Pakistan suffers greatly from financial exclusion. The total individual lending by all providers, including commercial banks, microfinance banks, and non-bank financial institutions (NBFIs), is approximately 15 million in a country of 225m. This is staggeringly low.

The biggest culprits are the commercial banks. While the commercial bank industry is hugely profitable, the earnings are generated by lending to the government, as opposed to the private sector, especially consumer lending. On this issue, the Ministry of Finance, the State Bank of Pakistan (SBP) and the board/owners are equally culpable.

Given the imbalance between the tax receipts and government expenditure, the role of the State Bank and the gravy train offered by treasury bills, Pakistan investment bonds and commodity lending, the commercial banks’ investment behaviour is not expected to change. In fact, their consumer lending, consisting of credit cards, personal loans, auto loans and mortgages, makes up less than 2.5m active loan customers. Where do individuals go in this scenario?

The largest provider of individual credit is the microfinance industry. Between microfinance banks (which can take retail deposits and are regulated by the SBP) and the NBFIs (non-deposit-taking and regulated by the Securities and Exchange Commission of Pakistan (SECP)), the combined customer outreach is 12.3m.

Critics argue that a 5pc interest rate charged weekly by NBFIs on nano loans exploits the poor and strips them of the ability to access small amounts of credit in case of a default

This is principally due to the introduction of nano loans, which have saved the industry from stagnation. Nano loans have revived the micro-industry and provided much-needed relief to the consumer.

The Pakistani consumer is starved for formal credit and largely dependent on friends, family and loan sharks. While informal credit is still the major source of credit for the unbanked and those at the bottom of the pyramid, the introduction of ‘nano loans’ has started to make a dent.

Nano loans are small ticket (Rs5,000 to Rs10,000), short tenor (two weeks to 60 days) loans with an undefined purpose. These loans are unsecured and usually require an instant decision from the lender. The customer journey is easy; there is no collateral requirement, and the documentation is minimal and digital. Loans are disbursed into the wallet or bank account provided by the customer. Compared to the usual onerous physical documentation of a commercial consumer or the 12-month loan by the microfinance industry, the customer journey is a sea change.

However, nano loans can have a sting in their tail. For microfinance banks, the typical interest charged is five per cent per week (unlike the SECP, the SBP has not set an interest rate cap). The criticism against this position is simple: that this is plain and simple exploitation of the needy. A 5pc interest rate per week translates into an annual rate of 260pc. Hence, the borrower will most likely default. A default means a negative rating at the credit bureau, thus depriving the borrower of any future loans for a default on a Rs5,000 loan.

Proponents argue that a nano loan provider provides an instant loan without any collateral and establishes a credit history for the first time for a borrower. They further argue that the 5pc per week loan should not be counted as an annualised number because the customer typically takes the loan for two weeks and a maximum of 60 days. Secondly, the interest rate metre stops after 60 days. The high interest rate is to cover the default risk.

For an NBFI, the SECP took special measures on many fronts to protect the customers after NBFIs started very unsavoury collection practices. In order to provide nano loans, an NBFI must now go through a very rigorous white labelling process. Other than an interest rate cap, the SECP has also imposed clear guidelines on which cell number can be called, the time of the call, and the type of information collected. Overall, customer protection has been improved significantly.

The nano loan market is dominated by two main players. Mobilink Microfinance Bank Limited and Easypaisa digital bank. Between just the two of them, they disburse over 200,000 loans a day. The industry has also attracted eight companies from China, which have either local or global expertise in cash loans. Unlike previous entrants, these are solid companies with stellar credentials.

It has become abundantly clear that this credit product has material demand and can be the first leg for financial inclusion for many new entrants. To further protect the customers and guard against the market criticism of usurious rates, the microfinance market leaders should voluntarily reduce the weekly rate from 5pc to 3pc per week for repeat customers.

The writer is Chairman of the Pakistan Fintech Network

Published in Dawn, The Business and Finance Weekly, April 14th, 2025