Microfinance Institutes in Pakistan

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Microfinance initiatives introduced around 1995, are now considered an integral part of a country’s financial system. But as these initiatives have gained popularity, the question regarding their sustainability and outreach has also become a thought provoking question. In Pakistan, the increasing return on equity from -78.4 to -1.1% during 2005-06 and increasing number of borrowers’ especially females are an evidence of a flourishing MFI system. But the question that will they ever reach sustainability still remains the same. Though the trends are positive but the stream of donations and numbers of cash aids are also staggering. This paper tries to analyze the growth in sustainability and outreach of MFI’s overtime with a simultaneous review of the social and political situations faced by Pakistan. A link socio-political condition and MFI’s financial reports has been built. This linkage is then further shown to find a refined version of the results and show that despite the fragile legal framework, no political stability and natural disasters in the past, MFI’s have shown consistent progress. Hence, they deserve to be further explored and reviewed for improvement in this sector leading to ultimate targets.

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Microfinance Institutes in Pakistan

  1. 1. Microfinance institutes in Pakistan: Outreach and Financial Sustainability Analysis through a Socio-Political Lens<br />
  2. 2. Objectives<br /><ul><li>To localize of concept of Microfinance Institutes according to </li></ul> Pakistan’s integral aspects<br /><ul><li>Integral aspects includes the long bouts of dictatorship, political </li></ul> agendas behind foreign exchange policy,<br /><ul><li>To draw focus on the natural disasters, constant state of war, political fragility
  3. 3. Current inflation in context of financial sustainability.
  4. 4. Integral aspects includes the long bouts of dictatorship, political </li></ul> agendas behind foreign exchange policy,<br /><ul><li>An optimistic approach has been adopted and light shed on the development overall in the microfinance sector despite of the ever increasing hurdles in Pakistan.</li></ul>Feasibility<br />Political Situations<br />Future plans<br />
  5. 5. Background Of Microfinance Institutions<br />
  6. 6. Trends Of Outreach<br />The total number of borrowers from 23 different MFI’s reaches up to a total of almost 1 million by 2006 which makes the aim to reach 3 million by 2010 unrealistic<br />On average in 2006 61% of the loan receivers were from rural areas, while women borrowers accounted for 50.6% of the total borrowers in 2007<br />
  7. 7. Trends Of Sustainability<br />We can observe that the profits observed in recent years are fairly handsome. With the yield on gross portfolio in nominal terms as high as 40% for ASA Pakistan and 31.78% for KASHF bank, the overall growth in profits is a great achievement. The debt to equity ratio though high for some banks is even negative or negligible for others. For example KASHF bank has a ratio of 1.27 while others like NMFB with a debt to equity ratio of only 0.47. <br />
  8. 8. Socio-Political situation analysis for Future prospects of MFI’s<br />Sources::http://essay.utwente.nl/59295/1/scriptie_S_Ahmad.pdf <br />http://essay.utwente.nl/59295/1/scriptie_S_Ahmad.pdf<br />
  9. 9. A Decade Of Disasters<br />Background<br />According to a paper by HidayatUllah Khan, research analysis was done through difference in difference procedure and results measured for a pooled data in a period of 1994-2006. <br />As the biggest natural disaster in history of Pakistan hit on 8th October, it had an impact of the MFI’s operations as well. The calculations of the regression described above showed that this disasters resulted in an almost 52% delay in the repayments in the subsequent period. It also affected the operational expenses, increased need for donations and hence, aggravated the already agitated war on terror situation in Pakistan. <br />Promising results and Future Prospects <br /><ul><li> Despite of the 2005 disaster the growth of MFI’s is commendable during the 2003-2006.
  10. 10. Return on equity not only sustained rather grew to an average of -1.1% from an average of -78.4% during the earthquake disaster.
  11. 11. The Return on Assets and Return on Equity averaged and overall showed great improvements.
  12. 12. Similarly in 2007 the death of Benazir Bhutto caused political instability which increased violence in the country. Since turmoil began at the beginning of the year, this affected the flow of funds to MFI’s by the donor agencies as well. But in fact data shows that the Return on equity overall remained negative but sustained and rather improved from 2006. E.g. KASHF bank showed financial revenue/assets grew from 22.3%to 26.83%. Khushhali bank showed financial revenue/assets grew from10.56% to 11.48%.
  13. 13. KASHF showed a magnanimous increase in ROE i.e. from 16.32% to 26.15%.
  14. 14. The above analysis can be taken as an evidence; that despite of the staggering political and natural disaster, Pakistani MFI’s not only withstood the pressure on funds rather continuously grew.</li></li></ul><li>Future Prospects<br /><ul><li> The outreach of the Microfinance initiatives at Pakistan has been remarkably well in the past years. Despite of an enthralling decade of 2000-2010, MFI’s especially some names like KASHF, Khushhali and NMFB have maintained and shown a positive growth throughout. The reports show that the number of borrowers and the ratio of females in the total borrowers are in a constant positive growth trend. Hence, this can assure a positive future for the outreach of MFI in Pakistan.
  15. 15. But the results are critical when we literally observe the values of financial sustainability. As predicted by the Microfinance Bulletin Survey, almost all the Pakistani MFI’s are in the process of trying to achieve financial sustainability. The financial ratios show mixed responses over a time span of past 3-4 years. Financial revenue/assets ratio has almost been positive for all the MFI’s from 2007 to 2009. Return on Equity has increased overall though still negative for most of the initiatives and fallen overall from 2008-2009 which can be an alarm.</li></li></ul><li>Background Of Microfinance Institutions<br />
  16. 16. For more log on to www.anamsaeed.com<br />

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