Microfinance Banks Serving More Accountholders, Borrowers Than Conventional Banks

Microfinance Banks (MFBs) continue to expand their outreach of financial services to the low-income segment of the population despite challenging macroeconomic conditions, serving more accountholders and borrowers than conventional banks with limited sizes. According to the State Bank of Pakistan (SBP), during CY23, the number of branchless banking (BB) accounts rose by 18.1 percent, reaching 114 million accounts whereas the number of active accounts reached 64.1 million. MFBs account for around 80 percent of the total branchless banking accounts of banks and MFBs combined. On the other hand, conventional banks maintain an accountholder base of around 85 million. The SBP stated in the Financial Stability Review-2023 that MFBs pose relatively low systemic risk as they represent only 1.3 percent of the total financial sector assets. Nonetheless, given their broad customer base that exceeds the banking sector in terms of number, MFBs are crucial for achieving the objectives set under the National Financial Inclusion Strategy. Despite their small share in the financial industry, MFBs have been instrumental in widening financial inclusion through branchless banking. BB accounts provide easy access and a cost-effective way of delivering financial services to the unbanked and underserved population. According to the SBP, the number of microfinance bank borrowers stood at 5.7 million whereas the number of bank borrowers stood at 4.0 million. MFBs have provided around 58 percent of their total loan portfolio without any collateral, i.e. loans secured through personal guarantees and expected cash flows. While this feature has helped rise in the usage of financial services, it also involves relatively higher credit risk for MFBs. Various factors, such as a lack of data-driven credit models, high susceptibility of the borrowers to economic shocks, and exposure to an agriculture sector that is vulnerable to climate risk, mainly drive the overall credit risk of the MFBs. Going forward, the MFBs’ performance will depend on their ability to build buffers to withstand such disruptions, especially reestablishing the institution-borrower relationship that was severed during the post-pandemic period. Tackling these issues is crucial for enhancing loan recoveries and lowering the credit risk thus protecting their already stressed solvency position, the report stated.