Microfinance: the next 8 million

Donor-driven development fads come and go. But it is “microfinance” that seems to be showing resilience in sticking around. In the current era where fancy Fintech solutions such as digital financial services are hogging the limelight, old microfinance hands seem to be sticking to the mantra of achieving steady, organic growth, without compromising on the integrity of an ecosystem that took hard work to build.

In Pakistan, microfinance coverage was targeted at 10 million active borrowers by 2020, under the 2016 national financial inclusion strategy. Pakistan Microfinance Network (PMN), the national association of microfinance providers, expects coverage to reach 8 million active borrowers by this year’s end. PMN estimates addressable market at almost 41 million active borrowers and 6 million micro enterprises.

This means that over 80 percent of potential market will remain un-served at the start of new decade. It is noteworthy that microfinance coverage has come a long way in the last two decades, growing from less than 100,000 borrowers to currently 7.3 million borrowers. Also, the menu of products has long expanded to include non-credit products such as deposits, insurance, and more recently, digital payments.

However, the scale of addressable market, which now also includes 61 million micro-deposit clients, 82 million payment clients and 97 million micro-insurance clients, reflects a widely under-served market. With over three dozen microfinance providers now active in the market, it may not take another two decades to reach the next 8 million of core microfinance clientele, the borrowers.

But it isn’t easy to answer as to how soon the coverage can be doubled or tripled from existing level. There is going to be a significant demand for fresh capital if the sector’s balance sheet is to expand rapidly. That means a deeper interest by local commercial banks and overseas investment firms in the bottom of the pyramid. That, in turn, depends on creating an enabling business environment within an economy that is witnessing a broad-based growth.

Unfortunately, among other sectors, microfinance also catches a cold every time economy tanks under the country’s quinquennial boom-bust cycle. Current times are also taking their toll. On the supply-side, sector profitability is affected due to narrowing spreads in a sensitive market; besides, ratio of non-performing loans has tripled. On the demand side, purchasing power of target market (low-income population) is drying up due to high inflation and joblessness, thus affecting demand for fresh credit.

Besides relying on macroeconomic stability, leveling up microfinance coverage will also depend a lot on driving a partnership between microfinance and its Fintech cousin. Micro-credit cannot scale rapidly without blending traditional finance with tech-based solutions; nor can Fintech have a meaningful development impact without adapting to ground realties of financial exclusion in Pakistan. In that context, ongoing efforts to create a platform for the two sectors to converge and collaborate are encouraging.