Constraints to the Development of Microfinance Sector in Pakistan

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Constrains to the development of Microfinance Sector in PakistanAyesha MajidIntroductiona system of providing services such as lending money and saving for people who are too poor to use banks—Oxford DictionaryMicro finance is the provision of financial services including Credit, Savings, Insurance etc, to those sectors of economy, which are not serviced by traditional formal financial institutions viz. commercial banks and non-banking financial institutions.Suppliers of Microfinance Category 1: Informal Sources Category 2: Semiformal Sources Category 3: Formal SourcesPakistan transitioned from introductory to growth stage in 2008Objectives & AimsOverall Objective“To determine the factors effecting growth of micro finance sector in Pakistan”. Despite the participation of the low-income earners and so-called “Poor” in MFIs, these organizations continue to thrive despite the challenges that surround them, e.g. High rate of defaulters.Specific AimsDetermine the extent to which the amount of individual investment influence the growth of these MFIs.How education levels of the participants influence the growth of MFIs.How the utilization of loans received by individuals / Group impact growth of the MFIs.To find out how the participation rate of individuals/ Groups in MFIs affect growth rate.Background90% of the microfinance market is untappedAccording to SBP annual report 2016 the growth rate is unsatisfactoryIt is one of the most robust periods in the microfinance sector of Pakistan in terms of growth. Growth rate over 30% annually. There are more than 40 microfinance institutes operating9 major microfinance banksThe total outstanding loans are approximately Rs 50 billiontotal number of borrowers is approximately 2.8 million.Cont’dNon Performing Loans or Portfolio at Risk  is less than 5%FINCA, the non performing loans are less than 1%market’s average loan size is Rs 26,000 onlyThere are three main principles of lending :The repayment capacity of borrowerEnsuring that the loan is consumed for same purpose which the borrower had mentionedThe overall general reputation of the borrowerMicrofinance (Credit, Deposit, Insurance and Remittances)Transitory VulnerableTransitory PoorChronic Poor Extremely Poor Non-Poor Transitory Non-PoorFrom a pyramid Microfinance Featuresfinancial services : poor & low-income clients/unsalaried borrowersNo collateralLoan Amount : 10,000 - 40,000 Loan Tenure :3 – 24 Months include group lending and liability pre-loan savings requirements gradually increasing loan sizesMicro Business Loan Micro Agriculture Loan Micro Assets Loan Livestock Loan New Micro Business LoanProcess of Micro CreditMajor cause for constrainsRecession2009 recession of the industry slowed the growth rateIncreased default ratesmaller loans cost of doing business and managing these loans is generally highhave to charge a rate which is slightly higher than commercial banksThus many customers try to obtain loan from commercial banksCustomer BaseIlliterate populationMajority hasn’t used a formal banking service in pastMost view MFI to be unislamicChallenges in MicrofinanceHigh interest rate & high transaction costBarriers for conventional bankingInadequate investment in Agricultural and Rural developmentLow level of technical understanding of banking and financeNo innovative Mix of products by microfinance institutionCredit decisions for borrowers without collateral or salary cannot be based on automated scoring Inappropriate donor subsidies.Competition is increasing with entrance of international players like FINCAPoor regulation and supervision of deposit-taking MFIsFew MFIs that meet the needs for savings, remittances or insurance Limited management capacity in MFIsInstitutional inefficienciesNeed for more dissemination and adoption of rural, agricultural microfinance methodology. MFPs & Insurance Co.Awareness & Low literacy High Premium High Transportation Cost (Rural) Product viabilityCulture (Low demand for voluntary insurance distrust Diseases highConsumer protection ClientIssues/ChallengesTransparency   Cashless vs. cash based Settlement of claims (time required)Competition (product pricing)Volumes required (low cost)Existing products not meet the need Product diversificationMarketing difficult then Credit/SavingsPush Vs. PullLate reimbursement of claimsRegulationLack of understanding of microinsurance Lack of appropriate informationLegal framework not supportive MFPs agents or brokers Product diversificationLiterature ReviewBackground(Shahnaz A Rauf, Tahir Mahmood, 2009) Views the growth strategy adopted by the microfinance sector has influenced performance of the microfinance institutions in Pakistan. MFI’s in Pakistan are facing credit constrains hence have focused on sustainability rather than social support.Credit Constraints & Credit management(Khan, 2015) There is a significant impact of internal and external variables on credit constrained faced by microfinance providers. Due to credit constraints and low deposit mobilization 81% of potential clients remain unserved.(Evelyn Richard 2008) The components of CRM system differ in CBs operating in a less developed economy from those in a developed economy. This implies that the environment within which the bank operates is an important consideration for a CRM system to be successful. Loan portfolio is not only the largest revenue-generating asset of FI but also the biggest source of risk.Economies of ScalePakistan Micro finance industry is still in early-development-phase (Bugvi, Sahibzada Ahmad Muneeb, 2014). Pakistan has very few interested commercial banks who supply micro-funds. Pakistan microfinance industry relies significantly on international donor funds. Microfinance is considered as a social service in Pakistan and banks lack a Socio-Commercial approach.External Environment(Mohammad, 2010) The industry has witnessed rapid growth since 2000 after the entrance of international players and of local mega banks. There are enormous opportunities that can be availed if the government provides a level playing field to the private sector market players in the arena.Financial PerformanceDue to prohibition of interest (Riba) in Shariah, two microfinance banks operate in parallel systems in Pakistan (Dr. Muhammad Farooq, Zahoor Khan, 2014). Under MSDP federal government on 12th August 2000 inaugurated the first microfinance bank of Pakistan—Khushhali Bank (KB). . He conclude this based on comparison of social and financial performance of Islamic and conventional MFIs from 2005 to 2010 in Pakistan. IMFIs were more cost effective compared to conventional MFIs based on CPB and OEA.Financial Self SufficiencyThe current emphases of key players is operational shift from donor-funded organizations to financially sustainable commercial financial institutes. The shift is led by khushhali Bank. This shift is conflicting with millennium development goals and due to it; MFI’s are inclined to operate near urban areas. These MFB offer short-term smaller loans at higher interest rates than traditional banks (Heather Montgomery, John Weiss, 2011).Non-Performance LoansMain debacle in Microfinance industry is non-performance of loans (Amal Aslam, Neelam Azmat, 2012). Search for alternative collateral options is secondary to more pressing issues concerning loan recovery. The roots of the issue lie in client screening, selection and monitoring processes. The character and quality of staff is key to the screening, selection and monitoring of borrowers hence internal corruption and collusion play the pivotal role. MFBs have access to banking courts, non-bank MFPs do not. Internal Environment(Amal Aslam et al 2011) The roots of the issue lie in client screening, selection and monitoring processes. The character and quality of staff is key to the screening, selection and monitoring of borrowers hence internal corruption and collusion play the pivotal role.Customer BehaviourLow number of women are taking microfinancing for entre

 

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