Microfinance: growing in numbers

Despite the political instability and economic worries through much of 2018, nothing could stop the microfinance juggernaut. Latest data released by the microfinance sector’s representative body, the Pakistan Microfinance Network (PMN), show a continuation of healthy year-on-year growth in all three key areas – credit, savings, and insurance – for the year ended December 31, 2018.

PMN’s year-end data is an aggregation of 42 microfinance providers (MFPs). As per the PMN, these MFPs are a sum of 12 microfinance banks (MFBs), 16 microfinance institutions providing specialized microfinance services, 4 rural support programmes that are running microfinance operations as well, and 10 social sector organisations that provide microfinance as part of a multi-dimensional service offering.

On the borrowing front, number of active borrowers grew by 20 percent year-on-year – an addition of 1.1 million users in 2018. At 6.9 million users, about a third of the potential market for microfinance is reported as covered. The gross loan portfolio grew by 36 percent year-on-year to Rs275 billion, an increase of Rs72 billion. Thanks to that higher growth, average loan size grew to Rs55,173 by 2018 end, up from 48,695 in 2017 end.

As for savings, the number of savers grew by an impressive 14 percent year-on-year to 35.3 million – an addition of 4.3 million new savers. Savings portfolio attracted Rs53 billion more in deposits, or a growth of 28 percent year-on-year, to have a final tally of Rs240 billion by December 2018. This growth is driven by MFBs, who offer competitive savings rate to the general public.

This aggressive deposit generation helps MFBs finance their credit operations without relying too much on borrowings from commercial banks. However, it must be noted that not the entire deposit portfolio can be classified as “micro”. This is because MFBs – who are keen to tap the country’s deposit base – also offer attractive deposit schemes to corporate as well as well-to-do individuals.

The third product, micro insurance, also continues to grow decently. Number of policy holders stood at 8.5 million by 2018 end, up 16 percent, or one million more, than a year back. The sum insured jumped by Rs50 billion to stand at Rs249 billion, displaying healthy growth of 25 percent year-on-year. Micro insurance is linked with growth in micro-credit, as MFBs tend to sell it alongside their loans.

As of 2018 end, the MFPs have helped expand the microfinance footprint to 135 districts in Pakistan, with 4,239 branches or units in total. The potential market size is said to be of 20 million borrowers – with a third already covered. To cover the remaining, the gross loan portfolio will have to expand by over Rs500 billion, which would require the MFPs to increase their capital in accordance with prudential regulations.

But not so fast! Many microfinance practitioners urge caution when it comes to growth. They feel that the sector’s approach to grow gradually and organically in the last decade and a half is a prudent one. That helps MFPs expand their operations in a self-sustaining and responsible way. On the other hand, at current pace (one million new borrowers p.a.), it will take MFPs 15 years to cover the currently un-served market. It’s a fine balance between risk and sustainability that MFPs need to master.