The concept of Microfinance is not new as it has had its occurrence in the long past. The term `microfinance’ and `microcredit’ are often used interchangeably but in reality, there is a difference between the two. Microcredit is the extension of small loans to entrepreneurs too poor to qualify for traditional bank loans. Microfinance is a broader concept encompassing not only the extension of credit to the poor but also the provision of other financial services like savings, cash withdrawals, and insurance. Hence, microcredit is a component of microfinance.
Since the 1990s, Pakistan, Microfinance (MF) has started gaining importance, as a tool of social mobilization and poverty reduction in Pakistan. Indeed the enhanced international emphasis, in particular the increased funding from IFIs for MF, encouraged both the public and private sectors to develop the microfinance sector in the country. The significant increase in international funding enabled Non- Government Organizations (NGOs) to expand their operations and was also a major driving force for the establishment of specialized microfinance institutions in the formal sector i.e. MFBs.
Microfinance: The potential market
There is no common international standard to estimate the potential market of microfinance. Every country estimates the market size according to its objectives and focus of the sector. In Pakistan, the potential market for MF is generally being considered around 8 million households, which is approximately one-third of the total household in the country. A little is known about the methodology to come upon this market size, though practitioners in this area explain that the potential market is roughly the population below the poverty line.
Pakistan is a lower-middle-income country, with a GDP (nominal) of $347 billion a GDP per capita (nominal) of $1,666, and a GDP per capita (PPP) of $5,973. Pakistan’s growing working-age population requires the government to provide adequate services and increase employment and coupled with economic, governance, and security challenges, as well as its susceptibility to natural disasters, economic growth continues to be a struggle.
Brief History
Established in 1982 by the Aga Khan Foundation, Aga Khan Rural Support Program (AKRSP) was the first Integrated Rural Development Program of its kind, outside the government domain. It has focused its development interventions on the Northern Areas of Pakistan. The first large-scale practical implementation and conceptualization of development frameworks such as “social mobilization” and “group lending methodology” can be traced to AKRSP’s microfinance model initiated in 1982. AKRSP organized and mobilized Village Organizations (VOs) and animated them as partners in developing the health, education, and income-generating initiatives in the Northern Area of Pakistan. A World Bank Evaluation had reported AKRSP outreach to 900,000 people in 1,100 villages in the Northern Area and Chitral District of Pakistan. Most significantly, equal emphasis was placed on savings as well as credit in its microfinance program. Development practitioners used to marvel at the volume of savings generated by the VOs in remote areas where subsistence agriculture was the predominant source of income. While AKRSP pioneered development service providers in the rural, agrarian frontiers of north Pakistan, OPP took up the challenge of tackling urban poverty in the biggest slum settlement in Karachi.
The RSP Model
AKRSP formulated and implemented an integrated development approach whereby the rural population was organized into VOs and the needs prioritized by these community organizations were provided through a broad range of development services such as education, health, sanitation as well as financial services (microfinance). AKRSP endeavored to develop the human, social and financial capital of the communities it worked with. This integrated approach was replicated by government-initiated development organizations called Rural Support Programs (RSPs). By 2004, RSPs were working with more than 43,000 community organizations comprising more than 1,000,000 households. Sarhad Rural Support Program (SRSP) was the first RSP to be established in 1989 as a replication of the AKRSP model in the North-West Frontier Province of Pakistan. In the same year, a Pak German development project was restructured as an RSP and renamed as Baluchistan Rural Support Program (BRSP). Later on, Punjab Rural Support Program (PRSP) was also launched by the Government of the Punjab province.
National Rural Support Program (NRSP)
The NRSP was established in 1992. While SRSP and BRSP had a provincial focus, NRSP was meant to be the largest national RSP with development interventions including a very ambitious microfinance program all over Pakistan. The rural-focused microfinance operations of NRSP have expanded into urban areas as well under its Urban Poverty Alleviation Program (UPAP).
Microfinance activities started receiving considerable donor interest at that stage, probably inspired by the success of the Grameen model and its replications/inspirations around the world. Again, the support mostly focused on the provision of “revolving funds” for a “credit component” which acted only as a support to some other intervention such as education or health programs.
Role of Commercial Banks
Commercial banks did not fail to join the microfinance bandwagon. Their social finance initiatives took two shapes:
- Banks providing credit lines to NGO MFIs for lending as microfinance loans
- Banks provide direct/retail finance to poor people.
Habib Bank can be considered a pioneer in the indirect lending strategy. It had provided a credit line of Rs 2.2 billion to NRSP for on-lending as microfinance loans to rural communities in the 1999 – 2000 period. The Bank of Khyber (BOK) and the First Women Bank (FWBL), both public sector banks with a development mandate, established direct microfinance windows. In terms of outreach, expansion, and institutional development, BOK was the most aggressive achieving successful linkages with major donors and their multi-sectoral Area Development Programs such as the Asian Development Bank (ADB) funded Barani Area Development Program (BADP) and Malakand Area Development Project (MRDP) as well as IFAD funded Dir Area Support Program (DASP). BOK also experimented with various microfinance products and methodologies including individual lending, group lending, NGO linkages as well as whole-selling of funds to NGOs. It also provided SRSP with a credit line of Rs 10 million for lending. However, BOK’s microfinance initiative has lost its vigor over the last few years due and there are rumors of the microfinance program being closed down shortly. FWBL33 has a “unique charter” as a commercial bank with a development mandate for the uplift of women in Pakistan. Its shareholding includes not only all major banks in Pakistan but also The Ministry of Women Development. This shareholder has always
The Microfinance Banks (MFB) in Pakistan
Initially, five Microfinance Banks, almost similar in the basic business model to commercial banks, have been established under the new SBP Microfinance Regulatory Environment. They were Khushhali Bank and First Microfinance Bank, established under the patronage of Asian Development Bank (ADB) and Aga Khan Fund for Economic Development (AKFED) respectively, two more MF banks are noteworthy – Network Bank and Rozgar Bank. Network Bank’s sponsor, Network Leasing, has an established micro leasing program since 1995 and has a presence throughout Pakistan.
Rozgar Bank also represents “purely commercial” capital going into the MF sector. While Network Bank and Rozgar Bank have operations restricted to specific districts (i.e. Karachi), Khushhali Bank and First Microfinance Bank are working nationwide. The fifth MF Bank, Tameer Bank, also having equity contributions by International Finance Corporation (IFC) is the last one to enter the market through its Karachi operations. It will expand operations nationally and is reportedly planning to introduce the latest technology and automation such as Digital PDAs and ATMs.
By 2002 a total of Rs 430 million had been generated by Village Organizations as savings. AKRSP brought a major shift in its microfinance strategy by spinning off its microfinance operations into First Microfinance Bank (FMFB), a formal, regulated financial institution established under the new Microfinance Ordinance of the State Bank of Pakistan. AKRSP is FMFB’s major shareholder with a 45% stake with the remaining shares being held by Aga Khan Fund for Economic Development (AKFED) (30%) and International Finance Corporation (IFC) (25%). FMFB has not limited its operations to the Northern Area but has expanded to major urban areas of Second half of the 90s also saw the establishment of a specialist MFI, KASHF (meaning “miracle” in Arabic). It applied a business–like an approach to microfinance loosely following the Grameen style group lending methodology and focusing exclusively on women. In December 2004, KASHF had more than 60,000 clients and it was the best performing PMN member in 2004.
Both OPP and KASHF realized early the specialist nature of microfinance. Accordingly, OPP established a separate sister entity, Orangi Charitable Trust (OCT) to conduct its microfinance operations while KASHF focused exclusively on microfinance. ASASAH (meaning “asset” in Urdu), although a late entrant (year of establishment: 2003) has quickly established its market as a specialist MFI based mostly in urban areas of Punjab province including cities such as Lahore. Till the end of 2004, its funding came exclusively from commercial sources, and hence no funding was obtained from donors. Pakistan Microfinance Network (PMN) By the mid-’90s, microfinance institutions led by KASHF and NRSP realized the need for an “industry association” for the microfinance sector to give it a voice and a platform for capacity building activities. This led to the formation of The Microfinance Group which was later converted into a legal entity as Pakistan Microfinance Network (PMN).
Pakistan Poverty Alleviation Fund (PPAF)
It was established by the Federal Government in the year 200. It was funded by The World Bank and other donors. Its resource base includes a Rs 500 million endowment fund of GOP and World Bank credit of $90 million. During the period April 2000 – March 2005, PPAF provided microfinance funding to 52 partner organizations and provided credit amounting to more than Rs 8.3 billion which reached out to more than 3 million beneficiaries46. PPAF has four “core” program components; Credit and Enterprise Development, Community Infrastructure, Human and Institutional Development, and Social Sector Development Program. The Credit and Enterprise Development with disbursement amounting to Rs 1.4 billion in 2004 has the maximum resource allocation among all core components.
Current Scenario
COVID-19 has restricted the ability of microfinance providers to remain in close contact with their clients, while at the same time it has dramatically reduced the ability of clients to earn income. It has also created unprecedented challenges for financial institutions that serve them.
According to statistics, at the close of 2021, MFBs had over 4.6 million borrowers with an outstanding loan portfolio exceeding Rs290 billion. This included over 674,000 MSEs and 75,000 housing finance beneficiaries with loans aggregating to Rs77 billion and Rs20 billion, respectively.
Even if microfinance institutions can refinance loans for their hard-hit clients, or forgive debts, their inability to recover will pose serious challenges to the institutions themselves. These institutions may quickly face insolvency, putting pressure on their ability to repay their investors and keep the lights on. Their survival will depend on their own creditors’ openness to being patient and forgiving.
Low-income businesses, especially women-owned businesses, and their families depend on these institutions. It is unclear whether borrowers will ever be able to repay existing loans. What will responsible lending and repayment protocols look like in the aftermath of this pandemic? Clients will need a strong microfinance sector, ready to support their recovery once the pandemic subsides, and a strong regulatory framework that extends beyond financial oversight to consumer protection.
In Pakistan, microfinance is a relatively less developed sector and a large scope is available to increase the financial services to poor people in the country. Realizing the importance of MF in social mobilization and poverty reduction, the Government has geared up its efforts to provide support to both the formal and informal sectors. Currently, the informal sector, i.e. NGOs and RSPs, is contributing a major share towards the coverage of the market, however, MFBs saw rapid growth during the last four years and have captured a significant share in the overall coverage of the MF sector in the country. Pakistan’s experience has confirmed that the poor can repay their loans on time and also can save a part of their income. Now, MFBs need to increase focus on deposit mobilization to sustain their operations in the future as presently mainly dependent on external funding.
The author, Nazir Ahmed Shaikh, is a freelance columnist. He is an academician by profession and writes articles on diversified topics. Mr. Shaikh could be reached at nazir_shaikh86@hotmail.com.