ISLAMABAD: Microfinance has maintained its steady path of providing loans to small and medium-sized enterprises (SMEs) despite economic vulnerabilities particularly in the aftermath of the pandemic.
However, the recent flash floods in Pakistan would overwhelm these challenges, impeding the growth and profitability of the microfinance sector.
Shahmir Saad, Senior Research Analyst at Pakistan Credit Rating Agency Limited, told WealthPK that calendar year 2022 is shaping up to be another challenging year for the microfinance sector, but it is still on a steady path of providing loans to SMEs. He said the disaster posed a risk of non-recovery of payment from those customers who have lost their belongings due to floods.
Shahmir said farmers obtain bank loans with the expectation of making a profit after selling their crops and return the bank loan after that, but they were unaware that floods will wash away their crops.
He said the repayment capacity of borrowers would decrease after the loss of their crops and livestock as well as the destruction of houses. This would impact the profitability of the microfinance sector due to increased administrative costs.
The researcher said that as of calendar year 2021, microfinance banks (MFBs) had lent 60% of their gross loan portfolio (GLP) to agriculture inputs and livestock, which are primarily impacted by the flash floods.
He said the microfinance sector remained intact throughout challenges like the pandemic, economic vulnerabilities, and flash floods that hampered its growth.
The outcome of the flash floods has yet to be determined, he said. In the absence of any regulatory relief, the credit quality of the sector is expected to take a further hit, especially for those microfinance banks where exposure to agri and livestock lending is high.
The Food and Agriculture Organisation (FAO) assessment of the flash floods projected that over 9.461 million acres of cultivated crops were destroyed and a large number of livestock lost due to floods.
Moreover, the growth momentum of GLP might also slow down in the third and fourth quarters of CY22. Due to prevalent challenges and associated uncertainties, the sector remains under surveillance.
Shahmir said the microfinance sector’s growth rate slowed down, but a healthy recovery was seen in CY21 where the GLP posted growth of 21% on a year-over-year (YoY) basis. Going forward, there are chances of restricted growth because of the recent flash floods, which had a huge impact on the lower income tier of the society.
Ayaz Ahmed, a former research economist at the Pakistan Institute of Development Economics (PIDE) Islamabad, told WealthPK that the microfinance sector in Pakistan has significant growth potential. He said the microfinance banks’ growth rate remained higher than the industry average and microfinance institutions and rural support programs.
He said climate change had an overwhelming effect on the microfinance sector due to unexpected rains and pest attacks, issues pertaining to crop yield and pricing, and damage and loss of livestock in Balochistan and Sindh provinces.
Data shows that the average growth in GLP is around 13% from CY18 to CY21. Total funding of MFBs was recorded at Rs506 billion as of the end of June, and the deposit base of MFB was recorded at Rs447 billion.
