KARACHI: Pakistan’s microfinance sector is on the road to recovery, the head of the Pakistan Microfinance Network said this week, after the collection of loans ground to a halt in April as the South Asian nation came to terms with a fast-growing coronavirus crisis.
Alternative lending companies and microfinance banks across Asia have been scrambling to raise funds and stave off bankruptcy as they faced a wave of bad loans in the wake of the coronavirus pandemic. The Pakistani microfinance sector was also badly hit, industry experts say.
A study, published in the Oxford Review of Economic Policy, on the future of Pakistan’s microfinance sector amid the coronavirus pandemic revealed that on average, week-on-week sales and household income both fell by about 90 percent, while 70 percent of microfinance borrowers reported that they could not repay their loans.
“In April, the recovery of some of our members [microfinance firms] dropped to 15 percent,” Syed Mohsin Ahmed, the CEO of the Pakistan Microfinance Network (PMN), told Arab News.
“As the lockdown has eased since May 2020, the recovery has also improved by 60-65 percent.”
Microfinanciers provide tiny loans to small-scale entrepreneurs. In Pakistan, the sector, which grew at an average rate of 40 percent between 2015-18, caters to the needs of around 7.3 million borrowers, according to PMN data. The gross loan portfolio of the sector stood at Rs308 billion, as per PMN’s figures for March 2020.
Farid Ahmed Khan, the CEO of FINCA Microfinance Bank, told Arab News that 2019 was already a tough year for the sector due to double-digit inflation, high interest rates and rapid currency devaluation.
“To make things worse, in early 2020, COVID-19 brought about an unprecedented economic impact – immediately affecting the vulnerable and low-income sections of society, which this sector primarily deals with,” Khan said.
In March 2020, Pakistan’s central bank announced a relief package allowing debt rescheduling for borrowers from the microfinance, small and medium sized enterprise, corporate, retail and agricultural sectors. Under the package, payment was deferred for at least a year given that many borrowers were assumed to have lost 100 percent income.
“So far around 30 percent loans have been restructured,” PMN chairman Syed Nadeem Hussain told Arab News. “The instalments are being prolonged to avoid undue pressure because of the circumstances caused by the pandemic.”
While debt moratoriums come with their own set of problems, they also present an opportunity to reform the microfinance sector, experts say.
“Because of the moratorium offered on the loan portfolio, microfinance institutions will face liquidity and cash-flow challenges,” FINCA’s Khan said.
“But this will force the institutions to review the cost structure, look for ways to control operational expenses and be extremely disciplined about resource utilization.”
However, he said, microfinance players would be able to weather the coronavirus storm as lockdown restrictions continued to be eased.
“Although current predicament is unparalleled in terms of magnitude and impact, the microfinance sector in Pakistan is resilient enough to cope with it,” Khan said. “It will slow us down, but we will weather this crisis due to strong regulatory oversight and the inherent strength of the system.”
Going forward, said Roshaneh Zafar, the founder and managing director of Kashf Foundation, measures needed to be put in place to tackle chronic liquidity issues of the sector.
“Liquidity is a very big risk for the sector as a whole and many efforts need to be made to address this both on an immediate basis and in the long run,” Zafar said. “There is a need to build a risk mitigation fund for the sector in order to enable the sector to address future crises.”