As of CY18, the microfinance sector had shown substantial growth in uptake of small credit, insurance and savings (read “Microfinance: growing in numbers,” published March 8, 2019). A recent study, conducted on behalf of the Pakistan Microfinance Network (the sector aggregator) and funded by donors, suggests that microfinance coverage will continue to grow in double digits until 2025. The study assessed Pakistan’s “Microfinance Index of Market Outreach and Saturation” – MIMOSA, which is a framework to assess micro-credit’s saturation and over-indebtedness in different markets. As per the study, there are 9.1 million unique microfinance borrowers in a country of 138 million adults. This penetration of 6.6 percent gives Pakistan a saturation score of ‘2’ – or “moderately under-served”.
The study forecast a double-digit growth in microfinance customers for the next seven years, making Pakistan a “moderately saturated” microfinance market by 2025. By that time, there are expected to be 25 million borrowers, equaling a penetration rate of 15.8 percent. The report discusses both the positive and not so positive aspects of this particular market in reaching that mark.
On the positive side, the report suggests that Pakistan can level up its microfinance lending without experiencing significant sustainability concerns. It credits a strong regulatory framework that prioritizes consumer protection by demanding transparency and discouraging over-indebtedness.
Meanwhile, microfinance players also have a mature profile. They have long years of experience; some of the microfinance banks have credit ratings; while a few institutions have globally-certified client protection practices. Still, two major risks to sustainable growth are identified in the report.
Firstly, even though majority of customers seem to be aware of credit bureaus that can track their loan histories, there is still room for improvements in the credit reporting system. The key is to avoid the hazards of “multiple borrowings” – multiple loans can plague the financial system if left unchecked.
If customers feel that they can always get another loan to repay an existing loan in a bad financial situation, they have a higher likelihood of getting over-indebted. The report highlights this systemic risk when it points towards a lack of a proper coordination between commercial banks and microfinance banks on credit checks.
As per the study, the issue can be resolved if all financial institutions – commercial banks and microfinance banks and institutions – became members of all the credit bureaus that exist in the market. Better yet, follow a centralized credit reporting system. A centralized system can also make credit bureau data available to internal and external stakeholders so that market insights are timely generated.
And secondly, while the number of unique microfinance customers could triple by 2025, the growth will be uneven, the report warns. Specifically, some regions will experience more uptake than the others, in line with current growth trends. In that regard, only the sector regulator, the SBP, has the regulatory capability to responsibly guide more of the future growth towards highly-underserved areas.
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