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ISLAMABAD: As the economic crisis arising from the Covid-19 pandemic unfolded in Pakistan, microfinance institution (MFI) operations became severely restricted, and some MFIs were forced to close temporarily, says the World Bank.

The bank in its latest, “Finance for an equitable recovery” stated that the government’s Kamyab Pakistan Programme, rolled out in September 2021 to provide subsidised or interest-free loans to SMEs and agricultural workers, could also have mixed impacts on the stability and future growth potential of the microfinance sector by distorting the price of credit and increasing the moral hazard of strategic future default.

The report noted that many MFIs acted quickly, however, to initiate business continuity plans to ensure the health and safety of staff and clients and work around lockdowns. Digital financial services and branchless banking surged.

In the first year of the pandemic, the number of active branchless banking accounts increased by 53.7 percent, from 27.7 million to 42.6 million. From March 2020 to March 2021 regulators enacted a debt moratorium to ease the financial crunch on borrowers caused by lockdowns and the decline in economic activity.

In addition, nonbank microfinance companies (NBMFCs) were shielded by federal guidelines asking commercial banks and other lenders to MFIs, such as the Pakistan Microfinance Investment Company, to reschedule wholesale lending to the sector. Anecdotal reports also suggest that handshake agreements with other MFI lenders to extend repayment terms, as well as the continued availability of wholesale funding for creditworthy MFIs, helped buoy the sector.

Overall, these measures appear to have averted a liquidity crisis among Pakistan’s MFIs in the short term, particularly those regulated, deposit-taking, and digitally enabled. Indeed, during 2020 loans totaling approximately $635 million in the sector were deferred or rescheduled, the report noted.

The bank further stated that some MFIs even experienced an increase in business. Microfinance banks (MFBs) saw a net increase in deposits in 2020 of 29 percent, and gross loan portfolios increased from $1.97 billion to $2.02 billion during 2020. However, results were mixed across the sector. The largest MFBs saw growth continue, while the smaller players, including the vast majority of NBMFCs, saw declines in their portfolios and asset quality.

By the end of 2020, many Pakistani MFIs had temporarily suspended their lending operations, and the demand for credit declined slightly as people suffered income losses. Whether some consolidation and solvency support, particularly for smaller institutions, are needed in the sector remains to be seen. Going forward, it will be important to distinguish viable MFIs from those likely to fail.

MFIs, especially those unable to restart lending and return to pre- pandemic levels of growth, may find that their weaker balance sheets no longer meet prudential requirements once temporary regulatory forbearance is lifted. Recapitalization of institutions focused on MSME lending, especially MFIs, may be necessary and critical to restoring the viability of private sector MSMEs.

A study from Pakistan of 5,500 digital loan applications compared outcomes of submissions randomly assigned for review by loan officers or by a machine learning algorithm. The study found that the algorithm achieved a 21 percent reduction in loan defaults while serving a similar share of female and ethnic minority group borrowers.

However, when the gender of the applicants was revealed in the data, loan officers exhibited a positive bias, approving 22 percent more applications from women than those based on an anonymized review, without leading to an increase in defaults. When the algorithm was exposed to gender information, it was better able to predict defaults than loan officers, but it approved 16–21 percent fewer applications from women than when it was fed anonymized data.

The report noted that the results from the Pakistan study are consistent with nondiscrimination laws, which typically do not allow lending decisions to be based on personal characteristics.

A survey in Pakistan found that active mobile money users increased from eight percent of adults in February–March 2020 to 14 percent by the end of the year. These new banking behaviors resulted in several challenges for financial institutions.

Another study in Pakistan found that hire purchase agreements—a type of leasing contract—motivated an MFI to finance business assets worth several times its prevailing borrowing limit, while maintaining low default rates and offering flexible repayment options. The asset-based finance contracts had significant and persistent effects on the resilience and growth of the microenterprises, as well as on corresponding household wealth, compared with the MFI’s traditional loan products.

Pakistan launched an electronic registry in 2020 to enable financial institutions to register rights in movable assets (machinery, furniture, inventory, accounts receivable, and digital assets) and accept these as collateral for loans.

The launch was particularly timely considering the urgent need for credit by low-income households and MSMEs arising from the pandemic. Collateral registries must adhere to harmonised requirements for secured transaction law and prudential regulation, specifically capital and loan-loss provisioning requirements. Productor sector-specific digital platforms can complement this core infrastructure by accepting security in the form of assets such as invoices and warehouse receipts, it added.

Copyright Business Recorder, 2022


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