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Business Recorder
26-05-2025
- Business
- Business Recorder
Microfinance in Pakistan
An overview Microfinance in Pakistan has emerged as a critical tool for financial inclusion, extending access to credit and essential financial services to millions who remain unbanked. The industry operates within a structured regulatory framework involving two key regulators, namely State Bank of Pakistan for micro finance banks and the Securities and Exchange Commission of Pakistan (SECP) for Non-Banking Micro Finance Companies, which oversee its activities. Additionally, certain non-financial institutions (NFIs) support the ecosystem (money lenders, shops providing buy now – pay later schemes etc.), while established forums facilitate industry discussions and collaboration, including Pakistan Micro Finance Network, Pakistan Micro Finance Investment Company, etc. The sector boasts a robust infrastructure, consisting of 12 Microfinance Banks (MFBs) and 25 Non-Bank Microfinance Institutions (NBFIs), collectively spanning 135 districts. These institutions operate through an extensive network of 4,500 branches and 3,500 branchless banking agents, ensuring accessibility even in remote areas. With a client base of approximately 12.5 million clients at the end of year 2024, microfinance is playing a significant role in uplifting small entrepreneurs, farmers, and underprivileged communities by providing them with necessary cash flows they need to manage working capital cycle, buying of assets or in many cases, meeting emergency cash needs. Out of these clients, around 6.5 million are nano-finance clients (very small loan size from Rs. 5,000 to Rs. 20,000), with the remaining 6 million classified as micro finance clients, highlighting the industry's potential for further expansion to cater to millions of people still unbanked. Microfinance ecosystem The microfinance industry in Pakistan operates under stringent audit and oversight mechanisms, with auditors and regulatory bodies ensuring transparency and compliance. Investment interest in the sector remains strong, with impact investors and venture funds actively participating in its growth as evidenced by entry of Halan Group (Egypt) and LOLC Group (Sri Lanka) in the micro finance banking sector. Currently, the sector employs approximately over 50,000 professionals. Workforce projections suggest an expansion to accommodate the growing demand. However, HR development and IT capacity enhancements are necessary to support this growth, particularly in digital finance. These two areas are considered critical for future expansion of the sector. The integration of predictive analytics and artificial intelligence in risk assessment will be crucial to improving financial sustainability. Funding sources for microfinance institutions are diverse, with contributions from institutions such as the Asian Development Bank (ADB), the World Bank, and the Pakistan Microfinance Investment Company (PMIC). Additionally, discussions with the State Bank of Pakistan (SBP) are underway to explore mechanisms allowing MFBs to lend to MFIs, thereby enhancing sector liquidity. Future strategy and growth Looking ahead, microfinance is poised for substantial growth. The number of nano-finance users is expected to reach 10 million, while the overall client base is projected to expand to between 18 and 20 million in next five to seven years. The sector's portfolio is anticipated to increase from PKR 80 billion to PKR 110 billion, underscoring the increasing demand for microfinance services. To achieve these ambitious goals, the industry will require significant funding, estimated between PKR 250-300 billion in debt and equity. Additionally, an estimated 40,000 new employees will be needed to sustain the expansion. The shift towards branchless and digital finance will further streamline service delivery and enhance financial inclusion. This also leads to a critical question: How will the resources be acquired for growth and expansion in the sector? Risk factors and sustainability Small farmers and micro-entrepreneurs are among the most vulnerable to climate change. Events like floods, droughts, and unpredictable weather patterns can destroy crops, reduce income, and make it difficult for borrowers to repay their loans. Many microfinance institutions (MFIs) offer crop or livestock insurance, but insurance alone may not be enough. The question is: Are there other risk mitigation tools that MFIs can offer besides insurance? Some possible solutions include: • Flexible loan repayment plans: Borrowers affected by climate-related losses could benefit from loan restructuring or repayment moratoriums to give them time to recover. • Weather-linked credit models: Loans that adjust based on climate patterns or harvest cycles could help reduce financial pressure on farmers. • Disaster relief funds & emergency loans: MFIs could establish special funds to provide quick assistance to borrowers affected by natural disasters. • Climate-smart agriculture support: Offering training and financial products for climate-resilient farming techniques (e.g., drought-resistant seeds, solar-powered irrigation) could help borrowers adapt to changing conditions. If these alternative risk-mitigation tools are not developed, Pakistan's microfinance sector could face increasing defaults from climate-affected borrowers. This issue may become critical in the future as extreme weather events become more frequent. Microfinance institutions (MFIs) operate differently from corporate banks that focus on large businesses and capital-intensive projects. MFIs primarily serve small businesses and individuals with tiny loan amounts, which make profitability a challenge. Most MFIs struggle due to High Operating costs at times. Consider this: Processing a Rs. 20,000 microloan by an MFI may cost more than processing a Rs. 20,000,000 business loan by a corporate banker owing to stringent field visits, verification, risk assessment and monitoring needed for the smaller loan. Further, in the micro finance segment, borrowers have irregular incomes: Unlike businesses with steady revenues, micro-entrepreneurs often have fluctuating incomes, leading to delayed or missed payments. Need for a balanced approach To ensure both financial sustainability and social impact, Pakistan's microfinance sector needs a hybrid model — one that blends social support with financial viability. Potential solutions include: • Longer-term loan products: Rather than short-term loans with high repayment pressure, MFIs could offer low-interest, long-term financing for sustainable business growth. • Blended finance: Combining donor grants, impact investments, and commercial funding could help MFIs stay financially stable while supporting vulnerable borrowers. • Technology-driven cost reduction: Digital banking, mobile wallets, and AI-based credit assessments could lower operational costs and improve efficiency. • Public-private partnerships: Government-backed microfinance programs could support businesses that struggle to access commercial loans. Comparative learning and reflection Lessons from Bangladesh and India offer interesting insights for Pakistan's microfinance sector. Both Bangladesh and India have successfully diversified their microfinance models by integrating savings, insurance, remittance services, and SME financing alongside traditional microloans. In contrast, Pakistan's microfinance sector remains largely focused on credit-based services, limiting its ability to cater to broader financial needs. • Bangladesh's example: Institutions like ASA and BRAC have diversified into agriculture finance, social enterprises, and impact-driven investments, allowing them to cross-subsidize financial services while remaining profitable. Further, it is worthwhile to note that there is only one regulatory authority in Bangladesh, i.e., Microcredit Regulatory Authority (MRA), established in 2006 (as compared to SECP in Pakistan, regulating NBMFCs and SBP, regulating MFBs). Every MFI must obtain a license from the MRA to operate. Further, Licensed MFIs are permitted to accept deposits from their members, with the MRA setting guidelines to ensure depositor safety. The MRA focuses on balancing financial inclusion with depositor protection. It has implemented regulations to prevent exploitative practices and ensure transparency in the microfinance sector. However, at the same time, it should be noted that the microfinance sector in Bangladesh has faced scrutiny due to allegations against certain prominent figures, leading to discussions about the need for stricter regulations to prevent abuse and ensure the sector's integrity. ? • India's example: Regulatory shifts have allowed MFIs to transform into Small Finance Banks (SFBs), enabling them to offer savings accounts, fixed deposits, and investment products, thereby reducing reliance on external funding. The point to learn from regional experience and past trend is to make funds available to the sector players, non-banking micro finance companies in particular. For Pakistan, regulatory support in expanding microfinance banks (MFBs) into multi-product financial institutions can help ensure long-term sustainability. Encouraging partnerships with FinTech, mobile money operators, and insurance providers could lead to product diversification that better serves low-income communities. Microfinance clients are inherently vulnerable, and ensuring long-term financial stability requires a combination of contingency planning and patient capital. Additionally, integrating microfinance into corporate structures remains a critical question—how can microfinance institutions sustain their social mission while ensuring financial profitability? Key reflections include: • Can microfinance be integrated into corporate financial structures without losing its core objective? • How can sustainability be maintained amid economic fluctuations? • What lessons from Bangladesh and India can be applied to strengthen Pakistan's microfinance sector? Conclusion In Pakistan, political instability, inflationary pressures, and climate risks significantly impact microfinance repayment cycles and institutional sustainability. Learning from Bangladesh and India, Pakistan's MFIs should focus on developing risk-mitigation strategies, enhancing liquidity management, and offering climate-adaptive financial solutions to sustain operations in volatile economic conditions. Pakistan's microfinance sector has achieved significant milestones, yet there remains a long road ahead. Addressing funding gaps, expanding digital finance, mitigating climate risks, and learning from international experiences will be crucial in shaping the future of microfinance in the country. With sustained investment, innovation, and strategic coordination, the industry can further its mission of financial inclusion and economic empowerment. Copyright Business Recorder, 2025
Business Recorder
19-05-2025
- Business
- Business Recorder
Microfinance banks: SBP sets Rs2bn Minimum Capital Requirement target
KARACHI: The State Bank of Pakistan (SBP) has announced that the Minimum Capital Requirement (MCR) for Microfinance Banks (MFBs) will be increased to Rs 2 billion by the end of June 2027. In order to align the prudential regulations for Microfinance Banks (MFBs) with changing business environment, the State Bank of Pakistan has issued revised Prudential Regulations (PRs) for Microfinance Banks (MFBs). As per revised RPs provincial and national MFBs are required to maintain a minimum paid up capital (net of losses) of at least Rs. 2 billion by June 2027. The existing MFBs (irrespective of their category) will raise their minimum paid-up capital to at least Rs 2 billion in a phased manner. SBP affirms commitment to increasing financial inclusion Currently, Minimum Capital Requirement (MCR) of Provincial MFBs is Rs. 500 million and they are required to build up it up to Rs 1.5 billion by June 2026 and Rs 2 billion by June 2027. While, existing MCR for national MFB is Rs 1 billion and they will also require increase MCR to Rs. 1.5 by June 2026 and billon Rs 2 billion by June 2027. The MCR standard includes fully paid-up common shares, balance in share premium account, reserve for issue of bonus shares, any other type of instrument approved by the SBP less, accumulated losses or discount allowed on the issuance of shares and negative general reserves. MFBs shall also maintain Capital Adequacy Ratio (CAR) equivalent to at least 15 percent of their risk weighted assets. In view of business growth and technological innovations in the sector, SBP has further strengthened the regulations in areas of governance, consumer protection, and operations to help MFBs to manage the expected higher level of growth in future. To add clarity, the Prudential Regulations for MFBs have been segregated in three categories including Risk Management, Corporate Governance, and Operations. These regulations prescribe minimum benchmarks in Governance, Operations, Consumer Protection and Risk Management to ensure financial stability and sustainability of the microfinance banks. The instructions issued by SBP from time to time have also been included in the revised PRs. However, SBP has mentioned that MFBs will continue to comply with the directives and instructions of the SBP not covered under these regulations. These regulations will come into force with immediate effect except where specifically mentioned otherwise. Any deviation or non-compliance of the same will attract enforcement actions under the relevant legal and regulatory provisions, the SBP warned. Penalty on default in maintaining CRR: For levy of penalty on default in maintaining average balance, the minimum balance required to be maintained during the reserve maintenance period shall be the product of CRR Rate (Average i.e. currently 3 percent), Liabilities (subject to CRR) and number of days in the reserve maintenance period. MFBs are required to maintain the liquid assets (excluding CRR) equivalent to at least 12 percent of their total 'demand liabilities' and 'time deposits with tenor of less than one year' in Pakistan. Copyright Business Recorder, 2025
Business Recorder
19-05-2025
- Business
- Business Recorder
Microfinance banks: SBP sets Rs2bn MCR target
KARACHI: The State Bank of Pakistan (SBP) has announced that the Minimum Capital Requirement (MCR) for Microfinance Banks (MFBs) will be increased to Rs 2 billion by the end of June 2027. In order to align the prudential regulations for Microfinance Banks (MFBs) with changing business environment, the State Bank of Pakistan has issued revised Prudential Regulations (PRs) for Microfinance Banks (MFBs). As per revised RPs provincial and national MFBs are required to maintain a minimum paid up capital (net of losses) of at least Rs. 2 billion by June 2027. The existing MFBs (irrespective of their category) will raise their minimum paid-up capital to at least Rs 2 billion in a phased manner. SBP affirms commitment to increasing financial inclusion Currently, Minimum Capital Requirement (MCR) of Provincial MFBs is Rs. 500 million and they are required to build up it up to Rs 1.5 billion by June 2026 and Rs 2 billion by June 2027. While, existing MCR for national MFB is Rs 1 billion and they will also require increase MCR to Rs. 1.5 by June 2026 and billon Rs 2 billion by June 2027. The MCR standard includes fully paid-up common shares, balance in share premium account, reserve for issue of bonus shares, any other type of instrument approved by the SBP less, accumulated losses or discount allowed on the issuance of shares and negative general reserves. MFBs shall also maintain Capital Adequacy Ratio (CAR) equivalent to at least 15 percent of their risk weighted assets. In view of business growth and technological innovations in the sector, SBP has further strengthened the regulations in areas of governance, consumer protection, and operations to help MFBs to manage the expected higher level of growth in future. To add clarity, the Prudential Regulations for MFBs have been segregated in three categories including Risk Management, Corporate Governance, and Operations. These regulations prescribe minimum benchmarks in Governance, Operations, Consumer Protection and Risk Management to ensure financial stability and sustainability of the microfinance banks. The instructions issued by SBP from time to time have also been included in the revised PRs. However, SBP has mentioned that MFBs will continue to comply with the directives and instructions of the SBP not covered under these regulations. These regulations will come into force with immediate effect except where specifically mentioned otherwise. Any deviation or non-compliance of the same will attract enforcement actions under the relevant legal and regulatory provisions, the SBP warned. Penalty on default in maintaining CRR: For levy of penalty on default in maintaining average balance, the minimum balance required to be maintained during the reserve maintenance period shall be the product of CRR Rate (Average i.e. currently 3 percent), Liabilities (subject to CRR) and number of days in the reserve maintenance period. MFBs are required to maintain the liquid assets (excluding CRR) equivalent to at least 12 percent of their total 'demand liabilities' and 'time deposits with tenor of less than one year' in Pakistan. Copyright Business Recorder, 2025
Business Recorder
24-04-2025
- Business
- Business Recorder
SBP Stability Review'24: banks borrow more; deposit shrinks by over Rs1 trillion
Pakistan banks lost momentum on mobilising deposit amid shift in their focus to raise advance-to-deposit (ADR) ratios in the year ended December 31, 2024, the State Bank of Pakistan (SBP) said in its Financial Stability Review – 2024 published on Thursday. This resulted into their increased reliance on borrowings to fund the assets growth in the year, the report said. The Stability Review showed the performance and risk assessment of various segments of the financial sector including banks, microfinance banks (MFBs), development finance institutions (DFIs), non-bank financial institutions (NBFIs), insurance, financial markets and financial market infrastructures (FMIs). It also assessed the financial soundness of non-financial corporate sector, a major private sector user of bank credit. Pakistan receives record $4.1bn in remittances in March, says SBP governor The central bank data suggested that banks deposit stood at Rs30.28 trillion at the end of December 2024 after hitting Rs31.34 trillion in September 2024, showing a drop of Rs1.06 trillion, or 3.5%, in the last three-month of the year under review. 'Deposit mobilisation also lost momentum as banks strived to raise their ADR ratios. Accordingly, the sector's reliance on borrowings increased to fund the assets growth,' the central bank said. 'Banks' earnings remained steady on the back of increased volume of earning assets as the fall in interest rates translated into deceleration in earnings' growth.' Banks strived to achieve the government's then mandatory target of increasing their advances in the last quarter of the year 2024, it was learnt. To achieve the target, banks had to increase their advances (credit to private sector) to 50% of their respective deposits to avoid additional taxes of up to 15%. For that, banks apparently avoided accepting fresh deposits and increased their lending to the corporate sector in the year. It may be noted that the government later abolished ADR-based tax and increased corporate income tax rate by 5% to 44% for banks in late December 2024. Accordingly, the deposits have peaked to a new high at Rs31.63 trillion in March 2025, as per SBP data. 'In order to enhance depositor trust and augment safety nets, the deposit protection amount has been increased to Rs1 million from Rs0.5 million,' the Stability Review report said. The report further said Raast – the central bank's instant payment system - maintained its growth momentum with its outreach reaching around 40 million users and processing almost 800 million transactions during calendar year 2024. Moreover, credit risk profile of the banking sector manifested no serious concerns due to adequate provisioning coverage of non-performing loans, the report said. New design banknotes: Rs3.4bn paper machine upgrade project awarded to German firm It said the adoption of the new accounting standards IFRS-9 (International Financial Reporting Standard) was expected to further enhance the risk management practices of banks and augment their financial cushions to withstand delinquencies in loan portfolio. Solvency indicators such as capital adequacy ratio (CAR) of the banking sector improved further to 20.6% and remained well above the global standard as well as domestic minimum regulatory requirements, according to the SBP review. The report said macroeconomic conditions improved considerably during CY24, as reflected by receding inflationary pressures and consequent significant monetary easing, fiscal consolidation, stable rupee-dollar parity, pick-up in economic activity, and improved external account balance. In that backdrop, financial sector—growing by a decent pace of 17.8% —maintained its operational and financial resilience during CY24.
