By Kazim Alam
KARACHI: Terrorism and poor law and order have taken a toll on the country’s microfinance industry, with Balochistan and Khyber-Pakhtunkhwa being the hardest hit provinces, industry officials say.
According to a recent survey by the Pakistan Microfinance Network (PMN) titled “Risks to Microfinance in Pakistan,” the poor security situation is the top-most concern of the microfinance industry after macroeconomic trends.
The risk arising from poor security seems to have become more serious in the last three years, as stakeholders of the microfinance industry ranked it at the fourth position in a similar survey that the PMN conducted back in 2011.
Speaking to The Express Tribune, Khushhali Bank President Ghalib Nishtar said the closure of businesses on account of strikes has a direct impact on individuals that the microfinance banks have extended loans to.
“They are unable to work and their businesses are momentarily paused. This directly hurts their revenues, which affects their ability to service debt,” he said.
As opposed to similar surveys conducted globally, the PMN says that the risk from poor security is unique to the Pakistani microfinance industry. While Pakistan’s microfinance industry perceives external risks, such as macroeconomic trends and security, to be the greatest threats, most pressing risks facing the microfinance sector globally are those of the day-to-day nature, such as over-indebtedness and credit risk, the survey reveals.
Nishtar said microfinance clients and their businesses are generally more vulnerable in times of crises or calamity. “Their economic resources are meagre with very little reserves. They need to keep their businesses going on at all costs,” he said.
According to the PMN, the situation has deteriorated to a level that many microfinance providers have completely ceased their operations in the sensitive areas of Balochistan and Khyber-Pakhtunkhwa.
Quoting an investor anonymously, the PMN survey says the security situation is shrinking the available market for microfinance providers, as microfinance operations are decreasing rapidly in the affected areas.
“Most institutes prefer to operate in the safer areas of Punjab and Sindh while the affected areas are being excluded from access to formal financial services,” it said.
There are over 3.2 million active microfinance borrowers in Pakistan, according to the latest data gathered by the PMN. The share of Balochistan-based active borrowers in the overall microcredit sector, however, is only 0.6%. Similarly, the share of Khyber-Pakhtunkhwa in the overall microcredit sector is just 3.2%.
Statistics paint a bleak picture of Balochistan’s microfinance industry even if one accounts for its small population. According to the PMN’s estimates, the size of the potential market for microfinance in Balochistan is 1.6 million. This translates into an overall market penetration rate of just about 1.3% in the largest province of Pakistan.
It means it has the least level of microfinance penetration among all provinces, as the country-wide market penetration rate currently stands at 11.8%. “Balochistan has a lot of security issues, dispersed population and low economic activity, which affects the cost of operations,” Nishtar said, adding that his bank maintains a fair presence in Khyber-Pakhtunkhwa.
Khushhali Bank is the largest provider of microcredit in Pakistan with an approximate market share of 18%. At the end of the last fiscal year, 2,203 out of Khushhali Bank’s 423,944 active borrowers were based in Balochistan. It means roughly 0.5% of the bank’s total customer base belonged to Balochistan at the end of 2013-14. The share of Khyber-Pakhtunkhwa in the bank’s total clientele was 7.4% on June 30, 2014.
The PMN suggests that in order to mitigate the security risk, microfinance providers should possess sufficiently in-depth knowledge of the local communities and maintain good relationships with local leaders. “Setting up of a risk fund that can be drawn from in the event of security-related incidents will protect microfinance providers,” it said.
The writer is a staff correspondent
Published in The Express Tribune, January 12, 2015.