Microfinance banks vital for economic growth

Microfinance banks help farmers and people who work in small industries. It plays a vital role in the country’s economic growth.
Micro, small and medium size enterprises (MSMEs) along with small farmers are leading the growth of Pakistan’s economy.
Up to 80 percent of non-agricultural labour force is said to work in MSMEs in Pakistan while over 70 percent of Pakistan’s farmers grow crops on landholdings of less than five acres.
At the end of the third quarter in 2017, the gross loan portfolio of Pakistan’s entire microfinance industry stood at Rs183 billion. This was up 49 percent compared with last year.
FINCA has a global network of microfinance institutions in 20 countries.
The bank has given over 700,000 small loans to micro enterprises for businesses and disbursed Rs60 billion.
The accesses to financial services are a necessary requirement of the small businesses to increase productivity and their operations.
For rapid economic development Pakistan need to focus on bringing financial inclusion with emphasis on incentivizing use of digital money, allowing digital credit, introducing block-chain, electronic payments and documentation.
Despite quick growth in recent years, Pakistan is still one of the most financially excluded countries in the world with 85 percent of the people without a bank account.
FINCA says that its loan disbursements are evenly focused more on extending outreach to the agriculture, both livestock and crop farmers, and the MSME sector.
The 700,000 loans that it extended so far has directly resulted in the creation of 135,555 additional employments within its micro entrepreneurs’ businesses.
Agriculture accounts for 20 percent of the GDP, employing roughly 45 percent of the labour force while also contributing to the value chain of several related industries.
The financial services of Pakistan will be completely transformed in the next five years.
Majority of the people in Pakistan will have a Smartphone and they will own a digital bank account on those phones which means digital transactions and payments through these wallets will become mainstream.
Microfinance is a growing business in Pakistan
Microfinance structure (as in case of Indonesia) in Pakistan has a significant role to play in helping it to alleviate poverty
Pakistan has developed an innovative public-private partnership that aims to drive business growth by providing loans to small and micro businesses
Small businesses can play a strategic role in achieving sustainable growth in developing countries. This is especially true in Pakistan, where nearly 90 percent of companies are SMEs, most of them operating in the informal sector, according to SMEDA, the country’s SME development authority.
As Pakistan’s government aim of becoming an upper-middle-income economy by 2025, helping these companies grow will be an effort to increase financial inclusion and reduce poverty.
When the government launched Vision 2025, it emphasized the importance of a development strategy for small business.
It underscored in particular the need to improve access to finance and build financial literacy skills, and to simplify regulations to make it easier for people to set up and build a successful business.
The State Bank of Pakistan sees microfinance as sustainable economic growth and a key driver of grass-root-level development’.
In late 2017, Pakistan’s microfinance sector had more than 40 accredited institutions operating in 106 districts. This is an improvement on previous years, according to the International Monetary Fund Pakistan.
The roots of microfinance lie in a social mission of enhancing outreach to alleviate poverty.
There is a major shift in emphasis from the social objective of poverty alleviation towards the economic objective of sustainable and market-based financial services.
The new focus of microfinance will involves a trade-off between outreach and efficiency.
The target market of the microfinance sector in Pakistan is estimated to be 25 to 30 million borrowers and the government has set the outreach goal posts to at least 15 million by 2020.
The sector is growing tremendously in fact outpacing the early entrants in South Asia.
Pakistan has a well-recognized legal and regulatory framework for microfinance and is being ranked among the top countries for microfinance regulations by the Economist Intelligence Unit (EIU) of the Economist Magazine.
The SBP has promoted a healthy competition in the sector by ensuring a strong presence of the private sector; promoting growth of inclusive financial services; and by encouraging innovative business models.
SBP’s aim is to ensure access to financial services for all segments of the population, particularly to the poor groups by using microfinance.
According to a recent research carried out on the sector by Pakistan Economic and Social Review, although the microfinance sector in Pakistan adopted an extensive growth strategy (over the last decade) and made some good progress in various indicators of outreach and performance, yet the challenge remains. It has not outreach at a low cost.
The financial sustainability of the sector remains to be addressed. The overall cost per borrower is increasing and the productivity ratios are also low.
MFBs (Microfinance Banks) are the least efficient, whereas, the MFIs (Microfinance Institutions, e.g. Kashf) have so far performed the best.
In order to minimize the trade-off between the social and commercial objective of microfinance, the sector needs to concentrate less on extensive expansion and focus more on utilizing the existing human and financial resources.
A good example is BRI (Bank Rakyat, Indonesia). It provides technical and moral support to the people it lends money to.
It sees that collaterals like motorcycles, cars, cattle, and land etc are chosen to secure loans so that in case the clients fail to repay, the collateral in it is not only monetarily sufficient but also of a nature that can easily be managed in a poor community.
A ‘responsible’ microfinance structure (as in case of Indonesia) in Pakistan has a significant role to play in helping it to alleviate poverty and in ensuring equitable growth.
SBP doubles loan size limit for microenterprises
State Bank of Pakistan (SBP) has doubled the loan size to Rs 1 million for micro-enterprises from previous limit of Rs500, 000, said a circular issued.
The central bank revised Prudential Regulations for Microfinance Banks (MFBs) issued through Circular No. 03 dated June 10, 2014.
The SBP said that in order to enable MFBs to serve the microenterprise credit requirements, it has been decided to enhance the loan size to Rs. 1.0 million for microenterprises employing up to 25 individuals (excluding seasonal labor).
However, the existing limit of 40 percent on enterprise lending (as percentage of Gross Loan Portfolio) shall remain unchanged.
The maximum exposure limit for borrowers who are able to avail both general and microenterprise loans shall not exceed Rs. 1.0 million.
Pakistan’s microfinance institutions serving 5.2 million borrowers with a loan portfolio of PKR184bn (US$1.6bn) as at September 2017 – range widely in strategy, capacity and outreach.
Just over half of loans are made to women borrowers and 55 percent focused on rural areas. In the past few years, loan sizes have also been increasing, with the current average size being PKR44, 000 (US$397).
There is a growing reliance on smartphones as a mechanism for payments and to reach out to Pakistan’s 200 million populations.
According to GSMA intelligence, mobile phone subscriptions outnumber bank accounts by two to one.
As part of its National Financial Inclusion Strategy, the government has created the Pakistan Microfinance Investment Company (PMIC), providing finance direct to target sectors as well as offering funding and support to other microfinance lenders. Set up in 2016, PMIC is registered as an investment finance company, operating under the country’s non-finance banking company regulations administered by the Securities and Exchange Commission of Pakistan.
It was established as a joint initiative backed by the Pakistan Poverty Alleviation Fund (PPAF) and the UK’s Department for International Development, through the non-profit organization Karandaaz Pakistan and the German development bank KfW.
Initiatives financed so far include renewable energy, crops and livestock, micro-insurance and digital finance; priorities for 2018 include low-cost private schools and housing.
In addition to contributing equity of US$60m to underpin PMIC, its backers have also committed to providing a further US$140m in unsecured and subordinated debt, giving the company confidence as it expands its lending.
As a private sector commercial entity, PMIC is also strategically placed to raise funds from commercial banks as well as capital markets, using bonds and other financing tools.

PMIC’s creation represents an important landmark in the government’s financial inclusion strategy, which wants to expand financial access to at least 50 percent of all Pakistani adults by 2020.
The purpose of PMIC is to provide a wide range of financial services to microfinance institutions and microfinance banks to promote financial inclusion in Pakistan, alleviating poverty and contributing to broad-based development.
PMIC’s prime target borrowers are microfinance banks and other non-bank microfinance institutions.
Almost 44 percent of all Pakistan microfinance loans have been extended for agriculture and related businesses, while another 46 percent have been granted to small entrepreneurs for their micro businesses,’
‘PMIC’s mission is to strengthen and scale up provision of sustainable and responsible access to finance to individuals, micro entrepreneurs and micro enterprises in Pakistan to accelerate employment and income opportunities for poor and underserved citizens.’
Managing the PPAF’s loan portfolio of PKR14.2bn (US$126m) of 30 microfinance institutions and banks is also vital.
Partners are offered a range of funding instruments and financial services, such as senior debt, guarantees, debt syndication and subordinate debt.
PMIC also offers to place equity in institutions that can accelerate their growth, boost their management and regulatory controls and offer more loans.
In lending direct to businesses and partners, PMIC prioritizes women, who are, better clients, exhibiting greater financial discipline, investing more in family, household durables and business expansion.
The organization is also focused on developing financial products to support women-centric businesses, such as embroidery and stitching businesses, farm product initiatives, start-up incubation labs and low-cost private schools.
PMIC advises borrowing institutions to give women lending priority.
So far 76 percent of PMIC-financed loans have been extended to women, clinical banks, capital markets, domestic and foreign financiers will have to invest in the sector through loans and equity.
A useful addition would be a national credit information bureau, which would advise borrowers about trading risk, responsible finance and financial literacy.
As businesses grow, they acquire new challenges in terms of recruiting and maintaining talented staff and improving governance.

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