Breaking through: Microfinance swiftly gaining ground

Demand swells with high unemployment, need for business funds.

Shahram Haq November 23, 2014

LAHORE: The moderate growth of the sector is helping new entrants like FINCA Microfinance bank to reasonably place itself among the top players of the sector in the short span of a year.

Given that unemployment in Pakistan is on the rise and majority need finance to start a small-scale business, the microfinance sector has emerged as a big hope for many of them.

“The biggest challenge for us is to change the mindset of 88% unbanked population and convince them to switch from taking informal loans to taking microfinance loans through the formal sector. We are doing it reasonably well,” said Mudassar Aqil, chief executive officer, FINCA Microfinance Bank in an interview with The Express Tribune.

Aqil said that there is hardly any adult who will not require finance. The unbanked population, majority of which is rural, only manage to gain finance informally from loan sharks or predatory lenders, who charge much higher rates and, as a result, majority of them spend their lives repaying it.

Around 80% of urbanites are employed by some sort of small enterprise and nearly the entire rural population is associated with the livestock sector. “Small enterprisers are running the wheel of the national economy so they should be brought under the formal lending sector,” Aqil added.

FINCA Microfinance Bank Pakistan, formally Kashaf Microfinance Bank Limited, started its operation in 2008. In 2013, FINCA international, having presence in 23 countries, acquired majority of KMBL and renamed it to FINCA Pakistan.

The deal was made after State Bank of Pakistan raised the deposit limit of microfinance banks from Rs500 million to Rs1 billion in 2010. According to Aqil, the banks need fresh capital each year and KMBL was looking for partners who not only inject capital but also have the ability and resources to take the bank to the next level.

After acquisition, FINCA international injected liquidity of Rs1 billion and the bank’s current capital is now Rs1.1 billion.

There are around nine microfinance banks operating in Pakistan and FINCA currently ranks at the fifth position. The bank has over 70,000 active borrowers and over 260,000 depositors and has sanctioned loans amounting to Rs3.4 billion.

In the last five years, the bank has sanctioned loans to around 150,000 people with a total amount of Rs12 billion.

There is a clear difference in numbers after the new management took over. For instance, the number of loans disbursed during the January-September period of 2014 was 55,843 as compared to 27,592 during the comparative period previous year, reflecting an increase of 102%.

The number of deposits during Jan-Sep 2014 were Rs3,912 million, up 71% compared to the corresponding period last year. “In general, our loan book is growing annually at around 100% and our deposit book at around 60%.”

He further said that the problem in Pakistan is not the cost of finance, but the availability of it through the formal sector. “Our strength is the deep roots we have at the community level which commercial banks don’t have.”

Talking about the interest rate factor for microfinance loans, Aqil said that this is mainly due to more penetration, ground and paper work.

The processes involved in loan sanctioning is approximately the same as of any commercial bank but for a Rs10-million loan, the microfinance bank has to sanction around 200 loans of the same amount.

This increased the paper work and other requirements, making it the main reason why interest rates for microfinance lending ranges between 24% to 30%.


Published in The Express Tribune, November 24th, 2014.

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