The aggregate profitability of the Microfinance Banks remained in losses for the fifth year in a row, as the sector’s pre-tax losses by the end of 2023 stood at Rs. 10.8 billion, lower than last year’s loss of Rs. 21.6 billion.
This indicates some signs of recovery, possibly because of the fading impact of the COVID-19 pandemic and the rain/flooding in 2022 and 2023, according to the report “Financial Stability Review” released by the State Bank of Pakistan.
The sector continued to face the challenging situation that started in the wake of the COVID-19 pandemic and was further compounded by the 2022 floods and their continued impact in 2023, prolonged stress in macroeconomic conditions, and consequent tightened economic policies to address the high inflation.
Overall, 13 microfinance banks are operating in Pakistan with a few maintained profitability, including Habib Microfinance Bank, U Microfinance Bank, Mobilink Microfinance Bank, and Telenor Microfinance Bank.
The number of loss-making institutions in the sector remained the same as the previous year. Most loss-making MFBs experienced higher administrative expenses in 2023, whereas, in 2022, higher provisioning against bad debts drove overall losses. The sector is facing challenges of administrative expenses which surged to Rs. 74.8 billion in 2023.
Most of these expenses were incurred due to branch expansion carried out by several MFBs. Higher administrative expenses are a universal phenomenon for microfinance banks due to their unique business model that involves a vast number of borrowers and the need to maintain continuous interaction. However, emerging technological advancements are offering opportunities that banks can leverage to reduce their operating costs.
Although the sector posted losses during the year under review, it is worth mentioning that the incurred losses were lower than last year. The sector’s financial indicators, including the ROA (before tax), reached -1.5 percent (-3.4 percent in 2022), and ROE (before tax) stood at -26.4 percent (-42.9 percent in 2022). Operational Self Sufficiency (i.e., the ratio of financial revenue to all expenses) stood at 78.8 percent in 2023 (69.8 percent in 2022).
The banks’ profitability indicates a substantial increase in the net interest income (NII), which almost doubled, reaching Rs. 54.8 billion by the end of 2023. This strong growth can be attributed to the rising interest rates in 2023, allowing interest income to outpace expenses. The net interest margin (NIM) rose to 12.2 percent in 2023 (10.1 percent in 2022). The sector’s income level was further supported by the non-interest component, which expanded 39.7 percent (42.0 percent in 2022) to reach Rs. 33.6 billion.
The growth in the asset base of MFBs was supported by a 15.8 percent (Rs. 81.3 billion) increase in deposits from 2022. Meanwhile, borrowings by MFBs fell by 57.3 percent (Rs. 78.6 billion) from the previous year due to lower investment activity. A detailed analysis of growth in advances by segments reveals that most of the segments recorded an increase in advances during 2023.
In particular, loans to agriculture and livestock rose by Rs. 21.6 billion and Rs. 20.8 billion, respectively. On the contrary, loans to enterprises and consumer segments fell by Rs. 6.4 billion and Rs. 1.8 billion, respectively.
The financing for agriculture and livestock rose, in part, due to the Prime Minister’s Youth Business and Agriculture Loan Scheme (PMYB&ALS) that started in December 2022. The objective of this scheme was to ensure the provision of loans to the agriculture and SME sector. Under this scheme, a new tier of interest-free microloans was introduced.
In addition, the Government of Pakistan (GoP) introduced three more schemes under the Kisan Package-2022 to provide relief to the farmers of rain/flood-affected areas.
Under the schemes, the government provided a Mark-up Waiver Scheme (MWS) for subsistence farmers against agricultural loans.
Microfinance banks also need to revisit their business models to rationalize and curb operating costs that have hauled their profits in the past several years. In addition, given the increase in credit risk due to high inflation and consequent stabilization policies, MFBs need to manage the underlying risks preemptively by enhancing their risk management capacities and strengthening capital buffers.
MFBs need to focus on raising funds through stable sources for profit generation and supporting the policy objective of financial inclusion in a sustainable manner.
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