Syed Mohsin Ahmed has worked in the microfinance sector for nearly fifteen years. He has been associated with the Pakistan Microfinance Network (PMN), which is the national association for retail players in Pakistan's microfinance sector, since 2001 in various roles. Mohsin is a qualified management accountant, and has taken executive courses on leadership from the Harvard Business School, a Financial Risk Management course by the Citi Foundation and Women World Banking, and a diploma course on Microfinance at the Microfinance Training Program in Boulder, Colorado.
Following are edited excerpts from BR Research's recent sit-down with the PMN CEO in Islamabad:

<B>BR Research: What is the size of addressable market for microfinance in Pakistan? And how much of that potential market is currently being served by the microfinance providers (MFPs)?</B>

<B>Syed Mohsin Ahmed:</B> The addressable market is close to 19 million borrowers, or individual clients. There are another 3 to 3.5 million borrowers that are micro-enterprises. Currently, there are 4.3 million active borrowers. So, it means we have a coverage level of 20 percent of the potential market.

The MFPs are present in 90 out of 130 districts across Pakistan, mainly in Punjab and Sindh. Different kinds of MFPs are in the market - there are about 50 in total. There are eleven deposit-taking microfinance banks (MFBs), which are regulated by the State Bank of Pakistan (SBP). And the rest are microfinance institutions (MFIs), some of whom are unregulated but are being brought into the regulatory fold by the SECP.

<B>BRR: So it seems that a large chunk of addressable market is still out of the microfinance fold. Is it mainly because MFPs are inadequately capitalized to serve a bigger chunk of the pie?</B>

<B>SMA:</B> I will provide some context here. As per the SBP's National Financial Inclusion Strategy (NFIS), which was released in 2015, at least 50 percent of individuals have to maintain deposit accounts by 2020. Besides, there are targets for lending to microfinance, agricultural and SME clients. In pursuing the NFIS, the microfinance sector has prepared a Microfinance Growth Framework, which plans to achieve 10 million active borrowers by 2020.

Now to achieve 10 million borrowers, the microfinance sector's current loan book, which is about Rs 110 billion, will need to expand to Rs 400 billion. So, there is a funding gap of about Rs 290 billion - or about $3 billion - that needs to be raised in the next three and a half years. As MFPs grow, they hit capital adequacy ratios, which mean equity investments become very critical for them. The sector currently has about Rs 13-14 billion of equity. To reach Rs 400 billion of loan book, MFPs will need another Rs 40-45 billion of equity. I think some of that will come from retained earnings, but largely it will be from new investments.

<B>BRR: What will be the new funding sources in your view?</B>

<B>SMA:</B> On the demand side, we know that there is appetite. On the supply-side of funds, I feel that seven to eight MFPs - equal part MFBs and MFIs, such as NRSP group, Tameer, Khushhali, FMFBL, Akhuwat, ASA, and Kashf - will be the drivers of growth as their business models are mature and they have reached between 300,000 and 750,000 active borrowers. Such institutions are now much more confident about their business models, and they are now in a good position to raise more funding from private institutions.

Previous initiatives such as the DFID-funded Microfinance Credit Guarantee Facility, has led to a much better understanding of microfinance business on part of commercial banks. A lot of MFBs have recently entered into syndicated funding with commercial banks. Similarly, Pakistan Poverty Alleviation Fund (PPAF) is now spinning off into Pakistan Microfinance Investment Company (PMIC), which is a very positive step for the sector.

Previously, PPAF was only able to access government and donor sector funding. Now, with the PMIC, PPAF can also access private funding to boost their onward funding to MFPs. I know that PMIC has plans to increase the funds available to the microfinance sector from current level of Rs 18 billion to Rs 55 billion over the next three to four years. So, the funding on the supply-side is going to increase.

<B>BRR: What about commercial banks? How can more commercial banks be nudged to dabble in microfinance?</B>

<B>SMA:</B> I think the banking sector will continue with this model where they will use MFBs and NBMFIs as an instrument of their financial inclusion focus. They will not go into retail, whether it is on equity side or debt side.

<B>BRR: Can MFPs raise funds from the stock market?</B>

<B>SMA:</B> Yes, they are allowed to do that. Only APNA Microfinance Bank is currently listed. I would like more MFPs to get listed, because it will lead to the sector having access to a large source of funding. Currently, the players have to go through a laborious process to access private funding. But most private equity investors have been patient to let the business model develop and, may be, take an exit at a later stage.

<B>BRR: What kind of returns are the MFPs offering to private investors?</B>

<B>SMA:</B> Their ROEs currently are between 20 to 25 percent. Their ROIs are around 4 to 5 percent. As these institutions move into the enterprise market, it will provide them greater margins.

<B>BRR: Let's look at Pakistan vis-à-vis the region. The Pakistani microfinance sector achieved 4 million - or 20 percent penetration - in fifteen years. How did first fifteen years of India and Bangladesh look like?</B>

<B>SMA:</B> India started almost at the same time as Pakistan. Bangladesh started back in the 1970s. So let's compare Pakistan with India as Bangladesh has had a head start in South Asia. India, after 15 years, is at 35-40 million borrowers. That can be viewed as population-proportionate with respect to Pakistan, but I think differently on that. India has been able to reach higher numbers because macro picture has been much better in India and political stability much more present than in Pakistan. The Indian microfinance sector CAGR is close to 60 percent now, despite a high base. This is really aggressive.

Why has Pakistan not been able to match that? I think there is a macro context. Every few months, political instability hits Pakistan one way or the other. This takes a toll on the microfinance sector, which is not decoupled from economy in Pakistan's case and that of many other developing countries. We still have the energy crisis. We did a research project with the economist Akbar Zaidi in which we found that inflation had no or limited effect on our clients. But energy crisis led to a closing down of many micro businesses.

<B>BRR: In general, has the business climate improved for the microfinance sector during 2013 and now?</B>

<B>SMA:</B> The macro picture has improved. The pessimism has left. Security has become better. Electricity provision has improved. Natural disasters are still a concern for micro borrowers.

<B>BRR: How much of an impediment is the middleman to uptake of microfinance in rural areas? Is mindset an obstacle that folks don't wanna borrow formally?</B>

<B>SMA:</B> I have no empirical evidence, but my gut feeling is that if we move up the market and serve small enterprises instead of micro-enterprises, it is there where the middleman factor will come in. For micro borrowers, it is an 'access' issue. They are looking for funding. Most of the times, they are looking for more funding.

<B>BRR: How is the risk-mitigation framework operating in the sector?</B>

<B>SMA:</B> It is robust. Microfinance sector is adequately regulated. There is focus on governance, accountability and transparency. The sector has its own credit bureau. Not more than one percent of the microfinance loans have an NPL of above 30 days. On one level, it is good. But on the other, this reflects a conservative attitude on part of the microfinance sector. But the sector's biggest challenge is funding, so that kind of a risk stance makes sense on part of MFPs.

<B>BRR: You mentioned the sector's biggest challenge right now is funding. If the MFPs have really grown strong in governance and if a robust risk-mitigation framework now exists, won't directed lending be beneficial now for the sector's growth?</B>

<B>SMA:</B> This is where the debate still continues in the microfinance sector. I don't know what the best policy instrument is. In priority sector lending regime, by nature of its regulations, it can weaken the due diligence process. In my view, if we continue what we have been doing, build stronger institutions, then market coverage will grow. In India, the priority sector regime worked because 80 percent of their banks are government-owned.

<B>BRR: Please tell us how the microfinance products have evolved over the years?</B>

<B>SMA:</B> From credit, the microfinance sector has moved to deposits and insurance. Besides 4.3 million active borrowers, there are 15 million depositors and close to 5.8 million insurance clients. On the credit side, there is now an increasing focus on lending to micro enterprises, schools, health clinics, etc. There is now a digital credit model that is getting traction, where emergency loans are issued based on cellular payment history. On the agriculture side, there is more focus on disaster related insurance and health insurance and life-cycle event insurance.

<B>BRR: How has the arrival of branchless banks since 2009 impacted microfinance as a sector?</B>

<B>SMA:</B> Pakistanis have to learn from success of its microfinance sector, which values diversity. PMN is the only network that has the diversity of institutions that are part of the network. In India, Bangladesh and other prominent markets, you will have only NGOs having one network, and MFBs another platform. We have brought all of the players, no matter which hue, into the fold. Now, not everyone has the same view on sector issues, but we still work together.

As for branchless banking (BB) providers, most positive thing is the use of technology and agent networks.

Thanks to that, linkages are being created through which not only client costs will decrease, accessibility will also increase. Given that BBs are regulated by SBP, despite their large focus on transactions, these providers have built significant loan books besides taking deposits.