Microfinance sector faces liquidity crunch in increasing market share

KARACHI: Pakistan’s microfinance sector is facing fund constraints in ratcheting up its share of miniscule 0.5 percent in the financial sector’s assets, said the World Bank. 

“There is a significant untapped market for microfinance, which is suffering from funding constraints,” the Bank said in a paper. “In order to fund future growth and reach 10 million active borrowers by 2020, the industry needs additional funding of Rs300 billion or $3 billion.” 

The Washington-based lender stated this in the document, released last month on the launch of $130 million worth of ‘Pakistan Financial Inclusion and Infrastructure Project’. 

It, citing Pakistan Microfinance Network (PMN), said the microfinance sector serves only 3.1 million borrowers, just 11.5 percent of the estimated potential market, while it accounts for only 0.5 percent of overall financial sector’s assets.

“The microfinance sector is small in terms of assets, but is significant in terms of financial access,” it added.

Presently, there are 10 microfinance banks and 16 institutions are operating in the country.  

The PMN, an association of microfinance institutions, forecast that the sector would require extra debt of up to Rs300 billion to reach the 10 million borrower mark.      

An analyst said microcredit is used in underdeveloped countries to eliminate poverty and gender gap and create employment. 

“While it’s growing faster in India and Bangladesh, the growth is slow in Pakistan,” the analyst said. “The scarcity of financial resources in the microfinance industry is not a positive sign for the government’s national financial inclusion strategy.”  

The World Bank’s project will support working capital loans and other loans such as those for equipment purchases. In the case of micro-enterprises, the loan size is expected to be very small, $200-1,500, as determined from up-to-date nationally representative survey data. 

The project will also support small-scale business activities conducted by microfinance borrowers, implemented through Pakistan Microfinance Investment Company that will on-lend to participating financial institutions that will, in turn, provide loans to end micro-borrowers that are private sector entities or individuals. 

The Bank said the development of branchless banking has the potential to significantly enhance financial inclusion. 

Commercial and microfinance banks are actively involved in branchless banking, in partnership with mobile network operators. Pakistan has the highest penetration of mobile money accounts in South Asia – 5.8 percent of the adult population compared with a regional average of 1.9 percent.

In Pakistan, the gender gap on mobile accounts is also much narrower than the overall gap for accounts.

The World Bank’s document said the country’s financial sector has gone from one dominated by underperforming state-owned banks to a modern and sound financial sector dominated by private banks during the last 25 years.

It said the banking sector accounts for 75 percent of financial sector assets, with the balance in the national savings (16.5 percent), insurance companies (five percent) and non-bank financial institutions (4 percent).  

The paper said only 13 percent of adults had access to a formal account in Pakistan in 2014, far behind Sri Lanka (83 percent), India (53 percent) and Bangladesh (31 percent).

The Bank said the country has taken measures to improve financial inclusion for over a decade, and led the way in South Asia in digital payments and branchless banking. 

“A proactive regulator the State Bank of Pakistan and widespread computerised national identity cards has contributed to significant growth in digital transaction accounts,” it added.

“The use of formal financial services is also limited. Individuals often make payments or borrow informally (about 43 percent of unbanked adults made or received payments informally and half of the Pakistani population reported borrowing through informal methods) as financial services are too expensive to use for them.”