Microfinance Performance in Pakistan 1999-2005: Growth - But a Structural Flaw Persists
This document examines the progress that Pakistan has made over the years in generating growth, minimizing costs, and ensuring repayment. It argues that:
- Despite this progress, performance data reveals a reluctance to increase the revenue earned form lending to fully cover costs;
- Interest rates, service charges, and other fees charged to borrowers are too low for growth to continue.
The report identifies the following features of the microfinance industry in Pakistan:
- Massive upfront investment;
- Investment initiating growth;
- Globally competitive credit delivery costs;
- Solid loan repayment for most institutions;
- Insufficient revenue generation to cover costs;
- Lack of movement towards sustainability.
The report identifies the following implications of this shortfall of revenue against costs for the present and future of microfinance:
- Upfront investment in microfinance is used to cover this gap;
- Covering-up losses for too long misses the opportunity to build assets across the sector and create a capital base that can fund growth;
- Investment funds are leaking out of the sector, further weakening long-term growth prospects;
- If the flow of investment funds slows, the microfinance industry will contract below its current size.
The report concludes that:
- Under the current conditions, microfinance can continue but cannot grow towards sustainability;
- Pakistan can consider the costs and benefits of raising interest rates, service charges, and other fees necessary to become sustainable.