Most affluent Pakistanis would be surprised to find out that 80 percent of the countrys population has no access to banking network. Those benefiting from microfinance facilities are also few and far between. However, that dynamic is about to change.
In a healthy development for the growth of microfinance, Pakistan Microfinance Network - the association of microfinance institutions in Pakistan - and the central bank are collaborating with international institutions to develop a credit information bureau for microfinance institutions operating in the country.
After the central bank provided regulations for banks focused on microlending in 2000, seven banks have emerged. Sadly, none is profitable to date, as only 1.83 million Pakistanis have benefited from credit advances from microfinance institutions, according to industry sources.
Credit markets are known to be imperfect; and this is particularly true when the market caters to the poor. When credit lending takes place in an environment of imperfect information; the suboptimal selection of borrowers - a moral hazard in project choice for management - and willful default threatens the micro lender.
At present, microfinance banks are quite labour intensive when compared to commercial banks. Kashf Bank, for instance, has a loan portfolio of around Rs424 million. In a commercial bank, one or two analysts would handle that portfolio; at the microfinance bank a team of 130 credit officers conduct the due diligence.
Thats because decisions to lend or not are made by actually visiting the business premises, observing the dealings, supply chain and assessing the business model of the applicant. Character perceptions play a significant role in the success or turning down of an application.
Just like commercial banks, microfinance banks also have strict delinquency checks, which have enabled them to boast lower delinquencies than their traditional counterparts.
But with information sharing system in place, credit officers can better manage risk by reviewing the credit history of the application. This will help lower the number of delinquencies, giving lenders more confidence to penetrate the market.
A central database will also allow for better credit disbursement. Projects will be assessed on merit and individuals payment history developed over time. Graduation from micro lenders to commercial banks may also be made possible in the long run as proper documentation, the mainstay of lending in traditional outfits, will be hopefully developed over time.
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