Floods affect 40 per cent of small borrowers

ISLAMABAD: Recent floods have adversely affected four out of ten borrowers of a small loan which will lead to the writing off of almost 11 per cent of the microfinance institutions’ balance sheets.

These estimates have been provided by the Pakistan Microfinance Network, an umbrella organisation for all the microfinance institutions. The network has sought a bailout package from the government and international donors to restore the livelihood of 733,000 borrowers and save another 4,000 jobs in the microfinance sector.

“The sector employs 11,000 people and 4,000 of these will have to be laid off if the government does not rescue the sector,” said Syed Mohsin, the CEO of the Pakistan Microfinance Network. He said that out of Rs25 billion, Rs8 billion of microfinance loans were disbursed in those areas which have been adversely affected by the floods.

“Preliminary estimates show that recent floods have affected 733,000 clients and will result in a write-off of Rs2.7 billion worth of loans,” said Rashid Bajwa, the Chairman of Pakistan Microfinance Network. He said at least Rs5.1 billion is required to offset the impact of the written-off loans and to give new loans to affected individuals.

Bajwa proposed that the government or the international donors should pick up the losses. “However, what the donors need is a credible number,” said Bajwa.

The network has decided to form a committee under the supervision of the central bank in order to finalise a mechanism for the resettlement of small loans.

“If the government does not support us, then the banks’ balance sheets will be affected, as the microfinance sector itself is not in a position to sustain such losses,” added Bajwa. He said that the microfinance institutions (MFIs) are not earning profits and these institutions still need time to break even.

Bajwa also said that the floods damaged 87 offices of microfinance institutions that will cost Rs250 million to revamp. He further recommended that the criteria for writing off loans should be such that it does not result in the collapse of the sector. He proposed the setting up of a fund in order to deal with natural calamities and their effect on the microfinance sector.

“There is a fear that the government may leave microfinance institutions from any settlement deal, as they are not regulated by the central bank. If the government leaves them out then the ultimate effect will be on the balance sheet of commercial banks since MFIs borrow from commercial banks to extend small loans to poor clients,” said Bajwa.

MFIs extend loans on comparatively higher interest rates to clients without collateral. MFIs’ clients have reached 1.97 million and the lending portfolio has reached Rs25 billion.

As much as 55 per cent of small loans have been extended to borrowers from rural areas. About forty-one per cent has been disbursed in the agriculture sector and around a third given out in the trade sector. The average loan size is $147 or Rs12,680 and the average interest rate is 25 per cent.

According to various studies, such borrowers witnessed an increase of 20 per cent in their incomes which in turn boosted their consumption.

The government has assigned the task of calculating overall damages to the economy to the World Bank and the Asian Development Bank, which will submit a report on October 15.

The damage assessment in the microfinance sector is based on the estimates of the State Bank of Pakistan (SBP), the federal government and the World Bank.

Published in The Express Tribune, September 21^st, 2010.