Nadeem Hussain, Founder, President and CEO of Tameer Bank, speaks about the potential of microfinance banking.
What is the microfinance outreach in South Asia?
It differs from country to country. In Pakistan we have an outreach of about 3.1 million. Bangladesh has the highest outreach. The country has three microfinance institutions with an outreach of 10 million each. In India, the outreach in terms of absolute numbers is in excess of 30 million people.
However, if you look at the figure as a percentage of potential market then the penetration is low in all countries including Pakistan - especially in Pakistan – where it is 3.1 million against the market of 30 million. That makes the penetration only 10 percent.
Why is the penetration so low?
Microfinance has its own challenges. It takes time to develop. In Pakistan’s context, the positive feature is that the State Bank of Pakistan has special regulations for the microfinance sector. None of the other South Asian countries have it. There are no microfinance specific banks in Bangladesh and India while in Pakistan there are eight microfinance banks scheduled and licensed by the SBP.
However, the industry split between banks and what we call microfinance institutions is half and half. The microfinance institutions (MFIs) are regulated by the SECP. The challenge for the MFIs is funding. They don’t have enough capital and funding available to meet the customer demand. The challenge for the banks is distribution and a network that is large enough to meet the needs of the customer. But we are getting there – with a 30 percent increase every year. The percentage looks good considering the fact that we have started off with a small base, but the absolute amount is a challenge.
I am also the chairman of the Pakistan Microfinance Network. My three-year goal is to increase the figure of three million people to 10 million, which will eventually mean that we are impacting 50 million people assuming a family size of five.
What is the recovery rate?
Universally, the recovery rate in the microfinance sector is usually better as compared to commercial banks. In Pakistan the recovery rate is 97 percent. The recovery rates in Bangladesh and India are also good -- around 9799 percent.
The reason is this sector caters to the section of society which is most concerned about its honor. They don’t want to fall prey to money lenders or arhatis whose interest rate is usually 300 to 400 percent. The challenge in the microfinance sector is not the recovery rate but the business model that allows a bank to sell a small loan which has high scrutiny requirements. A commercial bank can give out a loan of, say, five million or 50 million since it has a balance sheet, rating report, income statement and broker’s report. Microfinance customers don’t have any of these.
So the bank has to go to a customer and rebuild his income statement. This means one loan at a time. A relationship manager goes and figures out what the customer’s income and expenses are. Then a verification officer goes and verifies the figures. It all needs a business model that can absorb the cost and create an interest rate that is acceptable to the customer. So default is not a challenge. Funding and scale is the challenge.
Is it true that the mark-up on microfinance is higher than on normal loans? If yes, why?
It is easy to say that mark-ups are high. What margins do microfinance banks operate at? They operate at a margin of three or four percent while the effective interest