KARACHI: Pakistan’s microfinance institutions will likely write off between Rs800 million and Rs1 billion as recovery of loans becomes difficult in the areas worst affected by last year’s floods, said a senior official of the industry body.
This, however, makes up just four percent of the outstanding loans of Rs25 billion and poses no direct threat to the industry, said Syed Mohsin Ahmed, CEO of Pakistan Microfinance Network (PMN).
Factors such as economic slowdown, recurrent power outages and religious extremism are retarding progress of industry, which saw annual growth of 30 percent between 2005 and 2008 but since then has plunged drastically, he said.
“Around 90,000 clients have been badly affected by floods,” he said. “They have lost everything and cannot repay loans, which must be taken off the books.”
At least 700,000 borrowers, mostly based in Punjab and Sindh, who came in the path of raging waters after heavy downpour last August, need additional loans to stand on their feet, he said.
“We estimate that refinancing of Rs7 billion to Rs8 billion is required to help bring these people to their feet,” Ahmed said. “They are not among those being accounted for write-offs. They just need money to reestablish their small businesses.”
These include clients of both microfinance banks (MFBs) and non-governmental organisations working in the area of micro-lending. PMN has 27 members.
State Bank of Pakistan (SBP) has relaxed provisioning requirements for microfinance banks, considering the challenges faced by them, he said. “MFBs can delay provisioning, which allows us to defer expenses and sparing cash to make loans again.”
But liquidity constraints for microfinance banks have increased, creating problem for future growth, said the CEO of PMN. Availability of funds from commercial banks that meet 35 percent of the funding needs of MFBs remains on the lower side, he said.
With limited outreach and relatively smaller operations, the MFBs are not yet able to raise enough deposits for meeting the lending requirement, he said. “It will take time to build brands, which enjoy customer trust.”
The deposit base of the MFBs increased to Rs9 billion in 2010 from Rs3 billion in 2006. The overall balance sheet of MFBs stands close to Rs20 billion. Other microfinance institutions raise funds from Pakistan Poverty Alleviation Fund (PPAF) and multilateral donors.
“Commercial banks do not feel the need to make risky lending to MFBs when they earn enough on government securities,” Ahmed said. “We need to promote the fact how important MFBs are to prosperity of the society.”
In 2008, SBP introduced a Microfinance Credit Guarantee Facility to encourage commercial banks to lend to MFBs. “It is doing very well. In the past six months, three deals (between commercial banks and MFBs) were finalised under the facility.”
Still, the risky nature of micro-lending business and larger economic woes discourage commercial banks to fund the MFBs, he said.
Ahmed said that more than inflation, economic slowdown and power crises limited the ability of microfinance borrowers to repay loans on time. “A tailor cannot do much if he doesn’t get electricity for eighteen hours a day.”
Religious extremism in Khyber Pakhtunkhawa has caused the portfolio of microfinance lending to shrink by almost 50 percent, he said. “NGOs were threatened as extremists say the work they do is not Islamic.”
MFBs are now allowed to take deposits from public sector organisations, he said and explained that only scheduled banks can do that. “It’s a technical issue and we are working with the central bank to find a way out of it.”
Pakistan has 2 million microfinance borrowers. The industry, however, sees the market could be as large as 20 million as a large part of population still depends on traditional moneylenders.
This, however, makes up just four percent of the outstanding loans of Rs25 billion and poses no direct threat to the industry, said Syed Mohsin Ahmed, CEO of Pakistan Microfinance Network (PMN).
Factors such as economic slowdown, recurrent power outages and religious extremism are retarding progress of industry, which saw annual growth of 30 percent between 2005 and 2008 but since then has plunged drastically, he said.
“Around 90,000 clients have been badly affected by floods,” he said. “They have lost everything and cannot repay loans, which must be taken off the books.”
At least 700,000 borrowers, mostly based in Punjab and Sindh, who came in the path of raging waters after heavy downpour last August, need additional loans to stand on their feet, he said.
“We estimate that refinancing of Rs7 billion to Rs8 billion is required to help bring these people to their feet,” Ahmed said. “They are not among those being accounted for write-offs. They just need money to reestablish their small businesses.”
These include clients of both microfinance banks (MFBs) and non-governmental organisations working in the area of micro-lending. PMN has 27 members.
State Bank of Pakistan (SBP) has relaxed provisioning requirements for microfinance banks, considering the challenges faced by them, he said. “MFBs can delay provisioning, which allows us to defer expenses and sparing cash to make loans again.”
But liquidity constraints for microfinance banks have increased, creating problem for future growth, said the CEO of PMN. Availability of funds from commercial banks that meet 35 percent of the funding needs of MFBs remains on the lower side, he said.
With limited outreach and relatively smaller operations, the MFBs are not yet able to raise enough deposits for meeting the lending requirement, he said. “It will take time to build brands, which enjoy customer trust.”
The deposit base of the MFBs increased to Rs9 billion in 2010 from Rs3 billion in 2006. The overall balance sheet of MFBs stands close to Rs20 billion. Other microfinance institutions raise funds from Pakistan Poverty Alleviation Fund (PPAF) and multilateral donors.
“Commercial banks do not feel the need to make risky lending to MFBs when they earn enough on government securities,” Ahmed said. “We need to promote the fact how important MFBs are to prosperity of the society.”
In 2008, SBP introduced a Microfinance Credit Guarantee Facility to encourage commercial banks to lend to MFBs. “It is doing very well. In the past six months, three deals (between commercial banks and MFBs) were finalised under the facility.”
Still, the risky nature of micro-lending business and larger economic woes discourage commercial banks to fund the MFBs, he said.
Ahmed said that more than inflation, economic slowdown and power crises limited the ability of microfinance borrowers to repay loans on time. “A tailor cannot do much if he doesn’t get electricity for eighteen hours a day.”
Religious extremism in Khyber Pakhtunkhawa has caused the portfolio of microfinance lending to shrink by almost 50 percent, he said. “NGOs were threatened as extremists say the work they do is not Islamic.”
MFBs are now allowed to take deposits from public sector organisations, he said and explained that only scheduled banks can do that. “It’s a technical issue and we are working with the central bank to find a way out of it.”
Pakistan has 2 million microfinance borrowers. The industry, however, sees the market could be as large as 20 million as a large part of population still depends on traditional moneylenders.
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