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.

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