Microfinance in Pakistan: Stymied Future?

Microfinance in Pakistan has been the subject of much discussion. It was one of the important initiatives of the last decade, seeking as it did, to reach out to the millions of poor people particularly in the rural areas who lack access to formal mechanisms for financing their needs. Financial and technical support from the ADB and World Bank and leadership from the State Bank of Pakistan helped establish several institutions, most notably the Khushali Bank, as well as put in place a regulatory framework for the sector.

Did all of this work?

If you listen to industry practitioners such as Roshaneh Zafar, founder of Kashf Foundation, there is much to rejoice about. In an interview recently published in the daily Dawn, she outlines Kashf's rise from a small organisation to one that now has over 150 branches and has disbursed over $202m in loans to over 300,000 families. Kashf claims to be a sustainable organisation and its efforts have been lauded and supported by various international organisation. In her interview, Ms. Zafar paints a fairly optimistic picture for the organisation itself, if not the sector.

But independent analysis of the sector and its future is not as rose-tinted. One analysis by Rauf and Mehmood published in the Pakistan Economic and Social Review points out that the sector is charactersied by operational and financial sustainability, the overall cost per borrower is high and increasing, while productivity ratios are low. The outreach and size of the sector is also small and growing slowly, with only 1.14m active borrowers in 2007. The cost per borrower at 32.5% suffers in comparison to 18% in South Asia as a whole.

The study identifies several problems, including overambitious outreach and expansion programs, particularly of the Microfinance Banks (which the study highlights as being the most inefficient) and points to the need for consolidation before expansion. In her interview, Ms. Zafar also points to the impact of the economic downturn as a constraint for growth.

Despite its problems, investment in improving and expanding the microfinance sector in Pakistan is important, given the extremely low coverage of the banking sector of the rural areas. However, there are a few other considerations: one, the firewalling between the social and commercial aspects of microfinance needs to be defined further and understood by all players. Microfinance is a business and should be run like one. Confusing it, as some politicians and bureaucrats tend to do, with alternative pro-poor initiatives such as cash transfer schemes such as the Benazir Income Support Program (BISP), would only exacerbate some of the difficulties the sector faces in terms of policy and political support under populist governments. Lest this be misconstrued, let me state that I believe the cash transfer initiatives like the BISP to be effective short term means of reducing the impact of poverty. Despite issues of poor targeting and potential for rent seeking which Ms. Zafar points out, the BISP offers a complementary mechanism for poverty alleviation. However, it is NOT a business and hence its operational model has to be necessarily different from that of Microfinance institutions. The pressure on MFIs (I use the term here to cover microfinance banks, rural support programs and micfrofinance institutions) is therefore that much greater to raise their efficiency and to become more sustainable. I often get the feeling the sector is dissipated in its efforts, with too many small players. Mergers and consolidation, as well as partnerships may be the way forward.

There is another angle to the need for strengthening MFIs: social enterpreneurship. In order to promote the concept in the rural areas, MFIs would need to be able to support entrepreneurs through microloans and other products like microinsurance. At the moment, that is an untapped, virgin market but one which will hopefully come under the radar of the MFIs sooner than later.