products and consider re-pricing their products and services so as to enhance their financial revenues and become self-sufficient. It is said that there are institutions in microfinance sector in Pakistan, which are not self-sufficient and have to heavily rely on the donations and cheap financing which is indeed most disturbing feature. There are no two opinions that poor requires regular rather reliable financing but the matter of fact is that most of the microfinance institutions are unable to generate sufficient revenues to cover their cost of operations.
The Covid-19 pandemic threatens the livelihoods of microenterprises, critical sources of income for poor households in low-income communities. It has also created unprecedented challenges for financial institutions that serve them. Pakistan’s microfinance sector serves 7.3 million low-income households that live close to the poverty line. In March 2020, Pakistan’s central bank announced a relief package allowing debt rescheduling for borrowers from the microfinance, small and medium sized enterprise, corporate, retail and agricultural sectors. Under the package, payment was deferred for at least a year given that many borrowers were assumed to have lost 100 percent income. Liquidity is a very big risk for the sector as a whole and many efforts need to be made to address this both on an immediate basis and in the long run. There is a need to build a risk mitigation fund for the sector in order to enable the sector to address future crises.
In addition to this, most of the microfinance institutions are not using their assets effectively and efficiently. There are various reasons attributable to this non-efficiency of assets management but one reason which is regarded as single most concern is that microfinance institutions in Pakistan are considered as charitable institutions and labeled for such activities. This perception further cemented with the fact that these Institutions charge exceptionally high interest rates and regard their credit operations as a significant means to raise revenue. Independent analysts think that due to charity mood discernment micro-financing is hampering the relevant institution’s product pricing, asset allocation and credit risk. There are a number of institutions in the country, which are not charging sustainable interest rates since those have perceived themselves as an instrument for eradicating poverty and consequently running heavily on subsidized programs. Currently microfinance institutions in the country are either regulated or not regulated. This is dependent on the kind of services they are providing and in which category they are registered. This needs to be addressed and regulated uniformly. Moreover, tax structure of different players is different because they are registered differently though doing the same task. It is vital to give them fiscal benefits so that they could utilize their profits in fulfilling their objectives.
Though a lot of work is underway in this sector but a lot more can been done. The number of beneficiaries can be increased manifold in next 10 years as there is a huge margin of growth. To achieve this goal, microfinance institutions need to work more aggressively on the introduction and marketing of new products and services. It is pertinent to mention that these goals couldn’t be achieved without the financial stability and continued development of the banking sector. Over the time, microfinance sector in Pakistan has grown significantly and the time has come to stop further State-support whereas these institutions should now rely on their strengths, minimize their dependence on the subsidies and emerge as a financially sustainable institutions. On government front, they must formulate sector friendly policies and provide such environment which can help microfinance sector to grow.
Although current challenges due to Covid-19 are unparalleled in terms of magnitude and impact, the microfinance sector in Pakistan is resilient enough to cope with it. In order to grow, the microfinance institutions must have to develop as financially sound and stable institutions. For ensuring the unyielding capacity and fulfillment of a concrete role these institutions have to abide by certain regulatory mechanism as well as secure essential monitoring systems. Customer outreach is also narrow and has to be improved by opening street-front offices in all districts of Pakistan. Microfinance institutions should emphasize on infrastructure, capacity building and training.