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The microfinance sector is considered a tool for poverty alleviation, empowerment of women and with the mission that the “poor are bankable”. These, however, have to be explored further as poverty is an abstract term and is becoming a bigger issue with every passing day.
Microfinance can’t be completely held responsible for eradicating poverty where the starting loan amount is Rs10,000 – 12,000 and an average loan size is Rs20,270. This loan size might be useful in consumption smoothing activities and for expanding existing businesses but it is insufficient to startup a new business. This also puts a question mark on the sustainability of the institution in the long run; will these clients continue to access such a small loan when it is effectively not helping them to start up their businesses? What can the institution do to retain these clients while positively impacting their life?
Another area within the capacity of the microfinance industry, specifically Microfinance Banks (MFBs) and is completely imperceptible is ‘Enterprise Lending’ which is essentially up-scaling a loan size to access borrowers that are the potential target market of microfinance but are not being considered.
The limit for microfinance has been extended to Rs150,000 for general purpose and Rs500,000 for housing loans in order to facilitate the graduate and missing middle class clients with an annual income of Rs300,000 – 600,000 by the State Bank of Pakistan. This is an opportunity for MFBs to add up to their target market by including these people in their current portfolio and improve the access to finance for them.
This is a very good initiative taken by the State Bank for the middle income clients who want to either start up their own business or graduated clients who want to acquire loans to expand their current enterprises. However, they are unable to apply as they are not the ‘ideal client’ for commercial banks, neither of current microfinance banks where the average loan size is not adequate to fulfill their requirements. This initiative will not only benefit microfinance banks but will also promote enterprise development in Pakistan.
The State Bank’s strategic frame work also mentions that for such loans the MFBs will certainly have to develop new capacities in terms of HR and the operations level. This will include innovation in product design and development that would suit this target market, forming credit policies that will mitigate the banks risk, SBP has asked to run every client through CIB and has introduced conditions of the CIB report for any amount exceeding Rs50, 000 to cater to the issue of over-indebtedness.
The MFBs can help in forming associations between clients and markets while facilitating them. In terms of HR, they would have to train their loan officers to deal effectively with these clients.
In my opinion, this can also provide MFBs an opportunity to lower their operation costs by using mobile banking services; these banks can further ease the process of disbursements and the collection of loans.
Including middle income clients into the target group would also increase the deposit base, provided new savings products are designed that attract them to save. These products can have features such as minimum amount of deposit terms, ease of withdrawing amount and decent profit returns.
Policy and monitoring, however, could require more attention than the current model especially for enterprises that are in startup phase and will require close monitoring and guidance. Additionally, a grace period before the repayment of loans would also put clients at ease as they start up their own businesses.
The above recommendations are made keeping in mind the State Bank’s strategic frame work for sustainable microfinance. It is becoming crucial for MFBs to take a look at a new target market, as well as mapping out and achieving long term goals of financial sustainability and poverty alleviation.
Sources: State Bank of Pakistan Strategic Frame work for Sustainable Microfinance in Pakistan January 2011, Pg 15, pg 25. Ali, Khadija, Microwatch, April-June 2011, Pg 3.
The author is an undergraduate from LUMS and is currently working for the Pakistan Microfinance Network.
The views expressed by this blogger and in the following reader comments do not necessarily reflect the views and policies of the Dawn Media Group.
While doing research/study on value chain for apricot in G-B region, Micro finance institution were supporting poor farmers only with working capital, where as the need for small farmers were to improve post harvest handling that may link them to the market, a change in lending policy's was needed to provide these farmers with meaningful support,
The biggest challenge for private sector micro-finance institutions would be to grow and be profitable. In a country like Pakistan, with poor enforceability of laws, it is very difficult for financial institutions to collect on bad debts. Small ticket size loans are essentially unsecured and incur high administrative costs. In other words it may be cheaper for a financial institution to originate one large corporate loan rather than several small micro-finance loans. If we are to treat micro-finance as a social uplift program, then it has to be done at a state level rather than within the private sector.
Impressive research, these suggestions should be looked with great concern as in the long run it would help us to improve our economy in terms of GDP.
Poverty is real rather than abstract. Pakistan has an unemployment rate running between 35% to 40%. The inflation rate is alarmingly at the double digit. It was the double digit inflation rate that determined the election results in 1980s in the U.S.A. when Carter lost the election to Reagan. Pakistan with 180 millions suffers from over population. The only industrial sector in a post information age world is a textile industries sector. Even Textile industries run under protection a.k.a. the most favoured country status. What is missing is the recognition that such problems exist.
Without addressing the core problems, the problem of population, education and science; how to uplift the poor when everybody is poor.
It was alright to have the country's MF sector start off under subsidies but unfortunately commercialization has not kicked in. The litmus test is in (1) Pace of expansion of individual MFBs and portfolio quality, (2) country's lead 5 banks expanding into previously untapped segments that are supposedly being developed by MFBs. There is ample evidence of inefficient usage of subsidies and the truth lies in endless capacity building across all tiers, starting from the regulator to the end beneficiary but all without upscaling of services.
Their needs to be a strategy shift so that pace of accessibility can be increased. I would recommend (a) deployment of common infrastructure so loan/deposit products can be delivered cost effectively. MF needs to focus on development of homogenous products and pass on cost benefits to customers. Spends need to be allocated to client education/awareness. As customers mature out, they should be handed off to commercial bank,a policy that needs to be blessed by the regulator. All payments infrastructure should be that of commercial banks and/or licensed PSPs. (b) MFBs should have centralized controls, decentralization will have demerits. (c) All subsidies should be supervised/passed on by the regulator. (d) Senior managements should hold banking experience, anything else would essentially be irrelevant. (e) Civil society should always be engaged but not in delivering financial services.
The current phenomenon of group-based loans can only work if there is an end game in sight which is purely to understand and develop behaviour of borrowers and move them to individual loans. The question is do our MFBs have that risk appetite and business sense ? Are MF policies always overshadowed by political muscle and do donors/investors also push their own agenda which undermines sustainability of MFBs ?
Domestic think tanks need to think through. Perhaps a political change will initiate the process and take Pakistan's MF sector to the next level. Pakistan's MF sector has come a long way but lacks innovation and needs to up the game.
Khadija ’s point of view on relevant research is noticed