Pakistan: Financial Infrastructure Requires Development to Increase Penetration

Nov 2014
Pakistan, November, 09 2014 - The overall financial penetration is low in Pakistan, and the financial infrastructure requires development to bring it at par with other well-performing markets in the region, said Ghalib Nishtar, president of the Khushhali Bank Limited.

“I believe the overall financial penetration is low in Pakistan. Despite having a fairly large banking sector, the total number of borrowers in the system is around six million, half of which are contributed by the microfinance institutions,” he said in an interview to The News.

“Bank accounts, excluding duplications will be around 15 million to 20 million and the situation with respect to insurance is even more adverse.”

Nishtar said the current market penetration of microfinance banking is around 10 percent to 15 percent, which given the size of the market should be higher.

At the macro level, financial infrastructure requires development to bring it at par with other well-performing markets in the region.

“Commercial banks are more focused on investing in sovereign debt opportunities and the upper segments of the market, which in any emerging economy are relatively a small band, whereas the majority of the potential market is at the lower end, which is classified as micro, small and medium enterprise (MSME)”.

He said microfinance banks are relatively a new phenomenon and initially required to invest in building their own capacities and sustainable business models.

“In order to grow exponentially, you require well-capitalised institutions, besides innovations in distribution channels, products and services. This takes time, but I think we are now getting there and we should see an uptake in the number of clients, as well as market penetration not just for micro credit, but savings, micro insurance and the overall level of transactions within this segment of the market,” Nishtar said.

However, he said, in terms of the regional context, Pakistan is privileged with a more progressive regulatory environment, as the emergence of regulated specialised institutions provided a strong foundation for growth and financial inclusion in the country.

“There is a large market for micro, as well as small and medium enterprise banking in Pakistan and with the emergence of several microfinance banks with strong domestic and international ownership, as well as balance-sheets, the potential is immense, particularly within the rural markets of Pakistan,” he said.

Moreover, the overall default ratio remains within globally acceptable levels at around two percent, which is quite encouraging.

To a question, he said there is a strong sentiment in the market for Islamic modes of financing, which provided a promising opportunity for the microfinance banks.

“I believe the central bank has been most proactive in supporting and shaping the industry over the years and should continue to steer the industry with the regulations that provide conveniences to the clients and opportunities to the institutions to serve that underserved segments of the market.”

“There is a huge potential within the informal markets that needs to be harnessed by the formal financial services industry.”

Initialised in 2000, Khushhali Bank was established as a part of the government of Pakistan’s Poverty Reduction Strategy and its Microfinance Sector Development Programme (MSDP). MSDP was developed with the assistance of the Asian Development Bank.

With its headquarters in Islamabad, Khushhali Bank operates under the supervision of the State Bank of Pakistan. Its mandate is to retail microfinance services and to act as a catalyst in stabilising the country’s newly-formed microfinance sector. Khushhali as a leader played a vital role in the development of the microfinance sector in Pakistan.

Today, Khushhali is one of the largest microfinance institutions in the country with over 700,000 clients, which endeavours to promote business and empower small entrepreneurs across the country.

The bank’s network is spread across all the four provinces and AJK with around 80 percent of branches located in the rural and under-banked areas of the country, bringing financial accessibility with convenience to the marginalised segments of the population, thereby, offering opportunities to small entrepreneurs, particularly across rural communities.


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