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Enterprise - - Contents -

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

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