The microfinance sector in Pakistan has grown tenfold, to 600,000 clients, over the past six years, but the further growth would be impeded if the lending rates continued to remain low, notes a latest United States Agency for International Development (USAID) funded report.
The report, titled 'Microfinance Performance in Pakistan 1999-2005: Growth - But a Structural Flaw Persists', observes that micro-finance industry is capable of providing financial services to the poor, who traditionally lack access to commercial banking services.
Various public and private organisations, such as Pakistan Poverty Alleviation Fund, Khushhali Bank, and a range of other microfinance banks and NGOs have invested at least $400 million for providing microcredit services. This investment has led to remarkable progress, as the microfinance sector has grown from 60,000 active borrowers in 1999 to more than 600,000 in 2005, the report notes.
The study applauds the incredible progress made in the country's microfinance sector in terms of rapid expansion, solid repayment rates of loans and low delivery costs.
However, it asserts that microfinance providers need to charge interest rates that meet their costs in order to make microfinance services fully sustainable. "The interest rates, service charges and other fees charged to borrowers are too low for growth to continue" in the microfinance sector.
It notes that delivering microfinance loans remains a high-cost activity because services are often delivered at the doorsteps of more difficult-to-service poor clients and remote areas. As a result, the interest rates charged on microfinance loans need to be higher than for typical loans from commercial banks, it stresses.
The study, conducted through USAID funded project 'Widening Harmonised Access to Microfinance' (WHAM), is being implemented by ShoreBank International Ltd. The report is a joint effort of ShoreBank and Pakistan Microfinance Network.
According to the report's statistics, most of Pakistan's microfinance lending organisations have a strong track record of recovering the loans. It also points out that the microfinance services have so far reached only 6 percent potential clients and 94 percent potential clients still remain without access to microfinance services.
It emphasises that microfinance lenders in Pakistan have a choice to make: they can either choose to continue to cover revenue shortfalls through subsidies and accept that the sector will never expand beyond the level of subsidised support; or they can charge higher interest rates to cover costs to build a capital base, and help in establishing strong and sustainable microfinance providers.
ShoreBank's Country Representative in Pakistan Gregory Chen, commenting on the report findings, said: "A rise in interest rates would help ensure that 94 percent of those who remain excluded from microfinance services could gain access over time."
"There is ample evidence in Pakistan, and around the globe, that most of those without access can afford to pay the full cost of access to financial services," he said, adding that "to cap interest rates at a level that does not fully cover costs will deny most potential borrowers this choice."
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