Pakistan: The Dynamics of Microfinance Expansion

Jul 2007
Islamabad, Pakistan, July, 14 2007 - Pakistan with an estimated 20 million potential clients is among the largest microfinance markets in the world and a substantial portion of existing microfinance clients are located in Lahore District, reveals a latest research report.

While microcredit provision is expanding rapidly in Lahore district, the total market coverage remained only at 13 percent, notes the study titled ‘The Dynamics of Microfinance Expansion in Lahore’, which was jointly conducted by ShoreBank International Ltd and Pakistan Microfinance Network to depict the behaviour of microfinance institutions (MFIs) and their clients.

The report was funded by a USAID sponsored project ‘Widening Harmonised Access to Microfinance’, the UK Department for International Development and Financial Sector Strengthening Programme, a project of the Swiss Agency for Development and Cooperation.

It observes that despite a low, though rapidly increasing penetration of microfinance in Lahore, many resident microfinance providers (MFPs) are feeling competitive pressure that is likely to intensify over the coming years.

Microfinance outreach in Lahore, according to the report, stood at about 90,000 active clients in June 2006 and by September 2006, this count had reached about 112,547 active clients, showing 25 percent growth over a period of three months only. The study authors Hussan Bano Burki and Mehr Shah say, “As the microfinance sector gears up to expand at the national level, the Lahore market offers a valuable opportunity to study the dynamics of microfinance expansion in an urban market and to forecast the likely impact on the sector at the macro-level, should similar dynamics arise in other areas of the country.”

The study also reveals that rapid microfinance expansion in Lahore has led to a number of benefits including speedier outreach; new products; push within all MFPs toward more client-responsive processes and service delivery; as well as a sense of competition amongst the MFPs that is translating into lower transaction and opportunity costs for most existing borrowers. The study recommends to the individual MFPs three areas of action. They should focus on expanding into untapped markets in order to offset the competitive pressure arising from the geographic overlapping of microfinance operations.

Secondly they should invest in more effective marketing capabilities to improve people’s awareness of access to financial services. And lastly, the MFPs should institute stronger internal control systems to maintain organisational efficiency and sustainability during the upcoming period of rapid expansion.

The report also recommends to the collective microfinance industry to build industry-wide information sharing systems for supplementing MFPs’ internal control systems and to balance the increase in risk as clients discover increased opportunities for parallel borrowing from multiple organisations.

The authors have also recommended investing in and coordinating consumer protection strategies through client education, awareness raising and marketing to not only ensure that the benefits of growth and competition are sustained over time, but that the rising levels of competition provide effective choice to borrowers. It is hoped that this exploratory work will help all stakeholders-practitioners, the government and funding bodies-foster healthy competition and benefit microfinance consumers across the country.

Source : Daily Times

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