Pakistan: Microfinance Banks Aggressive Lenders Even in Hard Times

Apr 2010
Karachi, Pakistan, April, 04 2010 - At a time when depressed economic conditions have forced commercial banks to opt for a cautious approach in extending loans, some of the leading microfinance banks have emerged as aggressive lenders.

And the good news for microfinance banks is that the number of their defaulters is barely two per cent, compared with 12.2 per cent non-performing loans of commercial banks.

The small loans range from Rs5,000 to Rs500,000 and are availed of mostly by the lowest rung of working class and peasants in both the rural and urban areas.

“It is a wrong perception that the working-class people are bad at loan repayments,” Nadeem Hussain, chief executive officer of Tameer Microfinance Bank, told The News. “A vast majority of them repay their installments on time.”

Bankers say that the large informal economy of Pakistan has turned out to be an untapped market of hundreds of thousands of individuals, who do not qualify for any loans from conventional commercial banks.

Hussain said that even at the times of economic crunch, the micro-credit borrowers largely manage to keep themselves afloat.

“Our customers in the informal sector are small entrepreneurs, who can easily pass on their cost to end-user. The default rate of our customers is just 0.5 per cent.”

Overall, the default rate of microfinance banking sector hovers around at two per cent, which bankers say remains a big achievement.

Tameer Microfinance Bank has set a target of extending Rs4 billion credit this year, Hussain said, adding that in March alone the bank loaned Rs330 million to smalltime borrowers.

He said the bank had been able to increase its deposit base to Rs2.3 billion by offering better interest rate than commercial banks. Relatively higher margin on advances made it possible to offer attractive deposit rates, he added.

Microfinance banks are still in their infancy in Pakistan, where they started operation in 2001/02. Their branch network remains limited, but analysts say has a huge potential to grow.

Most of the deposits at microfinance banks come from funds and corporations which park excess liquidity with these institutions, often as part of corporate social responsibility.

Despite a 5-year tax exemption given to the microfinance banks in 2007, many of these institutions are facing liquidity problems because of their inability to generate seed money.

Moazzam Khan, CEO of Network Microfinance Bank, said generating funds remained a big challenge for most of the banks. “The industry has around 1.8 million borrowers in the country, which is much lower than the target of 3 million for 2010.”

He said that gathering micro-deposits had become difficult with a double-digit rise in inflation. “How can you expect someone who earns Rs6,000 to save at the end of the month?”

The government should make it mandatory for public-sector entities to park part of their funds with microfinance banks, he said, adding that the central bank’s initiative to address the liquidity shortfall was yet to bear fruit.

He said that the State Bank of Pakistan (SBP) should start giving discounted loans to the microfinance banks just like it helps exporters with refinance schemes.

The SBP launched the Microfinance Credit Guarantee Facility in 2008, encouraging commercial banks to lend to microfinance banks. Under the facility, the central bank guarantees compensation of up to 40 per cent for losses.

Ghalib Nishtar, President of Khushhali Bank, said that not many transactions had been finalised under the facility as yet, but some institutions were negotiating deals of around Rs1 billion with banks.

“The guidelines for the facility have recently been amended and hopefully the commercial banks will start lending to microfinance banks in the near future.”

But Roshaneh Zafar, President of Kashf Microfinance Bank, said that microfinance banking model must be self-sustaining in the long run. “This could be done through innovative products like tapping into the committee system.”


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