Microfinance banking is one of the fastest growing sectors in Pakistan in terms of its operations and business but it witnessed a major phase of correction recently which caused a closure of over 400 branches across the country.
These branches were being operated by different Microfinance Institutions providing services in their designated coverage areas.
According to statistics updated by Pakistan Microfinance Network (PMN), the number of branches and units of the microfinance sector have decreased from 4,239 to 3,838, showing a reduction of 9.5 percent (401 units).
The contraction in footprint caused a marked hit to the businesses of the microfinance sector, particularly the disbursement of loans and its value to various customers showed a significant drop.
In the last quarter, the disbursement size of loans reduced from Rs. 125 billion to Rs. 100 billion in the preceding quarter. The number of loans also reduced from 2.2 million per quarter to 1.9 million per quarter. Subsequently, the average size loan also dropped from Rs. 55 thousand to Rs. 50 thousand.
According to the industry stakeholders, the geographic footprint decreased due to the increased security and administrative requirements set out by the regulator for branches. This forced National Rural Support Programme (NRSP), a microfinance institution, to close down most of its smaller branches operating in remote parts where the cost of compliance was considerably high or unfeasible compared to the overall portfolio held in these very small branches or given the scale of operations.
SECP’s Steps To Bring Reforms in the Microfinance Sector
Security Exchange Commission of Pakistan (SCEP) issued circulars named “Guidelines for Grievance Redress System in Non-Bank Microfinance Companies (NBMFCS)” and “Regulatory requirements for the branches of Non-Bank Microfinance Companies”.
These revolve around the facilitation and appropriate guidance for the NBMFCs to effectively and efficiently resolve clients’ complaints and branch requirements set out for NBMFCs respectively.
Regarding the branch requirements, the circular highlights that the NBMFCs are required to:
• Display certificate of incorporation and valid license issued by the SECP to conduct the business of microfinancing at an appropriate place in the branch offices.
• Have appropriately trained staff/human resources
• Security arrangements for the safety of documents and staff.
• Proper client support for filling up of applications and completion of documentation.
• Grievance redressal system/mechanism for prompt and effective resolution of clients’ complaints.
• Product information relating to various products being offered by the NBMFC at the branch through printed brochures for the information of potential/existing clients.
The microfinance institutions were to comply with these requirements within 60 days of the date of the circular.
Microfinance Sector’s 2020 Vision
The reduction of microfinance footprints and its impacts on the sector is being called temporary and likely to be reversed swiftly in the coming months. The expansion of the microfinance sector is persistent regardless of the recent correction in the sector.
Chairman Pakistan Microfinance Network, Nadeem Hussain, said that the microfinance sector will not be affected and will achieve the targets for 2020.
The microfinance players are moving away from the brick and mortar approach to digital financial services. Use of m-wallets and digital credits can deliver the volumes and expansion in outreach in a cheaper and convenient manner. This closure of branches is not a step to move out of these geographical areas as the decision is a result of cost-benefit analysis to ensure compliance with SECP security requirements, he added.
Pakistan Microfinance Network has set a target to reach 10 million borrowers by the end of 2020 while Gross Loan Portfolio (GLP) size will settle at Rs. 362 billion.
Update: A previous version of the article incorrectly mentioned NRSP Microfinance bank instead of NRSP (National Rural Support Programme). The mistake has been corrected.