Microfinance in Pakistan had a good run last year. Latest numbers released by the sector’s association, the Pakistan Microfinance Network (PMN), suggest an all-round improvement in microfinance penetration in 2016 even as microfinance operations reached 104 districts out of some 130 districts as of December end 2016.
On the lending side, microfinance’s main lever, the number of active borrowers had grown 22 percent year-on-year to reach 4.57 million by 2016 end. That covers 22.3 percent of the potential, 20 million+ market of micro borrowers. During the year, gross loan portfolio had increased by 47 percent to Rs137 billion. The average loan size came in at Rs41,633.
The quality of loan-book is evident in the sense that 1.4 percent of portfolio was at risk (overdue greater than 30 days) in the latest quarter, Oct-Dec 2016. The at-risk portfolio has consistently remained below 2 percent for the last few years.
The three dozen odd microfinance providers (MFPs) who reported their data to the PMN in CY16 did even better on the deposit mobilization front. A 65 percent growth in CY16 took the micro-savers’ tally to 23 million, mainly due to growth in mobile wallets. Aggregate savings’ value had increased by 88 percent to Rs121 billion, with the average saving balance standing at Rs5257.
Deposits are an important funding source for MFPs given challenges in attracting financing from commercial banks and capital markets. The microfinance product mix also includes micro insurance. At CY16 close, there were 5.9 million insurance holders, 28 percent more than CY15 year end. The total sum insured stood at about Rs151 billion in CY16, a growth of 85 percent over the previous year.
All that is great! Now the question is: how early can the MFPs – both microfinance banks and microfinance institutions – start serving a significant chunk of the addressable market? More than three-fourth of the micro-lending market remains untapped. And with the passage of time, the potential market is going to expand.
Between 2011 and 2016, MFPs have doubled the number of active borrowers. Now there is an effort to double the active borrowers to 10 million by 2020. To do that, the microfinance sector will have to expand its loan-book to Rs400 billion. That leaves a gap of over Rs250 billion on top of the existing coverage. To comply with capital adequacy ratios, MFPs will have to raise equity capital of around Rs40 billion.
In that context, the recent establishment of the Pakistan Microfinance Investment Company (PMIC) – a spin-off from the PPAF and funded by the governments of Pakistan, United Kingdom and Germany through their respective development arms – seems like a step in the right direction. PMIC is expected to fund the sector’s expansion in coming years.
But expanding the coverage goes beyond the issue of capital availability. It is also a function of the MFPs’ internal capacity and demand-side responsiveness.
In interviews with BR Research, the sector’s top leaders have insisted that microfinance has been put on a sustainable footing in Pakistan. Growth will continue in coming years as MFPs continue to increase their footprint in new regions as well as deepen their penetration in existing markets. But responsible growth will deliver over time, they contend, only if the MFPs keep using the formula of improving their internal governance, risk management, and customer relationship management practices.
That argument for sustainability has its merits. After all, if microfinance gets a bad reputation, it will not remain a viable business for its sponsors. And it will leave a financing hole in the market that the public sector cannot possibly fill. It took MFPs over 15 years to serve about a quarter of the addressable market. Let’s see how long it will take to cater the next quarter. As it seems, it would be a marathon, not a sprint.