The penetration rate of Pakistan’s microfinance industry may still be less than 12% of its estimated potential, yet it has undergone a fundamental transformation in the last couple of years.
Take, for example, the issue of market competition. If you listened to public speeches of the CEOs of microfinance banks a few years ago, they hardly had any fleeting references to the risk of market competition. If anything, they encouraged new market players, saying their entry would help the industry reach critical mass.
However, market competition has emerged as the fastest rising risk in 2014, according to a report titled “Risks to Microfinance in Pakistan” released recently by the Pakistan Microfinance Network (PMN). In contrast, stakeholders ranked it at the 11th position in a similar survey conducted in 2011.
The number of active borrowers has registered a compound annual growth rate of 17% between 2011 and 2013. No wonder the country’s microfinance industry has finally reached a point where stakeholders have started viewing competition as the ‘fastest trending risk’.
“Growth in outreach in the last couple of years, particularly in urban areas, has led to an increase in competition and its perception as the fastest rising risk in the industry,” the PMN report said.
The PMN collected data from a sample of stakeholders, including practitioners, investors, donors, researchers and consultants to assess top risks that Pakistan’s microfinance industry faces today.
The three biggest risks that stakeholders in the microfinance industry currently face are macroeconomic trends, security and profitability. ‘Macroeconomic trends’ continue to form the biggest perceived risk, as the 2011 edition of the survey also ranked the same at the top of the list.
The PMN believes worsening law and order, energy crisis, and inflation form a ‘major part’ of the deteriorating macroeconomic situation.
Inappropriate regulation
One consequence of the microfinance industry’s expanding outreach is that stakeholders are now fearful of inappropriate regulations. In contrast with the fifth top risk currently facing the industry, inappropriate regulations appeared down at the 25th position in the 2011 survey.
The latest study reveals the primary threat of inappropriate regulations stems from the fact that non-bank microfinance providers currently do not fall under any regulatory requirements.
Referring to the views of a respondent, the MFN said a ‘poorly calculated move’ by the regulators will have an adverse impact on microfinance providers.
Security
Maintaining its second position in terms of the biggest risk as well as fastest rising risk, security continues to be a concern for stakeholders in the microfinance industry.
Noting that microfinance operations are limited in the highly volatile regions of Khyber-Pakhtunkhwa and Balochistan, the PMN said the overall threat in terms of security remains high, thus making institutions cautious of entering even slightly risky areas.
Quoting an investor, the PMN said the worsening security situation is shrinking the available market for microfinance providers. They have restricted their operations in terror-hit areas, as most institutions are now choosing to operate in the safer areas of Punjab and Sindh only, it noted.
Foreign exchange
The latest survey reveals that the risk from foreign exchange volatility, which was ranked among the least significant risks in the previous survey, is now among the top 10 fastest rising threats for the Pakistan microfinance sector.
Microfinance providers are soon expected to explore commercial financing options from external sources in view of the rapid growth in the last two years.
The PMN believes the fact that microfinance providers are not allowed to deal or hedge against foreign currency directly adds to the challenge of mitigating exchange risks.
THE WRITER IS A STAFF CORRESPONDENT
Snapshot of the sector’s risk assessment (% of respondents)
| Biggest Risk | Fastest rising risk | Lowest ability to cope |
| Macro-Economic Trends 78% | Competition 69% | Natural Disasters 44% |
| Security 75% | Security 67% | Political Interference 42% |
| Profitability 71% | Macro-Economic Trend 65% | Religious influence 35% |
| Credit Risk 69% | Managing Technology 55% | Security 31% |
| Inappropriate Regulation 64% | Too Little Funding 47% | Macro-Economic Trends 22% |
Published in The Express Tribune, December 15th, 2014.
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writer needs to mention the DFID and Microfinance Credit Guarantee Facility (MCGF) which provides upto 40% guarantee to local lenders for micro finance institutions. Looking at the local bank credit disbursement figures, there is a huge potential to disburse loans to micro finance sector. Secondly, microfinance has the access to have a SWAP structure to hedge for their FCY loans with the support of Authorized Derivative Dealers. Poor research!