Constrains to the development of
Microfinance Sector in Pakistan
Ayesha Majid

Introduction
 a system of providing services such as lending money and saving for
people who are too poor to use banks—Oxford Dictionary
 Micro finance is the provision of financial services including Credit,
Savings, Insurance etc, to those sectors of economy, which are not
serviced by traditional formal financial institutions viz. commercial banks
and non-banking financial institutions.
 Suppliers of Microfinance
 Category 1: Informal Sources
 Category 2: Semiformal Sources
 Category 3: Formal Sources
 Pakistan transitioned from introductory to growth stage in 2008

Objectives & Aims
 Overall Objective
 “To determine the factors effecting growth of micro finance sector in Pakistan”.
Despite the participation of the low-income earners and so-called “Poor” in
MFIs, these organizations continue to thrive despite the challenges that
surround them, e.g. High rate of defaulters.
 Specific Aims
 Determine the extent to which the amount of individual investment influence the
growth of these MFIs.
 How education levels of the participants influence the growth of MFIs.
 How the utilization of loans received by individuals / Group impact growth of
the MFIs.
 To find out how the participation rate of individuals/ Groups in MFIs affect
growth rate.

Background
 90% of the microfinance market is untapped
 According to SBP annual report 2016 the growth rate is unsatisfactory
 It is one of the most robust periods in the microfinance sector of
Pakistan in terms of growth.
 Growth rate over 30% annually.
 There are more than 40 microfinance institutes operating
 9 major microfinance banks
 The total outstanding loans are approximately Rs 50 billion
 total number of borrowers is approximately 2.8 million.

Cont’d
 Non Performing Loans or Portfolio at Risk is less than 5%
 FINCA, the non performing loans are less than 1%
 market’s average loan size is Rs 26,000 only
 There are three main principles of lending :
 The repayment capacity of borrower
 Ensuring that the loan is consumed for same purpose which the borrower had
mentioned
 The overall general reputation of the borrower

Microfinance
(Credit, Deposit,
Insurance and
Remittances)
Transitory Vulnerable
Transitory Poor
Chronic Poor
Extremely Poor
Non-Poor
Transitory Non-Poor
From a pyramid

Microfinance Features
 financial services : poor & low-income clients/unsalaried borrowers
 No collateral
 Loan Amount : 10,000 - 40,000
 Loan Tenure :3 – 24 Months
 include group lending and liability
 pre-loan savings requirements
 gradually increasing loan sizes
 Micro Business Loan
 Micro Agriculture Loan
 Micro Assets Loan
 Livestock Loan
 New Micro Business Loan

Sources
of Funds
in MFI
Sharehold
ers' Equity
Venture
Capital
Grants &
Donation
Bank
Loan
Crowd
Funding
Private
Equity
Investmen
t
Peer to
Peer
(P2P)
Lending
fund
injection
by parent

Funding
Sources of
IMFI’s
Sukuk-
(Social
Sukuk)
Venture
Capital:
Institution
alized Zakat
System
Charity Fund in
Islamic Bank &
Financial
Institutions
Institutional
Penalty Fund
Crowd
Funding
Platform
Mudaraba &
Musharaka
Model
Waqf Model

• Income
• Guarantors/SecuritiesLoan
Application
• Committee
• Availability of funds
Loan
Appraisal
• Cash
• Cheque
• Transfer
Loan
Disbursement
Process of Micro Credit

Major cause for constrains
 Recession
 2009 recession of the industry slowed the growth rate
 Increased default rate
 smaller loans
 cost of doing business and managing these loans is generally high
 have to charge a rate which is slightly higher than commercial banks
 Thus many customers try to obtain loan from commercial banks
 Customer Base
 Illiterate population
 Majority hasn’t used a formal banking service in past
 Most view MFI to be unislamic

Challenges in Microfinance
 High interest rate & high transaction
cost
 Barriers for conventional banking
 Inadequate investment in Agricultural
and Rural development
 Low level of technical understanding of
banking and finance
 No innovative Mix of products by
microfinance institution
 Credit decisions for borrowers without
collateral or salary cannot be based on
automated scoring
 Inappropriate donor subsidies.
 Competition is increasing with
entrance of international players like
FINCA
 Poor regulation and supervision of
deposit-taking MFIs
 Few MFIs that meet the needs for
savings, remittances or insurance
 Limited management capacity in MFIs
 Institutional inefficiencies
 Need for more dissemination and
adoption of rural, agricultural
microfinance methodology.

Issues
Facing
the
Industry
Multiple
Lending Lack of
Customer
Orientatio
n
Lack of
Product
Customiz
ation
Lack of
Proper
Technolog
y
Sensitivity
to Interest
rates
Over
Regulatio
n & Under
Regulatio
n
Lack of
Cooperate
Governan
ce
Transpare
ncy in
Pricing
Access
to
Capital
Improper
Usage of
Loans

MFPs &
Insurance Co.
 Awareness & Low
literacy
 High Premium
 High Transportation
Cost (Rural)
 Product viability
 Culture (Low demand
for voluntary insurance
 distrust
 Diseases high
 Consumer protection
Client
Issues/Challenges
 Transparency
 Cashless vs. cash based
 Settlement of claims (time
required)
 Competition (product pricing)
 Volumes required (low cost)
 Existing products not meet the
need
 Product diversification
 Marketing difficult then
Credit/Savings
 Push Vs. Pull
 Late reimbursement of claims
Regulation
 Lack of understanding of microinsurance
 Lack of appropriate information
 Legal framework not supportive
 MFPs agents or brokers
 Product diversification

Literature Review

 Background
 (Shahnaz A Rauf, Tahir Mahmood, 2009) Views the growth strategy adopted by the
microfinance sector has influenced performance of the microfinance institutions in Pakistan.
MFI’s in Pakistan are facing credit constrains hence have focused on sustainability rather
than social support.
 Credit Constraints & Credit management
 (Khan, 2015) There is a significant impact of internal and external variables on credit
constrained faced by microfinance providers. Due to credit constraints and low deposit
mobilization 81% of potential clients remain unserved.
 (Evelyn Richard 2008) The components of CRM system differ in CBs operating in a less
developed economy from those in a developed economy. This implies that the environment
within which the bank operates is an important consideration for a CRM system to be
successful. Loan portfolio is not only the largest revenue-generating asset of FI but also the
biggest source of risk.
 Economies of Scale
 Pakistan Micro finance industry is still in early-development-phase (Bugvi, Sahibzada Ahmad
Muneeb, 2014). Pakistan has very few interested commercial banks who supply micro-
funds. Pakistan microfinance industry relies significantly on international donor funds.
Microfinance is considered as a social service in Pakistan and banks lack a Socio-
Commercial approach.

 External Environment
 (Mohammad, 2010) The industry has witnessed rapid growth since 2000 after the entrance
of international players and of local mega banks. There are enormous opportunities that can
be availed if the government provides a level playing field to the private sector market
players in the arena.
 Financial Performance
 Due to prohibition of interest (Riba) in Shariah, two microfinance banks operate in parallel
systems in Pakistan (Dr. Muhammad Farooq, Zahoor Khan, 2014). Under MSDP federal
government on 12th August 2000 inaugurated the first microfinance bank of Pakistan—
Khushhali Bank (KB). . He conclude this based on comparison of social and financial
performance of Islamic and conventional MFIs from 2005 to 2010 in Pakistan. IMFIs were
more cost effective compared to conventional MFIs based on CPB and OEA.
 Financial Self Sufficiency
 The current emphases of key players is operational shift from donor-funded organizations to
financially sustainable commercial financial institutes. The shift is led by khushhali Bank.
This shift is conflicting with millennium development goals and due to it; MFI’s are inclined to
operate near urban areas. These MFB offer short-term smaller loans at higher interest rates
than traditional banks (Heather Montgomery, John Weiss, 2011).

 Non-Performance Loans
 Main debacle in Microfinance industry is non-performance of loans (Amal Aslam, Neelam
Azmat, 2012). Search for alternative collateral options is secondary to more pressing issues
concerning loan recovery. The roots of the issue lie in client screening, selection and
monitoring processes. The character and quality of staff is key to the screening, selection
and monitoring of borrowers hence internal corruption and collusion play the pivotal role.
MFBs have access to banking courts, non-bank MFPs do not.
 Internal Environment
 (Amal Aslam et al 2011) The roots of the issue lie in client screening, selection and
monitoring processes. The character and quality of staff is key to the screening, selection
and monitoring of borrowers hence internal corruption and collusion play the pivotal role.
 Customer Behaviour
 Low number of women are taking microfinancing for entrepreneurship because they do not
provide skill development and advice. Which would enable these women to utilize the funds
profitably. Since these women have primitive skills loaning from formal sector is much
expensive than from semi or informal sector (Mahmood, 2011).

Theoretical Framework

Hypothesis
 Main Hypothesis: Constrains to the growth of Pakistan’s Microfinance
sector in the past decade.
 The Hypothesis of the variables revolved around these core questions
 How does the amount of investment influence growth?
 How does utilization of loans received enhance growth of the MFIs?
 How does government regulation and laws influence growth
 Does the level of education of the participants influence growth?
 Does the number of participants either individual or group influence the growth
of MFIs?
 Will entrance of foreign and traditional financial institutes boost growth

Growth
Consumer
Behaviour
Uneducated
clients
loan
default/late
payments
language
barrier
customer
protection/
guarantee
geographic
factors
Lack of
Customer
Orientation
Credit risk
Control
Portfolio at
Risk at 30
Days (PAR)
Lending
Methodology
peer group
Paid-loan per
staff
Demographic
s
Age
Gender
Income
Education
Economies
of Scale
Size of MFI
Parent group
Lending
Methodology
Asset
Utilization
Efficiency
Total
Revenue
Gross
Financial
Margin
Net Financial
Margin
Net Income
before Tax
External
Environment
Industry
competition
legislation
Industrial Risk
political unrest
Financial
Performance
Indicators
Efficiency and
Productivity
Portfolio
Quality
Financial
Structure
Profitability
Social and
Outreach
Financial
Self-
sufficiency
Portfolio at
Risk at 30
Days (PAR)
Size of MFI
Breadth of
Outreach
Management
Efficiency
Operating
Cost Ratio
Portfolio to
Assets
Internal
Environment
Access to
capital /fund
affiliation with
foreign MFI or
bank
Cost coverage
Product
Customization
Technological
infrastructure
loan collection
method
Operational
cost
Sensitivity to
Interest rates
Transparency
in Pricing
Loan
Performance
Number of
Deposit
Accounts
Deposits
Outstanding
Weighted
Avg.
Average Loan
Balance/
Active
Borrower
Avg. Loan
Balance/Per
Capita Income
Average
Outstanding
Loan Balance
Management
and
Performance
Theft/ fraud by
Staff
Management
Efficiency
Loans per
Staff
Employee
Turnover
Productivity
Lending
Methodology
Cost Per
Borrower
Borrowers Per
Staff Member
Operating
Expenses to
Assets
Financial
Revenue to
Assets
Fund
Mobilization
Efficiency

Methodology
 Primary Research
 Questionnaire
 Secondary Research
 Articles in Journals
 MFIs website
 SBP publications
 PMN publications/ statistical data
 Credit rating agency’s reports
Google Forms
Excel
Stata

Analysis & Conclusion

Results
Primary data
Dependent Variable Coefficient Std. Err. t P>t [95% Conf. Interval] Alpha
External Environment -1.011138 0.5079887 -1.99 0.053 -2.035595 0.0133189 0.78
Internal Environment 0.3320848 0.2983376 1.11 0.272 -0.2695703 0.93374 0.72
Economies of Scale -0.1759208 0.1903684 -0.92 0.361 -0.5598353 0.2079938 0.6
Management Performance 0.1568818 0.2653767 0.59 0.558 -0.3783013 0.6920648 0.67
Consumer Behaviour 0.0881716 0.265374 0.34 0.739 -0.4412856 0.6176288 0.87
_cons 25.01318 6.522683 3.83 0 11.85894 38.16742
Secondary Data
Dependant Variable Coefficient Std. Err. t P>t [95% Conf. Interval]
Financial Performance -.5746477 .8147661 -0.71 0.531 -3.167597 2.018302
Financial Sufficiency -.1263615 .7899106 -0.16 0.883 -2.64021 2.387487
Credit Risk Management 0.0408196 .0727013 0.56 0.614 -.1905482 .2721874
Productivity 0.0003107 .0012399 0.25 0.818 -.0036353 .0042566
Loan Performance -.000404 .0000254 -0.28 0.800 -.000088 .0000739
Profitability 2.591144 1.194612 2.17 0.119 -1.210644 6.392932
_cons 0.0883767 .452026 0.20 0.857 -1.350172 1.526925
 Growth Rate= 0.088CB + CR - 0.176ES -1.011EE + FP + FS + 0.332IE +
LP + 0.1569MP + P + PR
 Growth Rate = CB +0.04CR +ES +EE -0.574FP -0.126FS +IE -
0.0004LP +MP -0.0003P +2.59PR

Conclusion
 The results of the primary research affirm the hypothesis statements made in
the thesis and are in accordance with literature review showing that the results
are reliable.
 The mean alpha of the variables is 0.8 indicating it to be a very good result.
 The p-values of the research did indicate reliability of the data which could be
because the number of observations as there is acceptable standard deviation
among the results and is in line with the literature.
 The most crucial problem to the study was the availability of the data.
 Data bank resources were not able to give a sufficient volume of data thus
 for many variables for information gathering questionnaire and primary research was
relied upon
 The foremost limitation that was faced was generation of cohesion between variables
measured through secondary data and variables measured through primary data.

Major cause for constrains introductory stage
 Recession
 2009 recession of the industry slowed the growth rate
 Increased default rate
 smaller loans
 cost of doing business and managing these loans is generally high
 have to charge a rate which is slightly higher than commercial banks
 Thus many customers try to obtain loan from commercial banks
 Customer Base
 Illiterate population
 Majority hasn’t used a formal banking service in past
 Most view MFI to be unislamic

Institution
 Improper Usage of Loans
 Awareness & Low literacy
 High Premium
 High Transportation Cost
(Rural)
 Product viability
 Culture (Low demand for
voluntary insurance
 distrust
 Consumer protection
 Lack of Customer
Orientation
 Customers need referral
from peer group
Client
Issues/Challenges
 Transparency
 Cashless vs. cash based
 Settlement of claims (time
required)
 Competition (product pricing)
 Volumes required (low cost)
 Existing products not meet the
need
 Product diversification
 Marketing difficult then
Credit/Savings
 Push Vs. Pull
 Late reimbursement of claims
Regulation
 Lack of understanding of
microinsurance
 Lack of appropriate information
 Legal framework not supportive
 MFPs agents or brokers

Thank You!