Microfinance sector recoveries stall

Stakeholders hopeful for future because clients paid on time prior to Covid-19

LAHORE:

The microfinance sector of Pakistan is currently undergoing a recovery from the dent endured during the Covid-19 lockdown. The sector, which had posted a steady growth over the past few years, recorded a decline in 2020.

The Covid-19 pandemic was the primary reason behind the downturn because business activities came to a standstill in the first couple of months following the virus outbreak in the country.

Industry experts claim that the sector is currently in hot water as a majority of borrowers have not been able to repay loans due to little or no functioning of their businesses.

“Different banking and nonbanking institutions are able to recover their loans but the pace is slow since this sector caters to the low-income segment, which normally repays its loans on time,” said senior microfinance practitioner Mubashar Bashir while talking to The Express Tribune.

The industry was forced to defer the recovery of loans keeping in view the financial health of its borrowers and to recoup its own losses, it sought help from regulators to meet the liquidity shortfall, he said.

However, he said that the industry should expect a behavioural change from the borrowers as there still existed several challenges to making recoveries.

“The upcoming few months are challenging and June 2021 will be crucial for the industry because around that time a majority of the borrowers will begin repaying their loans,” he said.

“There is still a big question mark over what could be the ratio of recovery at that time.”

He added that due to changes in weather patterns, farmers, by and large, were in huge trouble.

The production of cotton crop has declined and many growers have suffered substantial losses. “Similar is the case with the livestock and allied sectors,” he said.

According to him, small households are also in trouble, which are the real customers of the microfinance industry.

They normally pay their installments on time but now they are delaying payments because of the difficulty in making both ends meet. There are 11 microfinance banking institutions under the supervision of State Bank of Pakistan.

On the other hand, the number of nonbanking microfinance institutions is around 25.

According to industry experts, the share of banking institutions in the total microfinance market currently stands at 52% whereas nonbanking institutions enjoy the remaining share.

As per Pakistan Microfinance Network, the number of active borrowers peaked during 2019 in this industry with 7.4 million active borrowers, who lifted the total loan portfolio to Rs302 billion.

Since women empowerment through microfinance lending is one of the core objectives of the sector, female borrowers in 2019 stood at 3.8 million. In March 2020, the number of active borrowers was recorded at 7.1 million with a loan portfolio of Rs310 billion.

However, this number shrank to 6.85 million in September this year. Pakistan Microfinance Network Chief Executive Officer Syed Mohsin Ahmed said that the first wave of Covid-19 had a devastating effect on the industry.

“This is the first time that the microfinance industry recorded a contraction but we remain hopeful for the future,” he said.

His hopes were backed by a case study of a western African country where another deadly Ebola virus outbreak destroyed the sector following a seven-month lockdown but the industry somehow managed to recover and refinance microenterprises.

“We are currently rescheduling nearly one-third of our loan portfolio which comprises 72% of banking institutions and 28% of non-banking institutions,” he said.

“Microfinance clients were facing issues of loan repayment due to closure of businesses during the Covid19 lockdown.”

He added that the percentage of loan recovery in March

2020 was 80%, which dropped to 20% in April but recovered to 50% in June.

The brighter side

There is brighter side of Covid-19 which has positively impacted the microfinance industry.

According to Bashir, during this time, the digital finance sphere and many institutions and banks introduced digital wallets and allied services, which had been long overdue for better health of the sector and to catch up with global practices.

“Covid-19 helped this sector to achieve its six-year target in only six months,” Bashir added. On the other hand, Mohsin Ahmed said that the sector was now ready to contribute to other segments of the economy.

“Based on our experience of dealing with the low-income segment, we are now ready to participate in low-cost housing, low-cost private schooling and other industrial value chains,” he said.

“We have a fair understanding of cash flow and profitability of our clients and we are the right entity for low-cost housing projects and other such initiatives.” He added that to achieve the aim, the sector would need to build its capacity.