There seems to be a common perception about deep penetration levels of commercial banking. Its probably just the hundreds of branches people see when zooming around the city. But few know that commercial banks, at least until now, attend to just over 15 out of every 100 people in the economy.
For the past decade, microfinance banks have been slowly providing financial services to the other 85. And in recent months, SBP - apparently under pressure from the World Bank - has been pushing for further development and penetration of microbanks.
Microfinance banks haven been able to escape the stranglehold of the recession. As an industry, micro lending expanded at about 43 percent between 2007 and 2008, but has remained virtually stagnant in the last two years.
Recently, the central bank Governor spoke of the importance of deposit mobilization in microfinance institutions. Until now, a handful of institutions on the microfinance landscape have been credit-led - they lend out money to micro-level entrepreneurs for short-term tenors.
And micro-lending focused banks have already started taking the challenge in stride. "The challenge for us is to be able to offer an interest rate that is higher than what commercial banks offer" said Ghazanfar Azzam, CEO of Kashf Microfinance Bank Limited in a recent interview with BR Research.
For lack of an established reputation, it is difficult for microfinance banks to compete with their traditional counterparts. The market for deposits is very competitive in Pakistan, according to Azzam.
To attract the already banked affluent class, the newly formed industry will have to provide higher returns. Interestingly, lending terms at microfinance institutions are significantly costlier owing primarily to the extensive human capital required to deem creditworthiness for the low-income clientele.
Keeping that in mind, these institutions may be able to attract investors who wouldn mind swapping a bit of the reputational
isk for a healthier return. Typically, lending rates for micro-loans can range from 20-80 percent.
The major hurdle between micro-lending institutions and customers - low-income borrowers and the relatively affluent depositors - is awareness. Very few know enough about microfinance institutions to let them handle their money. That is just where the SBP and respective lenders must strive hard if microfinance is supposed to join the mainstream of financial services anytime soon.
And oh! Just in case anyone is wondering if the recent floods are going to wipe away recoveries in microfinance loans, they are not. Credits extended by microfinance banks are insured under the microfinance credit guarantee facility.
All the more reason to support a nascent micro-lending industry.
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