Microfinance sector in Pakistan is facing multiple internal and external challenges, despite due importance from the government. Studies suggest that internal weaknesses of microfinance institutions (MFIs), lack of adequate training, misuse of loan money and common perception about microfinance products are hurting the growth of the sector in the country.
Skill development sought:
A study published in the recent issue of European Journal of Economics indicates the government in Pakistan has recognised the role of MFIs in the development process. Survey conducted in Lahore, Karachi and Islamabad shows that about 78 per cent banking and microfinance professionals agree that the government is giving due attention and importance to the microfinance sector in the country, while 22 per cent has negative viewpoint.
However, half the survey’s respondents pointed out that the staff associated with MFIs in the country needs adequate training. They stressed that without skill development and professional training, this human resource could neither be helpful for MFIs nor for the country’s economy. Research also underlines the significance of client’s capacity building as figures show that 74 per cent respondents believe that MFIs lack in clients’ skill development attitude. This huge gap indicates that policymakers at MFIs are not putting due efforts in their business and their clients are not only poor but also lack management and other skills.
Client orientation:
Another important factor is inappropriate use of the loan money by clients. Figures shows that 30 per cent microfinance professionals have pointed out that clients use loans for personal consumption, while 70 per cent are of the view that loans are being used for investment purpose or projects for which they are awarded.
Research also highlights that client’s perception towards microfinance products in Pakistan is another hurdle. 80 per cent respondents indicate that it is a common perception among their clients and general public that financial products in the country are largely non-Islamic. However, they pointed out that the issue could be resolve by the establishment of Islamic MFIs or marketing the microfinance concept more aggressively.
The study also points out that norm-restrictions in the financial sector are considered a hurdle, but it is believed that in the course of time of these norms may decline. However, today 53 per cent experts mention that such norms exist and hitting hard on MFIs.
Internal challenges:
Highlighting key internal challenges, it indicates that 74 per cent financial experts believe that availability of cheaper financial resources is the biggest challenge to MFIs and the growth of the sector. The cost of borrowing for small borrowers is exorbitantly high. They stress that consistent efforts are required to make small loans available at competitive cost in comparison to other financial products. About 87 per cent blame limited presence of MFIs as the root cause of low performance and growth of microfinance.
Giving their feedback on the general inability of MFIs about risks and standard practices, 52 per cent respond positively about the situation but 48 per cent do not agree. It shows that there is a great need for MFIs to mitigate risk factors and adopt standard practices. It also underscores the need to make microfinance products more compatible to conventional banking. However, a good percentage (48 per cent) does not agree that there is incompatibility between microfinance need and traditional banking, which means that second majority of MFIs believe that conventional banking system can also cater to the need of microfinance products. Research also shows that most MFIs (59 per cent) lack in value chain and delivery process of microfinance products.
