The Microfinance Banking (MFB) industry has undergone a transformation of sorts in the last ten years in Pakistan. As a sector originally seen as part of the social economy currently integrated into national and global markets, MFB is an emerging example of institutional hybridisation. Microfinance (MF) has been described as an inclusive financial system that can reach large numbers of poor and low-income people; yet it poses great challenges not least of which pertains the Mission Drift (MD). Over the past decade advocates have increasingly made the case for greater integration with the private financial markets. This entails MFB to attract private investors, commercialise, earn ample profits and expand as rapidly as profits allow. This financialization is concerned with the distribution of risk and pursues this through three processes of intermediation, valuation. and securitization. By doing so, the hitherto excluded poor borrowers are drawn more into the purview of commercialised private financial capital.
The roots of microfinance lie in a social mission of enhancing outreach to alleviate poverty. NGOs started offering Microfinance services in Pakistan in the 1990s; however, history of MF can be traced back to 1982. These MF services started as a social entity with the overriding concern to empower and pull people out of poverty; however, over the years, especially since the financial crisis of 2008, the industry has moved towards predominant commercial goals under the garb of ‘financial inclusion’. The peculiar context of Pakistan is tailored for the working of MF given the fact that it is a developing country with much of its population living below the poverty line and majority population lives in rural areas. Given the immense potential of the industry, there is still untapped market of millions of people and the industry growth rate estimated to be double digit every year. In terms of international positioning, the Pakistan MF industry holds a special place in many ways. Recently, there is a major shift in emphasis from the social objective of poverty alleviation towards the economic objective of sustainable and market-based financial services. In other words, the new focus of microfinance involves a trade-off between outreach and efficiency. One implication of this changed focus is that microfinance institutions will have to be financially self-sufficient to meet the objective of enhanced outreach. The Microfinance sector in Pakistan is also faced with the challenge of enhancing outreach on a sustainable basis.
The new incoming investors in the MF are making it more commercial by taking it away from the original development logic of ‘poor, less profitable and more risky clients’ while focusing on the female population
World Bank’s 2008 publication “Finance for All” suggests financial market development to a broader financial sector with focus on those on low incomes or without access to formal financial services. However, this shift the focus from poverty to one of inclusivity. over the past decade advocates have increasingly made the case for greater integration of MF Banks with the private financial markets. This entails MF Banks to attract private investors, commercialise, earn ample profits and expand as rapidly as profits allow. This financialization is concerned with the distribution of risk and pursues this through three processes of intermediation, valuation. and securitization. By doing so, the hitherto excluded poor borrowers are drawn more into the purview of commercialised private financial capital. Financial inclusion has changed the microfinance or ‘poverty finance’ in four important ways by new guiding ideas and ideology; apprising new theories of change; opening to mainstream finance and by introducing new practices. The seventeen Sustainable Development Goals set by the United Nations for 2030, access to financial services features in at least five of these. However, the traditional banking although flourishing has failed to adequately contribute to solving major social problems.
The MFB came into operation with the setup of Khushali bank after the Government promulgated the MF ordinance in 2001. Pakistan is a unique case study for MFB. It is the fastest growing and most stable MF Banking industry in the world. In addition, the regulatory environment in Pakistan is a comparatively advanced and the central bank in Pakistan, State Bank of Pakistan plays a vital role in guiding the MFB. Given its attractiveness (and the post financial crunch) it has attracted increasing number of commercial interests in the recent years in the MFB industry in Pakistan not least the giant Telecommunications companies. The recent entry of Telco’s, Mobilink, Telenor and Ufone, has given a fillip to the digital revolution in the Microfinance Industry (MFI) in Pakistan especially the MFB.
Small wonder that the inception of telecom companies into MF sector has initiated a change. Changing technology has also facilitated the change in different customer segments in recent years. The cellular revolution that has occurred in Pakistan since the early 200s have ushered an unprecedented growth of cellular technology in the country. It is estimated there are millions of mobile phones in operation just giving a huge potential for electronic financing activities. The three giant telecom companies have overtaken the three large MF banks and have, in fact, added to the financialization of the MFB sector. This coming of predominant commercial interests into Pakistan MF industry point to the attractiveness of the industry in terms of the large untapped market but also in terms of the emphasis put by the government emphasis on financial inclusion also. This has led to the transformation of sorts in the working of MFB in Pakistan.
The MFI especially MFB face the risk of MD since the changing environment can lead them to a more private banking approach than the development oriented which is the essence of MF. Although over the past decade the microfinance field has expanded and scaled up in terms of its number and size, there are apprehensions in terms of MFI drifting away from original poverty alleviation mission. Even though it has reached more people and have greatly increased its financial sustainability; there is a concern this may lead to larger loan sizes to fewer poor clients with more rigorous loan eligibility criteria. The new incoming investors in the MF are making it more commercial by taking it away from the original development logic of ‘poor, less profitable and more risky clients’ while focusing on the female population. It is also believed that international organisations play a role in diverting MFI from their original mission and it has emerged as a new commercial niche for private actors, challenging the role of early state-led models.
However, the transformation from informal non-profit to regulated and more commercially oriented status is not confined to MF. In financial matters the type and extent of regulations matter and for supporting the given govt regulations and policies, there is requirement to have new financial tools and restructured financial institutions; this could facilitate sustainable growth. It is suggested that states with weak capacity and flawed industrial policy may be better off with some degree of public control over finance. Although the role of the financial sector in Pakistan, which is widely considered to be a successful case of financial liberalization in the 2000s; the withdrawal of state control over the financial sector has led to a deterioration of outcomes.
The writer is a freelancer