‘Credit availability for small businesses can create jobs’

LAHORE: The News interviewed Mudassar Aqil, the Chief Operating Officer of Finca Microfinance Bank about the state of microfinance in the country. Microfinance is still in its infancy in Pakistan, as it has neglected micro small enterprises (MSMEs) that provide 75 percent non-farm employment in the country. He asserted that poverty could only be addressed through job creation which calls for making credit available for MSMEs that are the main job providers.

Q. What are MSMEs and what is their importance?

A. The small shops operating in different regions of urban and suburban areas of the country along with small scale manufacturers like lathe machine workshops, small component makers and even artisans are the actual job providers. Majority of them lack capital and are deprived of formal credit. They operate on informal credit provided to them by loan sharks or distributors of products and inputs at exorbitant rates. After servicing extremely high mark-up loans they hardly manage to survive and live on the edge of poverty. They are in dire need of low cost credit to expand their businesses.

Q. We have learnt that microfinance banks also charge very high mark-up of 25-26 percent on their loans; how could they help MSMES?

A. You will be surprised to know that 26 percent mark-up charged by microfinance institutions is extremely low compared with the loan MSMEs get from informal sectors. I will give you a few examples. The small grocery stores, popularly known as kiryana stores, are supplied products by different distributors on credit. To a lay man it looks like an interest free operation. However, in reality, the goods are supplied at 15 percent higher rates than rates on which they are available on cash.

An average grocery shop buys the goods twice a month. This means that he indirectly pays higher amount on that credit. In a year his cumulative interest shoots up to 360 percent. If the same shopkeeper takes Rs50,000 loan from a microfinance bank, he would buy on cash and pay only 26 percent mark-up; saving the remaining 234 percent mark-up. This would provide him an opportunity to scale up his business. This in turn would create more employment as well.

Q. These MSMEs usually have no collateral without which it must be very risky to provide them credit.

A. Traditionally microfinance flourishes on group lending to rural women or farmers. Each loaner knows the other loaner for decades or even for generations. They guarantee that if one of the members in the group defaults, others would pay on his behalf. This is not possible in case of MSMES as even the shopkeepers operating in the same market hardly know each other. Some come from villages and rent a shop and also a house. Some established a shop few years or month back.

They would not take the responsibility of guaranteeing loans of each other. So group lending is out of question. However, such an important economic sector cannot be left at the mercy of loan sharks. Finca is a US-based bank, operating in 23 countries. One of these countries is Bolivia where 60 percent of the population avails microcredit facilities. We adopted the Bolivian model successfully in Pakistan.

Q. Would you explain the model and the default rate on your loans?

A. In the last five years, we have disbursed loans worth Rs27 billion to MSMEs. Our default rate is less than one percent. We are on average disbursing loans worth Rs1.2 billion per month to around 12,500 SMEs through our 87 branches spread in Punjab, Sindh and KP. Our average loan size is Rs80,000 that is much higher than the average loan size of Rs35,000 of the microfinance bank sector.

The product we have developed to sanction loans to MSMEs is unique. Unlike the commercial banks that ask for collateral, we conduct the cash flow analysis of the loaner. This is a safer method as it gives a real insight into the paying ability of the loaner.

Cash flow analysis is a laborious and costly exercise which is why the mark-up is high. As a matter of policy, we sanction loans to only those MSMEs that have been successfully operating for at least a year. These MSMEs maintain no cash register. They pay for goods they buy and their personal expenses from their routine daily scales. We simply take a look at stock and where possible the input costs. From the gross sales the expenses on goods purchase and personal expenses are deducted which gives an idea of free cash available. Of course the reputation of the loaner in the neighbourhood is also assessed.