The landscape of microfinance banking in Pakistan is a complex one, combining both skepticism and optimism. The sector faces challenges due to its exposure to economic shocks that can impact low-income borrowers. It is essential to carefully analyze the vulnerabilities of institutions operating in this segment.

Nevertheless, the pivotal role of the microfinance banking sector in providing financial services to underserved populations in Pakistan is a notable accomplishment. This underscores the critical importance of microfinance in promoting financial inclusion and economic empowerment within the country’s most vulnerable communities.

Microfinance banking in Pakistan dates back to the inception of Khushali Bank in 2000, which was established under a special ordinance. The subsequent MFI Ordinance of 2001 laid the regulatory foundation for microfinance institutions, with a specific focus on providing financial support to micro-enterprises and marginalized individuals as part of a sustainable poverty alleviation strategy.

What sets MFIs apart from traditional commercial banks is their unique approach to lending. They provide a substantial portion of their financing without collateral, catering to various economic activities, including housing.

This model allows them to serve clients who might otherwise be excluded from formal financial systems. MFIs typically deal in smaller loan amounts compared to commercial banks, with general loans capped at Rs. 350,000 and housing loans limited to Rs. 3 million.

But, the sector has had its own share of troubles over the past few years and there is no respite in sight.

The state of play

Currently, there are 12 Microfinance Banks (MFBs) in the country, with HBL Microfinance Bank, UBank, and Khushali Bank being the largest in terms of lending book size. The industry’s prominent sponsors include commercial banks, NGOs, and telecom operators, reflecting a diverse range of stakeholders.

MFBs have demonstrated significant progress over the past five years. The asset base of MFBs has shown robust growth, with an average year-on-year growth of 19.1%. Equally impressive is the substantial increase in the gross loan........

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