As a country with severe issues of financial exclusion, Pakistan is setting up an institutional framework supporting microfinance institutions. The latest innovation is the launch of the Pakistan Microfinance Investment Company. Edward Russell-Walling maps the sector's development.

July 2016 will see the launch of the world's first national wholesaler of funds for microfinance lenders – the Pakistan Microfinance Investment Company (PMIC). With pedigree international backers, it will address the anomaly of relatively good growth and high demand for microfinance in Pakistan but low penetration.

PMIC's shareholders are effectively the UK's Department for International Development, Germany's KfW and the Pakistan Poverty Alleviation Fund. Its role will be to deliver funding and nurturing for the country's 51 microfinance providers – 10 banks and 41 non-bank finance companies (NBFC). PMIC is itself a NBFC.

Reaching the unbanked

There are 100 million unbanked adult Pakistanis, representing 5% of the world's unbanked population, according to the World Bank. About 27.5 million of them cite the sheer distance to a financial institution as the reason they cannot open an account.

That said, the country has attracted respect for its approach to the problem. The regulatory framework for microfinance in Pakistan is regularly rated at or near the top of The Economist Intelligence Unit's annual survey, Global Microscope. In 2015 it was ranked fifth out of 55 countries, just behind India. But it is among the bottom five in absolute numbers of the financially excluded, which is why it is part of the World Bank's Universal Financial Access by 2020 programme.

The programme requires each country to draw up a National Financial Inclusion Strategy, which Pakistan launched in February 2016. It wants to increase the number of adults with a formal account from 10% in 2010 to 50% by 2020, and from 2.9% to 25% in the case of women. It also wants to increase the percentage of adults living within 5 kilometres of an access point, boost formal savers from 1% of all savers to 10%, and raise small and medium-sized enterprise lending as a proportion of total private bank credit from 7% to 15%.

The State Bank of Pakistan (SBP) has identified four drivers to help make all this happen. They are to promote digital transaction accounts and reach scale through bulk payments; to expand and diversify access points; to improve the capacity of financial service providers; and to increase levels of financial awareness and capability on the part of the public. As well as diversifying the range of financial products on offer, other aims include increasing penetration of insurance services, bringing pensions to more workers and developing housing finance products.

In a country of more than 180 million people, there are only 76,000 outstanding housing loans, according to the SBP. "Owning a house takes two generations in Pakistan," says Illango Patchamuthu, World Bank country director for Pakistan. "We have got to make that one generation."

Growth industry

The microfinance industry itself continues to grow. Latest numbers published by the Pakistan Microfinance Network, an industry body, show 3.8 million microfinance borrowers in the fourth quarter of calendar 2015, up 20% from the previous year, and nearly 14 million savers, up 64%. The industry's gross loan portfolio rose 39% to Rs93bn ($967m) while savings rose 49% to nearly Rs65bn. 

Once a largely non-profit segment, the industry is now providing healthy financial as well as social returns for at least some players, and has attracted the interest of both telecommunications companies and commercial banks. The market leader is Khushhali Bank, which is majority owned by UBL, a large Karachi-based bank. Number two is Tameer, now wholly owned by Norwegian telco Telenor. HBL, another major Pakistani bank, recently acquired a majority stake in the country's oldest microfinance institution, First MicroFinance Bank. In a recent survey, microfinance operators said their fastest rising risk was competition.

The key pillars for the industry are now in place, according to Zubyr Soomro, a senior Karachi banking figure and chairman of PMIC. They include a "great" regulatory framework, a credit information bureau for microfinance customers and a technology framework. There is a new apex entity for funding, in the shape of PMIC, and a strong industry association, the Pakistan Microfinance Network.

"This has all resulted in substantial and profitable growth, and has attracted some high-quality international investment," says Mr Soomro. But the industry will also need to accommodate changes in loan profiles as its microfinance borrowers prosper and become small business borrowers.

"Then the risks change," says Mr Soomro. "There is no more social collateral and you must now understand the business. That requires different skills from bank officials, and PMIC can take the lead in helping with transitions such as these."

But the International Finance Corporation (IFC) wants to see more providers, particularly in remoter areas. "Microfinance has taken off in Pakistan but not in quite the way that it should," says Nadeem Siddiqui, IFC country manager for Pakistan and Afghanistan. "While there's urban and rural microfinance, most banks focus on urban. With only 7% penetration, Pakistan can scale up, but it needs many more players."

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