Microfinance framework supports one million active borrowers

The Microfinance institutional framework in Pakistan currently supports one million active borrowers, which are planned to be increased to 3 million by 2010, said official sources. The official sources stated that in Pakistan, Micro Finance (MF) has been recognised as an important instrument for poverty reduction in the first generation PRSP-I.
Realising the need and importance of MF, as a tool of poverty reduction and social mobilisation, the government has accelerated its efforts to establish strong foundations of MF in formal sector and extended considerable support to NGOs as well.
In order to promote the MF in formal sector, the most significant step taken by the government was the launching of Microfinance Sector Development Programme (MSDP) in 2000. The main objective of this programme was to broaden and increase the pace for the development of the sector to provide the financial services to poor on sustainable basis.
Khushali Bank (KB), the first specialised microfinance bank, was established in 2000 under a special ordinance. Then Microfinance Institutions (MFI) Ordinance 2001 was put in place to provide a separate regulatory framework for MF sector.
Currently, microfinance services in Pakistan are being provided by microfinance banks (MFBs); commercial banks; rural support programmes (RSPs) and non-governmental organisations (NGOs) with the Pakistan Poverty Alleviation Fund (PPAF) being wholesale provider of credit to NGOs. It is estimated that around 40 Microfinance Institutions (MFIs) are operating in all of the above mentioned categories, offering over 400 outlets countrywide.
Cumulatively, the outstanding loans of these institutions in 2005-06 amounted to Rs 6.6 billion. The Microfinance institutional framework currently supports one million active borrowers, which are planned to be increased to 3 million by 2010.
Future challenges include adapting policies to provide the conditions for expansion of the microfinance sector and to maximise its social and poverty impact. The broad conditions required for this expansion, at the highest level are macroeconomic stability and continued development of the banking sector. The key role of MF policies at this stage of the development of the sector is to provide an enabling environment in which the sector can grow.
First, there is a need to move away from subsidisation of microfinance services to commercialisation of such financial services, which invariably involves looking beyond the government or donor subsidised credit delivery systems to self-sufficient institutions providing commercial finance.
Secondly, the microfinance industry has to move from single to multiple products to ensure its financial and social sustainability. The microfinance providers would be encouraged to mobilise savings through deposits and provide insurance. Thirdly, financial sustainability of microfinance is contingent on recognising that the credit has to be priced effectively.
The administrative cost of delivery, disbursing and collecting a micro or tiny loan portfolio is much higher in comparison with conventional loan portfolios. The key to reducing costs is to introduce market competition, innovation and efficiency. Fourth, options to enhance the access to credit for the lower income group can be augmented by the combination of credit bureau's and statistical risk-scoring techniques.
Fifth, the MF Banks/MFIs need to know their customers, know their market and design products to fit the financial requirements of the people they serve. The design of products has to be based on the financial requirements of the household and the economic activities the household supports.