Few sectors or industries in Pakistan can claim to have the kind of growth that nano lending has had in the past two years, even if everything else seems to have crashed. The space started taking shape only back in June 2021 with the launch of Barwaqt on Google Play, now the biggest player. Since then, billions of rupees have been doled out across millions of instant loans.

A lot has been written about nano lending: how so many (often foreign) unregistered players are freely operating, how even the licensed entities are no less exploitative in nature with annual percentage rates running into four digits, and how the customers are being harassed. The brouhaha was enough for the Securities and Exchange Commission of Pakistan to take action and introduce amendments to the Non-Banking Financial Companies Act.

But the same shift towards nano is not only limited to the unregulated or the new digital non-banking financial companies. It’s been happening in the supposedly more regulated microfinance banking for even longer.

According to the Pakistan Microfinance Network, the average value of disbursed loans to individuals stood at Rs16,524 in Q1-2023. This is lower by 12.7 per cent QoQ and 14.9pc year-on-year. But the real trend becomes visible when you stretch the period a little further.

The kind of amounts offered might not even be enough to cover a small business’s electricity bill

It all seems to have started back in Q1-2021 when the average size of disbursed loans to individuals suddenly plunged to Rs18,829 from Rs41,398 in the preceding quarter. This is too sharp a decline and was a reversal of the general upwards trend that had been in place since at least the beginning of 2016.

So, what happened? Well, the denominator shot through the roof. In Q2-2021, the number of disbursed loans to individuals increased by 2.46 million to 6.18m, from 3.72m the preceding quarter. The same trend persisted the next quarter, with their respective YoY growth rates of 200pc and 288pc.

Meanwhile, the value of disbursed loans to individuals stood at Rs105 billion. This is a decline of 17.7pc QoQ but an increase of 11.8pc YoY.

Between March 2016 and 2023, the value of disbursed loans to individuals has increased at a compound annual growth rate of 27.1pc and 44.2pc.

Understandably, telco-backed mobile wallets are at the forefront. For example, Mobilink Microfinance Bank (MMBL), the largest player by active borrowers, increased unsecured loans to 2.57m in Q1-2023. At the end of 2020, this number stood at 0.71m. As a result, the average outstanding loan has declined from Rs23,249 to Rs12,057 during the period under review.

By 2022 end, MMBL had outstanding nano loans of Rs4.7bn or 8pc of its gross portfolio of Rs58.9bn. This translates into 2.3m active borrowers from whom it recorded Rs5.9bn as markup income.

This was further amplified in 1Q-2023 when the interest from nano lending was Rs2.47bn or 42.3pc of total markup earned from advances. It represents a growth of 243.9pc YoY in absolute value and an increase of 11.4 percentage points, from 30.9pc, in terms of share. At this rate, the bank would be an exclusively nano player sometime next year.

On the other hand, Telenor Microfinance Bank (TMB) (re)entered the scene somewhat late and saw the biggest jump in active borrowers at 182,641 during Jan-Mar, according to Microwatch data.

Its total outstanding advances surged 418pc to 634,118, from just 122,384 in the same period last year. In comparison, the amount rose by a modest 13pc to Rs8.27bn. Resultantly, the average outstanding value of its unsecured loans has fallen to just Rs13,047, from Rs59,802 in the same quarter last year.

With respect to nano credit specifically (instead of unsecured outstanding values), TMB’s annual report notes they disbursed 1.5m loans worth Rs4bn, which is an average of just Rs2,667.

Though both the companies and the wider sector continue to pitch it as a success, the reality is not as innocuous. Being licensed has done nothing to ensure it’s less exploitative, with annualised interest rates running around 250pc.

What is somewhat ironic is how the industry for decades has presented itself as the harbinger of financial inclusion by giving credit and encouraging entrepreneurship. Yet the kind of amounts they are currently offering might not even be enough to cover a small business’s electricity bill.

Published in Dawn, The Business and Finance Weekly, June 5th, 2023