“Digitization should not direct microfinance towards providing nano and consumption loans”
Yasir Ashfaq is the Chief Executive Officer of Pakistan Microfinance Investment Company (PMIC) since August 2017. With over 25 years of experience, he has significantly contributed to the development of Pakistan’s microfinance sector. Yasir has previously served as Group Head, Financial Services Group with Pakistan Poverty Alleviation Fund (PPAF), dealing with microfinance institutions, building organizational capacities, strengthening their systems, management and governance. His work at PPAF also involved dealing with livelihood improvement, health, education and social mobilization portfolios. Before PPAF, Yasir worked in important positions in commercial and investment banks for over twelve years. He currently serves on different committees of the sector and contributes at policy level.
BR Research recently sat down with the CEO PMIC in Islamabad, to discuss PMIC’s enabling role for the microfinance sector, especially given the challenges during the pandemic. Selected excerpts are provided below:
BR Research: Since the establishment of this apex body four years ago, in what tangible ways has the PMIC impacted the local microfinance sector?
Yasir Ashfaq: For a background, PMIC is an investment finance company, registered with the SECP. It has three shareholders – PPAF (which used to provide wholesale funding before PMIC came into existence), Karandaaz (which was set up by the DFID, now FCDO), and KfW (the German Development Bank). We have a mission to empower the under-served by contributing to financial inclusion and ensuring job creation, income enhancement and improvement in socio-economic conditions of the clients that do not have enough opportunities. Over the last five years, we have been able to build a portfolio of around Rs25 billion, which is double the amount of what we got from PPAF four years ago. Almost 62 percent of the portfolio is in rural areas. We are financing 26 microfinance providers (MFPs) and have impacted the lives of 850,000 clients, 86 percent of whom are women.
In addition to funds provided by our shareholders, we have also been able to attract commercial bank funding of Rs9 billion for microfinance institutions (MFIs) as well as microfinance banks (MFBs). We have closed four transactions of subordinate debt and TFCs for microfinance banks. The investments and guidance we have provided in improving the governance, management and transparency to the MFPs have made them more attractive to commercial banks and international lenders. PMIC now offers a wide range of financial instruments and services, including arranging senior debt, guarantees, credit enhancement facilities, Tier-II debt and advisory services. We also deploy 15 percent of our income towards impact financing in the areas of agriculture, enterprise development, renewable energy, education and graduating clients out of poverty. These initiatives use a blended finance approach where grants and technical assistance are provided along with financing to stimulate innovation, product development, value addition and risk mitigation leading to enhanced productivity. More than 100,000 clients have been impacted through these initiatives.
We have just finalized the first of its kind social impact fund with NIT – this innovative mutual fund will invest in the assets (e.g. commercial paper, TFCs and bonds) of microfinance institutions. That will help in attracting funding from various non-conventional sources and in establishing microfinance as an alternate asset class for investors, with the help of NIT. Every bond that this impact fund would invest in will have focus on social impact and indicators (other than financial indicators) to measure it. We have also established an Institution Development Fund and a Challenge Fund to develop and nurture new institutions and stimulate innovation and product development.
BRR: With some three dozen MFPs in the market, the current coverage of microfinance, about 8 million borrowers, is a fraction of the addressable market. How do we bridge the big gap in this space?
YA: There is a huge potential. One way to look at it is from the supply standpoint. For a population of more than 210 million people, having just 35 to 40 microfinance providers working in the field is a very low number, especially when compared to other countries in the region on a per capita basis. We need a lot more microfinance institutions to serve the market. I believe, development finance institutions have withdrawn from Pakistan’s microfinance sector a little too early, and there is no fund currently available to support new microfinance institutions. We are trying to address that issue through our Institution Development Fund and the Challenge Fund, which have been set up to support new entrants in the market and to ensure a tech and touch approach in lending. Under these funds, we are also focusing on supporting Fintechs that have artificial intelligence-based credit scoring and lending models with a low touch approach.
The last 20 months have made the sector more risk-averse due to the Covid-19 pandemic. The businesses of clients and the portfolios of MFPs have been impacted but both the clients and the MFPs are extremely resilient. We are still not out of the turbulent waters, however, and as the unemployment and poverty levels are on the rise, I firmly believe that we have to provide funding to those in need. To meet this demand, commercial funding would be required – it could be in the form of bonds or senior debts. We are also talking to a number of international development finance institutions, who are in the process of planning funding programs, taking advantage of our platform to fund the microfinance sector.
Then there is a need to segment the market in a better way. For those at the bottom of the poverty level, the ultra poor, a graduation program needs to be followed. Microfinance actually started off to support the poorest of the poor to generate income. But if we start providing subsidizing loans for those who are already in business, instead of those who haven’t started anything yet and who live in regions where cost of doing business is substantially high, then it will burden the taxpayer.
BRR: “Deposits” or “savings” are a rather cheaper funding source for MFPs to expand their credit portfolios. MFBs are able to raise deposits, but not MFIs. Why have we not seen MFIs turning into MFBs to fund their credit operations?
YA: I personally feel that savings are very critical, and deposits in the microfinance sector have increased during the pandemic. Internationally, microfinance clients have withdrawn savings because it was their cushion during an emergency, but in Pakistan it has increased, which is something that needs to be explored. As for the ability to raise deposits, there is a clear regulatory roadmap for any MFI that wants to become a bank. I know a number of large MFIs who do not want to become a microfinance bank. However, if someone wants to raise deposits, they must follow the prudential regulations, and we will be happy to facilitate them in that transition.
Globally, it has been seen that the success of an institution does not depend on whether they are a non-profit institution or a for-profit bank – it depends on the mission, the passion, the objectives and the social impact they want to create. The presence of long-term, strategic and patient shareholders is the key. My experience is that microfinance institutions still follow the classical philosophy of microfinance as it was forty or fifty years back. And with technology and digitalization of their client-acquisition and back-office processes, efficiencies could bring the cost of delivery down, ultimately reducing the pricing to the end clients.
BRR: To what extent did the microfinance borrowers avail the pandemic-era relief in terms of loan payments deferral / loan rescheduling? And when can we expect normal repayment behavior to resume?
YA: All MFPs offered their clients relief through loan deferrals and rescheduling. While some offered a month-on-month relief to clients who demanded or needed deferrals, others declared a blanket 6-12 months’ moratorium. We need to understand that microfinance is not a long-term instrument, and if you give long-term deferments to your clients, it does impact the credit culture and behavior of clients. We have seen that the institutions whose portfolio had more concentration of equal monthly installments, fared much better than those who had longer-term loan products.
After a couple of months early on when the lockdown was imposed, borrowers re-started whatever business they were doing, taking orders on the mobile, making deliveries, etc. Except for schools, the wedding value chain, small restaurants and a few other businesses, most of the sectors came back to activity. The impact came where a household was also dependent on salary income from other members – it was for an initial period, and people came with solutions, and now things are improving.
To a certain extent, the credit behavior of microfinance clients was developed through regular interactions, and if there is a gap in those interactions, then it becomes difficult to manage the credit portfolio. So, during the pandemic, those microfinance providers who gave long-term deferments were affected. Those providers who had more interactions with the client on the ground did better, as they could understand the situation and adjust their operations accordingly.
PMIC deferred Rs10.7 billion portfolio for a year in the April 2020 stage when the pandemic broke out, and we provided hat liquidity to MFIs and end clients. We not only supported the sector but also managed our liquidity in an effective manner. This helped MFIs to extend relief to individual borrowers. Following PMIC, some of the commercial banks also offered deferments to MFPs.
BRR: And currently, how has the pandemic affected the lending appetite of microfinance providers?
YA: Presently, institutions are cautious in terms of lending. What I feel is that it should have been otherwise, they should have provided more funding to clients to help them restart their businesses. Especially for good clients, they should have done that. I think the stabilization phase has become too long, and there is a requirement to accelerate lending.
BRR: Where do you see the microfinance sector in the next three years, especially after the impact of Covid-19?
YA: The answer depends on understanding that over the past two years, both Covid-19 and digitization have impacted microfinance in various ways. And I think that will also define the future of microfinance. The sector is gearing to reach 15 million clients by 2025. This would require the sector to almost triple its portfolio size, and a huge influx of liquidity for both debt and equity would be needed.
Digitization would certainly accelerate the journey, but I believe, it should not direct microfinance towards providing nano and consumption loans, rather it should help in attracting more clients. There is a risk that “digitally excluded would also be financially excluded,” especially in a country where a very large number of women and individuals in rural areas do not have access to smartphones and there is very little digital footprint. PMIC is preparing for this next phase of growth in the sector by expanding its menu of services for the sector, developing new institutions and strengthening the existing ones.