Microfinance Banks Expand Outreach Despite Economic Challenges: SBP Report
Karachi, July 15, 2024 – Microfinance Banks (MFBs) in Pakistan continue to expand their outreach to the low-income segment of the population despite challenging macroeconomic conditions, according to the State Bank of Pakistan (SBP). The SBP’s Financial Stability Review-2023 highlights that MFBs serve more account holders and borrowers than conventional banks, despite their limited size.
During the calendar year 2023 (CY23), the number of branchless banking (BB) accounts rose by 18.1%, reaching 114 million, while the number of active accounts reached 64.1 million. Notably, MFBs account for approximately 80% of the total branchless banking accounts of banks and MFBs combined. In contrast, conventional banks maintain an accountholder base of around 85 million.
The SBP report states that MFBs pose a relatively low systemic risk, representing only 1.3% of the total financial sector assets. Despite this, MFBs play a crucial role in achieving the objectives set under the National Financial Inclusion Strategy, given their extensive customer base that surpasses the banking sector in numbers.
MFBs have been instrumental in widening financial inclusion through branchless banking, which provides easy access and a cost-effective way of delivering financial services to the unbanked and underserved population. According to the SBP, the number of microfinance bank borrowers stood at 5.7 million, compared to 4.0 million bank borrowers. Remarkably, MFBs have provided around 58% of their total loan portfolio without any collateral, relying on personal guarantees and expected cash flows. While this approach has increased the usage of financial services, it also involves relatively higher credit risk for MFBs.
Various factors drive the overall credit risk for MFBs, including a lack of data-driven credit models, high susceptibility of borrowers to economic shocks, and exposure to the agriculture sector, which is vulnerable to climate risk. To enhance loan recoveries and lower credit risk, the SBP emphasizes the need for MFBs to build buffers to withstand disruptions, particularly by reestablishing the institution-borrower relationship severed during the post-pandemic period.
The report underscores the importance of addressing these challenges to protect the already stressed solvency position of MFBs and ensure their continued contribution to financial inclusion in Pakistan.
