Microfinance – Industry Report -Oct 2022

Microfinance
2022

Preamble

The microfinance sector has witnessed a remarkable growth in terms of

operational and financial sustainability with the emergence of few enterprises
driven by professional entrepreneurs in recent years. It has also attained fair
degree of maturity, sophistication and competence with the advent of rating
agencies, private/social equity investors, newer financial instruments, and more
importantly the recent thrust on financial inclusion.

Pakistan’s microfinance industry contains three types of institutions that provide

microcredit services to the poor households/micro enterprises:

1) Microfinance Banks (MFBs)

2) Microfinance Institutions (MFIs)
3) Rural Support Programmes (RSPs)

There are 11 MFBs, 17 MFIs, 4 RSPs, and 4 Other Institutions (reporting) in the
Sector. MFBs holds the highest market share of ~76% in terms of GLP (Gross
loan portfolio).

MFBs are regulated by the State Bank of Pakistan, while the SECP is the
Regulatory body for MFIs and RSPs. Relevant applicable laws for MFBs include
Prudential Regulations for Microfinance Banks, 2014, and Microfinance
Institutions Ordinance, 2001. MFIs & RSPs, on the other hand, are governed
through NBFC Rules, 2003 and NBFC Notified Entities Regulations, 2008. The
institutions carrying out microfinance services are required to be registered with
the SECP as NBMFCs.

The Sector’s credit quality dropped further with Portfolio at Risk (PAR>30 days)
rising to ~6% - June’22, up from ~5.1% as at End-Dec’21. Among peer groups,
the highest to record infection were MFBs (~6%). MFBs, holding the largest
share in the pie, witnessed a weakened credit health with PAR>30 days
increasing to ~6% - June’22 from ~5.1% as at End-Dec’21. Meanwhile, RSPs
recorded a substantial improvement registering PAR>30 days at ~ 4.2% in -
June’22 (~7.4% End-Dec’21).

Prepared by: Enterprise Risk Management – Risk Management Group

 Microfinance – Industry Report -Oct 2022

Challenges faced by the sector in CY 22

Pakistan’s Microfinance Banks
and their Market Share CY22 is turning to be yet again a challenging year for the Microfinance
Sector. One of the major highlights is the flashflood which has affected the
S.no MFBs Market lives of more than ~33mln people (or ~15% of the country’s population) and
Share (GLP) submerged one-third of the nation under water. Almost ~1.1mln livestock is
Khushhali 23.69% lost. Consequently, one of the key risks associated to the disaster is the risk
1.
of non-recovery from customers belonging to areas that have undergone
2. Habib MFB 21.89% adversities due to the floods.

3. U MFB 14.94%

4. Mobilink 11.58%
Sector Outlook (FY19-FY22)
5. NRSP 9.01%
Indicators FY19 FY20 FY21 FY22 Aug’22
6. FINCA 5.91%
Average 7.30% 10.70% 8.90% 21.30% 27.30%
7. Telenor 3.11% Inflation rate
Average 10.43% 11.95% 7.43% 15.40% 16.00%
8. APNA 3.73% KIBOR
Monetary 9.69% 11.75% 7.00% 9.70% 15.00%
9. Pak Oman 1.64%
Policy Rate
10. Advans 0.93% PKRV 10.20% 11.79% 7.28% 10.68% 15.60%

11. Sindh MFB 0.35% Average 136.45 158.4 160.46 177.91 220.43
Exchange
rate

The current rising inflation can hurt the repayment capacities of microfinance
borrowers, who are already undergoing stress due to their crops, livestock,
and business destruction. It would also elevate the already high
administrative costs of the microfinance players, impacting their profitability.
Further, spreads are also expected to shrink since the cost of funding will rise
and almost negligible room exists to raise the already high APR under such
circumstances, which otherwise would come at the expense of credit health.
The infection ratio of the Sector is already growing – from ~5.4% in Dec’21 to
~6.8% in June’22.

Prepared by: Enterprise Risk Management – Risk Management Group

 Microfinance – Industry Report -Oct 2022

STRENGTHS Opportunities
TOP TEN BIGGEST RISKS AND THEIR
Huge demand and supply gap
SEVERITY Making finance accessible to especially in rural areas.
people.
Creating an enabling policy and
S.No Risk Severity A right step forward to achieve promoting financial inclusion.
1. Credit Risk 2 financial inclusion.
2. Natural Disasters 5 Microfinance for specific sub-
sectors, clustor for sustainable
3. Strategy 12
livlihood.
4.
5.
Profitability
Liquidity
9
17 SWO
T Threat
6. Macroeconomic Trends 4
7. Internal Fraud 16 Weakness
8. Interest Rates 1 Not properly regulated. Highly competitive market
9. Technology Risk 6 Concentration of only a few Over involvement of the
10. Competition 10 people only and mainly in urban government.
“Risk to Microfinance in Pakistan” by Pakistan areas.
microfinance network

Credit Risk has been characterized as the

highest this year jumping from second
place previously and significantly
outranking Interest Rates. Credit Risk has
risen significantly due to the COVID-19
Pandemic which has hindered lending MBFs ǀ True Infection
activities of MFPs. The deferment and 10.00%
9.00%
rescheduling of the existing portfolio of 8.00%
institutions at the discretion of the 7.00%
regulators further escalated this risk. The 6.00%
decision of the regulators came amidst the 5.00%
financial constraints and liquidity 4.00%
3.00%
challenges faced by borrowers which 2.00%
affected their ability to pay. The global 1.00%
health crisis also contributed to the 0.00%
CY18 CY19 CY20 CY21 1HCY 22
escalation in the risk from Natural Disasters
rose to second place compared to its prior
Write-offs as a % of GLP Fresh NPLs as a % of GLP
fifth place.
Overall financial parameters of microfinance banks have remained under
stress during the last couple of years mainly due to slow economic growth,
uptick in inflation, unexpected rains and pest attacks, issues pertaining to crop
yield and pricing, and unexpected decrease in livestock particularly in Sindh
due to untimely rains. Following CY21, the fresh NPLs are on a rise again. Net
NPL coverage was recorded at ~73% as of End-June’22. The ratio was above
~100% in CY20 due to the MFBs’ prudence to record provisions against
anticipated losses, coverage ratio has dropped significantly.

Prepared by: Enterprise Risk Management – Risk Management Group

 Microfinance – Industry Report -Oct 2022

JSBL’s Exposure in Microfinance

JS Bank’s Top Borrowers in terms
As of November 2022, JS Bank’s overall concentration in the microfinance
of Sum of Total Outstanding banks and institutions is 4% of the total loan book.
(Amount in millions) The limit amount for funded and non-funded stands 173 million. Whereas, the
percentage share based on limits is 0.04%. The outstanding total (funded and
non-funded) stood at 182 million.
Sum of total
Name of Borrower Outstanding JSBL’s portfolio until October 2022 displays no NPL in the microfinance
THARDEEP industry.
MICROFINANCE
FOUNDATION 15614785

TELENOR MICRO
FINANCE BANK LIMITED 166
MOBILINK
Conclusion and Future Outlook
MICROFINANCE BANK
LTD 0.2
The year 2022 was a challenging year for the microfinance industry due to the
national flood crisis. Growth in outreach in the industry was affected by the
Grand Total 15614951
adverse situation. Despite growing in double digit for nearly a decade the
JS Bank’s November Portfolio
industry saw decline in numbers as active borrowers. This was largely due to
the fact that players facilitated their clients by deferring and rescheduling of
the loans.

Despite the decrease in active borrowers, the GLP of the industry saw a
modest increase backed increasing loan sizes. However, deposits and
depositors continued to grow and remained unaffected. Similarly, the asset
“The disbursement of base of the industry grew by 25 percent though it was skewed in the favor of
microfinance loans the MFBs. It was revealed that players were well capitalized including the
decreased 8.2 per cent in NBMFCs, while deposits continued to be the main source of funds for MFBs.
July-September on a
quarterly basis while early Therefore, with the recent situation in the country we have kept the industry
delinquencies — borrowers outlook as a HOLD.
missing loan payments —
rose notably “mostly as a
result” of the floods hitting
parts of Sindh, Punjab and
Khyber Pakhtunkhwa.”
Dawn 18th December 2022

Prepared by: Enterprise Risk Management – Risk Management Group