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Microfinance Performance in Pakistan 1999-2005: Growth - But a Structural Flaw Persists

Performance analysis of eighteen MFIs under USAID-sponsored WHAM project in Pakistan
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This document examines the progress that Pakistan has made over the years in generating growth, minimizing costs, and ensuring repayment. It argues that:

  • Despite this progress, performance data reveals a reluctance to increase the revenue earned form lending to fully cover costs;
  • Interest rates, service charges, and other fees charged to borrowers are too low for growth to continue.

The report identifies the following features of the microfinance industry in Pakistan:

  • Massive upfront investment;
  • Investment initiating growth;
  • Globally competitive credit delivery costs;
  • Solid loan repayment for most institutions;
  • Insufficient revenue generation to cover costs;
  • Lack of movement towards sustainability.

The report identifies the following implications of this shortfall of revenue against costs for the present and future of microfinance:

  • Upfront investment in microfinance is used to cover this gap;
  • Covering-up losses for too long misses the opportunity to build assets across the sector and create a capital base that can fund growth;
  • Investment funds are leaking out of the sector, further weakening long-term growth prospects;
  • If the flow of investment funds slows, the microfinance industry will contract below its current size.

The report concludes that:

  • Under the current conditions, microfinance can continue but cannot grow towards sustainability;
  • Pakistan can consider the costs and benefits of raising interest rates, service charges, and other fees necessary to become sustainable.

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بقلم Burki, H., Chen, G., Ahmed, S.M.
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