The financial industry has experienced tremendous growth over the past few decades. On one hand, complex financial products are to be blamed for the recent global economic disorder; but on the other, simple financial products to enable socio-economic development and poverty reduction have been found missing.
If there is any 'specialised branch of finance' that has the potential to improve the industry's image in these turbulent economic times, it is microfinance.
Evidence from various microfinance projects and programmes around the world are sufficient proofs that access to financial services not only facilitates poor people in increasing their earning, but also helps to establish small businesses, promote education and improve health.
A study conducted by the Kashf Foundation to assess the impact of microfinance on clients who have been with the Foundation for more than 4 years documented an increase in saving of two-third of its clients over the past one year, while 34 percent of their clients reported an improvement in economic situation during the same period.
The existence of microfinance is not very old in Pakistan. Various support programmes and pilot projects came into foray between the 1960s and 1980s. But, in essence, microfinance gained realisation in 1996, when the Aga Khan Rural Support Programme separated its microfinance operation into separate units.
The same year, the state-owned National Rural Support Programme launched the Urban Poverty Alleviation Programme while the country's first specialised NGO, Kashf Foundation, made its debut. Further progress was made after the formation of Pakistan Microfinance Network and formulation of Microfinance Ordinance in 2001.
With nearly one third of the population living below poverty line and more than 75 percent of the adult population deprived of basic banking facilities, the microfinance sector has witnessed tremendous growth in the space of few years.
At present, there are 29 microfinance service providers including eight microfinance banks. Of the 21 non-bank microfinance service providers, four cater to the rural support programme, nine are specialised entities, and eight represent social development organisations that have microfinance products in their service portfolio.
These organisations have launched a slew of microfinance products spanning four major areas, credit, savings, insurance and money transfer services. First Microfinance Bank, Khushali Bank and Kashf Foundation are considered as the major contributors to the development of microfinance product basket in Pakistan.
The growing microfinance industry reached a major milestone last year when Tameer Microfinance Bank launched 'easypaisa' that provides banking services outside bank branches. It was hailed as a watershed moment in the development story of the microfinance industry in Pakistan. It is hoped that the availability of a branchless banking network would pave way for the expansion of banking facilities to un-served, rural areas at low cost.
At present, the National Rural Support Programme holds a dominant position in all three key microfinance segments, capturing 22 percent, 51 percent and 46 percent market share in the micro-credit, micro-saving and micro insurance segment, respectively. The second slot has been taken by Khushali Bank in the micro-credit market, Kashf in micro-insurance and Punjab Rural Support Programme in micro-saving, according to the last available data released by Pakistan Microfinance Network.
On the growth front, of all three major segments, micro-insurance segment saw the highest growth in the past few years. This is evident from the fact that the industry was serving 3.2 million active insurance policies by September 2010, up from just 0.3 million at the start of 2007. At the same time, the size of the micro-insurance portfolio (sum insured) reached Rs44 billion from Rs5 billion.
Similarly, saving products have also gained attraction over the course of years; active savers more-than-doubled to 2.9 million and the size of saving portfolio nearly quadrupled to Rs9.7 billion at the end of September compared to the first quarter of CY07.
The high appetite for loans supported the demand for micro credit products, which are the most-loved product in developing countries, helping micro-lenders to expand outreach to 2 million borrowers from 1.1 million borrowers in the start of 2007.
Microfinance has come a long way in the last few years, but compared to the size of economy, its penetration is still very low.
This can be gauged from the fact that microfinance institutions have just around 20 deposit accounts per thousand adults compared to 229 accounts per thousand adults with commercial banks, according to the Financial Access Report 2010.
The main culprit behind low penetration is poor outreach. In Pakistan, there are 1.92 microfinance branches per thousand km compared to 20 branches per thousand km in Bangladesh.
Realising the fact that there is a large portion of population that is un-served - with some estimates suggest more than 27 million potential clients - microfinance in Pakistan has to go a long way, implying the need for more specialised banks to enter into this market.
ROLE OF SBP & CHALLENGES AHEAD
Positive developments in the microfinance sector, to some extent, have been attributed to a supportive regulatory environment as evident from the microfinance business ranking, released recently by the Economic Intelligence Unit.
Out of 54 countries, Pakistan got the 5th place in the microfinance business environment ranking, ascribed mainly to better regulatory framework, in which Pakistan, along with Cambodia and Philippines, was ranked first. Apart from aforesaid, Pakistan was also ranked 20th in investment climate and 12th in institutional development.
Lately, the State Bank of Pakistan has taken some constructive steps in the form of relaxation in certain conditions and lifted regulation that previously prevented microfinance banks from accepting foreign currency loans from international lenders.
Despite market potential, there are some challenges that have been making investors reluctant to setup microfinance institutions. The biggest impediment is high operating cost, as microfinance service providers offer small loans and deposit facilities, which makes it a very labour intensive industry. According to the last released data by Microfinance Information Exchange - a Washington-based NGO - the average cost per borrower per GNI per capita was 4.7 percent in Pakistan in 2008 compared to average 2.9 percent in Asia.
Another major challenge is the low saving rate among Pakistan's lower middle class families. Since individuals with small income are more inclined towards borrowing than saving, microfinance banks have to offer high interest rates on deposits than what commercial banks offer, in order to build volumes. At present, the size of micro saving account is Rs9 billion compared to total micro-credit of Rs26 billion.
Consequently, microfinance banks need to charge a higher lending rate to remain sustainable and profitable, which, in turn, hampers the ability of small micro banks to scale up. Therefore, the profitability of microfinance institutions in Pakistan remains weak. The industry's ROE in Pakistan is negative 23 percent, compared to an average of 11.2 percent in Asia.
But the good part is that local microfinance players have witnessed considerable improvement in the Operational Self Sufficiency (OSS) ratio. The ratio shows the ability of a microfinance institution to cover costs of operations, which includes financial and non-financial expenses with internally generated income. The OSS ration in Pakistan rose to 94 percent in 2009 from 80.8 percent the year before. However, it is still low compared to the average OSS of 109 percent of 1136 microfinance institutions around the world
Amid high operating costs, the advent of branchless banking is good news for the microfinance industry. In a country where around 65 percent of the people live in rural areas with little infrastructure, branchless banking will hopefully bring scale to the microfinance industry.
It is also expected to provide financial services to poor individuals at low cost. A CGAP analysis with the Tameer Microfinance Bank discovered that the capital and operating costs for a branchless agent are 76 times less than its microfinance branch in the first year, and 89 times cheaper over a span of five years.
In some developing countries, banks have already started providing microfinance services using branchless banking networks. For instance, in Kenya, the Equity Bank, a leading microfinance bank in partnership with Safaricom (a telecom firm), launched M-Kesho earlier this year. The service will give their customers access to mobile micro-savings, micro-insurance and other banking products via mobile phones.
Given the size of Pakistan's economy and a large untapped market, microfinance is the way forward to bring economic prosperity to millions of people. And to achieve that, the government needs to attract more experienced international microfinance players to Pakistan.
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Operational Return on Self-Sufficiency
Return on Asset Equity ratio
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Africa -0.2 2.3 100.5
Asia 1.8 11.2 111.4
ECA 1.1 3 109.8
MENA 3.4 10.2 123.5
Pakistan -5.6 -23 94.1
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Source: Microfinance Information Exchange ECA: Eastern Europe and Central Asia
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The writer can be reached at [email protected]
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