Despite the fact that microfinancing emerged and flourished basically in South East Asia and African countries as an effective tool by microfinance bank for economic empowerment of disadvantaged segments of the population, poverty concentrates in this part of the globe where almost 4 billion people are living below the poverty line. The reason is that the investment needed in this particular financial sector falls far short of what is needed.
According to data released by Consultative Group to Assist the Poorest (CGAP) total global investment in the Microfinance sector has just reached $30 billion by the end of 2007, whereas now the market size of microfinance has reached $207,349 million in 2022 and is likely to reach $447,764 million by 2028 while funding needed for unbanked poor is not less than $300 billion.
In recent years the majority of Micro Finance Institutions (MFIs) have been transformed into regulated Micro Finance Banks (MFBs) and cooperative banks, which pursue the social objective of empowering the poor economically and at the same time achieving investment viability, but due to much higher administration and operation cost involved for enhancing accessibility of their services to poor and compulsion of providing poor friendly saving and credit products to them prevent investments to come forward because of lack of sustainability with regard to the financial performance of these entities as normally financial performance of MFBs and MFIs go far below market financial returns in the face of commercial funding obtained with the condition of risk-adjusted returns.
However, there is a silver lining for this sector. Dr. Muhammed Yunus – founder of Grameen Bank of Bangladesh and a Noble Prize winner sees during his tenure as founding president has coined a new term ‘Social Business Entrepreneurs’. According to him “they are not interested in profit maximizing. They are totally committed to making a difference in the world. They want to give a better chance in life to other people.” No doubt this class of entrepreneurs/investors have a due concern for the sustainability of their projects for providing employment, credit and low-cost products to disadvantaged segments of the population, but never for accelerating their profits at the cost of economic discomfort to the masses. Accordingly, micro financing sector particularly in developing countries needs social business-oriented investments.
In Pakistan, MFIs and MFBs operating for the last two and a half decades have so far covered only 15 percent of the poor. MFIs and MFBs normally get funding from international and external sources.
Depositors from the private sector both individuals and corporate bodies, and government agencies are providers of funds within the country, whereas foreign donor agencies have been major external contributors.
The success of Grameen Bank of Bangladesh, which is a pioneering microfinance institution depends on sizable funding assistance received from economically rich countries and in the course of time they have developed a deposit and capital base from indigenous sources and also ploughed back their earnings to the extent that bank has not only attained sustained growth rate but also stakeholders of the bank are performing the role of the social business entrepreneur by providing seed money to various MFIs to start with in quite a number of countries of South East Asia including Pakistan.
The philosophy of social business entrepreneurs has gradually penetrated so deeply in Bangladesh business circles that in 2007 Grameen Bank raised funds of about 300 million Taka worth by floating Mutual funds. The mutual fund certificates offered were heavily oversubscribed despite the fact that bank caters to the financial needs of have-nots who are a more vulnerable segment of society.
In Pakistan microfinance sector is comprised of seven 12 full-fledged microfinance banks and about a dozen MFIs having satisfactory track records. Their capital base and deposits mobilized by them cannot meet the credit needs of the untapped 40 million workable population who are living below the poverty line. As such there is a need to set up more MFBs and to expand the outreach of existing entities by building up their funds base.
In the past State Bank of Pakistan had allowed MFBs and MFIs to raise foreign currency-denominated loans from international funding agencies to furbish their fund base. In this regard apart from international donor agencies multinationals and oversea Pakistanis must be offered incentives to invest in the microfinance sector.
More microfinance banks
It is the social responsibility of all the big commercial banks operating in the country to set up microfinance banks as their subsidiaries instead of opening separate credit windows for micro businesses. Some of the big commercial banks have recently merged leading microfinance banks with their operations as their subsidiaries. Separate windows for micro-credit set up by conventional banks have hardly achieved the set objective as maximisation of profitability is the main concern of the bank. As such small/micro loans involving high operational cost and high risk get secondary importance.
Microfinance banks operating as subsidiaries will have total transparency regarding their operations and people will have an identified institution to deal with for their banking needs. These banks will be able to show sustainable growth because of their having development funds side by side commercial funds to be used for providing commercial banking services to the clients with corresponding return targets.
Based on their blended social/financial objectives, below–market financial returns on development funding received and risk-adjusted returns for the commercial funds sought from the market for providing commercial banking business permissible under Micro Finance Banking Ordinance will be a viable business proposal for these institutions.
Apart from commercial banks, as stated above multinationals and other corporate bodies like insurance companies and family offices of ultra-high net worth and socially responsible individuals also need to take the initiative for investment in microfinance and SME sector as part of their social responsibility for arresting growing poverty and improving the socio-economic status of all disadvantaged segments of country’s workforce.
The recent Covid pandemic has adversely impacted loan portfolios of microfinance banks as well as individual borrowers and low-income communities. Despite the digitization of operations of microfinance banks which no doubt has helped in increasing the number of clients, repayment rates have dwindled considerably resulting in enhancing the volume of stuck-up loans. As such apart from
business-specific loans microfinance banks/institutions need to launch vigour sly their operations in social products for the uplift of the economically disadvantaged population thus affected.
Almost all the MFBs operating in the country have launched products like housing improvement loans, cost-free insurance as cover against agriculture loans and life insurance against accidental death at a nominal cost, education loan and also health care facilities for inmates of less developed remote areas. This necessitates an immediate expansion of their equity and fund base.
Existing microfinance banks for expanding their outreach can enhance their funds base by seeking credit lines from commercial banks, raising capital by issuing right shares and Sukuk, etc and also by floating Shariah-based Term Finance Certificates (TFCs), which can be taken up by socially oriented business houses and philanthropists, etc who earnestly want to do good for masses.
In Pakistan microfinance institutions and banks have yet to make a debut in the equity market. Micro-finance banks promise attractive opportunities and at the same time high risk factors to the investors. Attractive opportunities attribute to a loyal client base and thus lower acquisition cost and most importantly comparatively high markup rate, which compensates for high operational cost.
High repayment rate due to strong portfolio quality and high liquidity because of the short tenor of loans as a major share of the loans go to such micro businesses. Where high-risk opportunities come from the fact that the micro-financing equity market is lacking in the secondary market or alternate exit options and conflict of interest of various investors of the organisation when some of them may insist on high returns on their investments.
To conclude one can say that now social welfare is pervading business outlook both in developed and developing countries.