Nano loans in Pakistan: Financial inclusion or profit driver?
These unregulated entities often misled customers with hidden pricing structures, unauthorized data extraction, and compounding mark-up mechanisms, raising significant consumer protection concerns.
In contrast, nano loans offered by Financial Institutions (FIs) governed by the State Bank of Pakistan (SBP) are subject to stringent regulatory oversight. These products are designed to promote responsible lending while expanding access to credit.
The Dawn of Digital Nano Loans in Pakistan
In 2016, Telenor's acquisition of Tameer Microfinance Bank marked the beginning of digital lending in Pakistan. The goal was simple: leverage Easypaisa's vast customer base to introduce the country's first nano loan product – small, short-term loans disbursed digitally.
The initial pilot in late 2016 offered loans between Rs1,000–5,000 via USSD and call centers, disbursing Rs15 million to 5,000 customers. The Bank approached SBP to offer nano loans since under Microfinance Ordinance 2001, MFBs were allowed to to offer loans for income- generating purposes only.
By 2017, the Bank secured approval, and in collaboration with third- party offered nano loans based on credit scoring using telco and mobile wallet transaction data – an innovative approach at a time. The Bank launched a 6-month pilot program, disbursing Rs60 million to 23,000 customers with commercial launch on successful conclusion of pilot.
Exponential Growth & Market Impact
Today, three Microfinance Banks (MFBs) dominate the space, with JazzCash (JC) and Easypaisa (EP) leading the charge. Since 2017, nano loans have shown exponential growth with Rs237 billion in 2024, accounting for ~10% of total microfinance disbursements. Remarkably, 35-40% of active microfinance clients now constitute of nano loans.
Pricing & Profitability: A Double-Edged Sword?
Nano loans carry a weekly fee of 4–5% (208–260% APR), with one time late fees, but no compounding post-maturity, sparking debate over whether 'responsible lending' can coexist with such rates. While critics highlight high APRs, proponents argue that the product is risk- based pricing which accounts for defaults (high in early cycles) and repeat customers get lower rates in subsequent loan cycles thereby, improving affordability.
From Pilot to Profit Powerhouse
Initially, nano loans are a loss-making proposition due to higher default rates in early loan cycles. However, as customers progress into subsequent cycles, repayment behavior improves, allowing lenders to achieve profitability through higher-ticket repeat loans.
In 2024, JazzCash and Easypaisa disbursed 72 million loans with an average loan size of Rs3,278—equating to nearly 198,000 loans per day. With an average of 3.5 to 4 loans per customer, the total unique borrower base is estimated at 19 million. Among these, 23% were new-to-product (NTP) customers—around 4 million individuals—constituting under 10% of the platforms' 35 million Monthly Active Users (MAUs).
The average revenue per loan stood at Rs471, while per-customer revenue (adjusted for repeat usage) reached Rs1,800. This corresponds to yields of 14% and 55%, respectively, translating into APRs of approximately 86% and 300% for an average 8-week tenor.
Nano loans contributed Rs34 billion in markup income of JC & EP — constituting 44% of main head 'total markup revenue' and 60% under the 'Loans and Advances' head. This increasing dependence on a single product underscores both its revenue potential and the emerging concentration risk for FIs.
In 2024, the cost of funds for FIs ranged between 2% and 8%, largely due to a high proportion (60%–80%) of low-cost current account deposits. This favorable deposit structure enabled enhanced Net Interest Margins (NIMs), allowing institutions to absorb higher default rates while sustaining profitability.
Key Highlights
For lenders, nano loans are now a core revenue stream:
Daily disbursements: 198,000 loans (72 million in 2024).
Unique customers: 19 million (4 million new borrowers in 2024).
Revenue: Rs471 per loan, Rs1,800 per customer (APR: 86–300%).
44% of total markup income (Rs34 billion in 2024).
60% of loan-based revenue for leading MFBs.
Low-cost deposits (2–8% funding cost) boost Net Interest Margins (NIMs).
The Borrower's Dilemma: Lifeline or Trap?
Quantifying the social or economic impact of nano loans remains challenging due to the high transaction volume and limited customer-level data. While usage can be inferred from transaction patterns, qualitative assessment –particularly on improvements in living standards – requires deeper field-level research.
That said, anecdotal evidence suggests nano loans serve a critical function for Micro, Small, and Medium Enterprises (MSMEs), especially for short-term working capital needs. Moreover, nano loans serve as a quick access to funds help customers avoid informal borrowing (e.g., family, loan sharks) and maintain self-respect.
Anecdote: During COVID-19, a female bangle seller requested a late-fee waiver after lockdowns halted her sales. The customer was in her 6 loan cycle and graduated to Rs6,000 of loan. Such cases highlight the product's success stories but systemic studies are scarce.
The Nano Loan Blind Spot: How Small Loans Hide Big Risks
A glaring loophole undermines Pakistan's credit ecosystem as loans under Rs 10,000 are not reflected in bureau reports. Further, in order to avoid risk of financial exclusion negative reporting of only loans above Rs1,000 that have defaulted. This was implemented by was to cater for high-volume, low-ticket transactions on nano. This creates a dangerous asymmetry:
For lenders: A customer could default on Rs1,000 nano loan yet appear 'clean' in bureau records—masking their true risk profile.
For borrowers: Responsible repayment of small loans goes unrewarded, denying them a path to build credit history for larger products.
Graduation Pathways: From Nano Loans to Sustainable Credit
Nano loans have undeniably democratized credit in Pakistan, serving as a lifeline for the 60% of borrowers who are new to formal financial systems. But their true purpose – acting as a gateway to broader inclusion – is being undermined by stagnation.
With tenors capped at 2–3 months and amounts at Rs 30,000, these loans often trap borrowers in a high-cost cycle (Rs 37,000– 42,000 repayments). Scaling amounts or tenors under the current pricing model would only exacerbate the burden.
FIs are relying on repeat nano-loan customers (a reliable revenue stream) over innovation to graduate them to higher-value products like personal loans, credit cards, or working capital solutions for businesses.
Nano loans aren't inherently bad—they're a critical first touchpoint in a system where only 2.4% of Pakistan's population has access to formal credit. Yet financial inclusion stalls when institutions treat them as an endpoint. For nano loans to fulfill their promise, FIs must actively design graduation pathways tailored to customer segments.
For consumer segment, transition frequent nano loan users to structured products such as personal loans (longer tenors, lower APRs), offer pre-approved credit cards (starting with secured cards) to build credit discipline and introduce consumer durable financing (e.g., appliances, smartphones) to align credit with asset-building. It's worth mentioning that India has successfully been able to graduate nano loan (less than INR50,000) borrowers to higher ticket product within 12-24 months.
To better serve MSMEs reliant on nano loans for working capital, banks should replace repetitive small-ticket borrowing with revolving credit lines (enabling flexible drawdowns for inventory and cash flow gaps).
Additionally, pilot programs for embedded financing—such as supplier credit or B2B Buy Now, Pay Later (BNPL)—could streamline access. Leveraging alternative data (e.g., mobile money transactions, marketplace activity, or supply chain platform records) can also help underwrite term loans for business expansion. These solutions would address the critical gap in formal financing: today, just 3% of SMEs (155,000) access bank credit. Without scalable alternatives, small businesses risk remaining trapped in cycles of high-cost debt, stifling growth.
Without systemic change, Pakistan's digital lending revolution will remain half-finished. Banking sector must embrace digital risk and expand credit offerings beyond Existing-to-Bank (ETB) customers and address conservative policies that stifle experimentation with New-to-Bank (NTB) customers. Without these steps, nano loans risk becoming a debt trap—not a bridge to inclusion. The technology and data exist; what's needed is institutional will to evolve beyond 'easy money' and invest in scalable credit ecosystems.
The article does not necessarily reflect the opinion of Business Recorder or its owners
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