KARACHI: Microfinance banks have emerged as key players in enhancing the process of financial inclusion in Pakistan; however, the lack of funding resources, capacity-building and product innovation remains the major challenges for the microfinance banking industry, said experts.
Deposits are stable source of funding for the banks but, in terms of microfinance banks, by and large, the growth in deposit mobilisation seems to have been sluggish, they said. Consequently, these banks rely on subsidies and grants rather than becoming fully sustainable in generating substantial internal funding, they added.
In addition, meeting capital adequacy requirement is also an important issue for the majority of the microfinance banks, said experts.
Presently, there are 10 full-fledged licensed microfinance banks operating in the country; seven of them are nationwide, one is at a provincial level (Sindh), while the remaining two are district-based (Karachi district).
A general look at funding composition of the microfinance banks reveals that apart from a few banks, the deposits of most of the microfinance banks are less than the total loan they disbursed to various categories of borrowers. Therefore, it does not seem a profitable industry as compared to commercial banking industry.
The microfinance banks can accept and intermediate deposits from the people to finance their loan portfolios, said experts. Moreover, some of the microfinance banks offer microinsurance in the areas of life and health-servicing.
“Microfinance banks are relatively new in the sector so it will take some time to create an impact and develop a public confidence; however, the microfinance banks are still able to mobilise around 20 billion deposits as a whole,” said M Mobeen Yaqoob, head of finance and accounts at the Kashf Microfinance Bank Limited.
The countrywide microfinance banks, as per the State Bank of Pakistan, are required to comply with the minimum capital requirement of Rs1 billion as of December 31, whereas, the microfinance banks operating at the district level have to meet the minimum capital requirement of Rs300 million by the end of the year.
“As far as capital constraints are concerned, yes, initially a few banks do face problems of capital adequacy ratio and paid-up requirements but with the support of the State Bank they are able to manage the shortfall either through further investments or by a combination of telecommunications and microfinance banking, which also give path to enter into branchless banking,” said Yaqoob.
Of five major microfinance banks, three are profitable and growing their portfolio with the average annual rate of 35 percent, which is quite encouraging. After introduction of branchless banking (remittances, deposits, etc) and so far successful operation of it, the microfinance sector is now getting matured and showing faster penetration in the industry, said Yaqoob.
The State Bank in its “Development Finance Review” for the period April-June 2012 issued recently mentioned that four microfinance banks have their paid-up capital equal to or exceeding Rs1 billion.
The microfinance banks normally follow and maintain the benchmark of three percent non-performing loans but, in the past, they used to bear the hit due to calamities such as floods and earthquakes, he added.
“With an impressive growth in branchless banking, the microfinance banks are capable to diversify their deposit portfolios. Savings are attracted by adopting new technologies and alternative delivery channels such as mobile phone and agent-banking. Through mobile banking accounts, money can be transferred and loan can be repaid to the microfinance creditors,” said Nadeem Hussain, president and chief executive officer of Tameer Microfinance Bank.
According to estimates,
around Rs1 billion worth of domestic remittances are channelised by mobile accounts across the country on monthly basis, said Hussain.He said the microfinance banking sector of Pakistan has vast potential to attract foreign investment, therefore, strong and strategic foreign players are coming here to explore opportunities in the sector.
There is a significant increase in the market share of regulated microfinance banks within the overall microfinance sector, he said.Advans Microfinance Bank Limited has just been allowed to commence business on January 3.
The microfinance banks continue to dominate the sector in terms of both, active borrowers and gross loan portfolio, with a market share of 42 percent and 56 percent, respectively during the third quarter (July-September) of calendar year 2012, said a quarterly update on the microfinance outreach in Pakistan issued by Pakistan Microfinance Network (PMN).
Savings had increased by 10.11 percent to Rs20.13 billion by the end of the third quarter. Microfinance banks continue to hold the largest share in the value of savings (91 percent) mainly due to an average saving balance of Rs10,000, which remains the highest among peer group.
Potential microfinance market in Pakistan is around 28-30 million people, of which only 2.4 million are served by microfinance institutions and among them microfinance banks contribution is only of one million borrowers.
The agriculture sector dominates as the largest provider of employment in Pakistan, with a share in the overall employment of 45 percent. Most of the microfinance banks operating in Pakistan are serving in the rural areas, obviously, due to high potential. They also showed their presence in remote areas.
The primary reason for this inclusion is that microfinance in Pakistan is still largely regarded as a social service rather than a financial service. Furthermore, the small and medium enterprises, which constitutes 90 percent of business in Pakistan and is regarded as an important instrument of employment promotion, is neither being served by mainstream banks nor the microfinance sector.
According to Small and Medium Enterprises Development Authority (Smeda), there are approximately 3.2 million business enterprises in Pakistan, which employ 80 percent of the non-agricultural labour force and their share in the annual GDP is approximately 40 percent.
However, unlike large enterprises in the formal sector, a small and medium enterprise is constrained by financial and other resources.
The SBP has recently allowed the microfinance banks for enterprise lending up to 500,000, so there is a great opportunity in the sector to capture non-served SME sector as well. So, with the microfinance sector penetration of only eight percent, there is still a large potential market for microfinance in Pakistan to be captured by 10 microfinance banks.
The State Bank of Pakistan has taken several measures for smooth functioning of the microfinance banks such as it introduced an authenticated information sharing mechanism such as “Microfinance - exclusive Credit Information Bureau recently to reduce the credit risk cost of the lenders, besides lowering the loan price for the borrowers.
This measure will improve the credit quality and also credit risk cost depending upon the service fee levied by the regulators.
The International Strengthening Fund (ISF) has approved Rs632 million for 13 microfinance providers, including top- and middle-tier finance banks and microfinance institutions. The ISF has also provided a 10 million pounds facility, aiming at raising commercial debt from non-bank sources and to diversify sources of commercial capital for microfinance providers.
The SBP also allowed microfinance providers to mobilise funds from non-bank sources and capital markets.
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