More than a decade ago, Pakistan’s banking industry saw a very unusual transaction. Not fulfilling the capitalization requirements, Khadim Ali Shah Bukhari (Kasb) Bank was sold to Bankislami for a price of RS1,000. To this day, this transaction remains a topic of discussion among Nerd people and is surely an interesting pepita in the history of the sector.
While it may have been controversial, Kasb was easy to handle, since it was one of the few bad apples in an industry in another healthy way. What should the regulator do when a complete sector, almost a billion assets of assets, is on the same way and refuses to show signs of improvement?
This has been the situation facing microfinance banks, which has registered added losses every year since 2019 and continued that ritual in Q1Fy25 with a net income of RS2.3 billion negative. As a result, their capital shock absorbers have been exhausted for 12 quarters in a row and are now 1.2 percent of total assets weighted by the risk, well below the 15PC required by the State Bank of Pakistan.
Unlike the last time, this disaster is not so simple to clean, since microfinance risks are more systematic than specific to the company. The big question is whether to transfer the problem to another sponsor is really the solution. Paraphrasing Professor Damodaran, why throw good money after bad?
Almost 141.5m total financial accounts have been opened in Pakistan between fiscal year 2017 and fiscal year 200, of which two thirds were without branches
Haris Mahmood Chaudhary, president and executive director of Mobilink Microfinance Bank, does not agree with this opinion and feels that it requires a little more context. “Starting with COVID-19 and then with subsequent floods, the industry has faced a series of serious clashes, which have put the profile of our client, that is, low-income and agriculture communities, in particular the pressure. As a result, banks have also felt stress in books,” he explains.
More importantly, Chaudhary believes that it is not fair to evaluate microfinance purely from the bottom line lens. “Worldwide, the success of microfinance should be judged on the basis of how social indicators affects. In the context of Pakistan, the data show that 56PC of all loans to agriculture has been through this industry. Similarly, almost half of all mortgages in the country are raised by microfinance. That despite the fact that our industry is not only much younger but also more young small than the main banks individually. “
“We should focus on how the industry has contributed to our social indicators. Has poverty fallen? How many women have we opened financial services? Do people now have access to digital wallets?” He questions.
If that is our lens, Mr. Chaudhary has a point. According to a Data Drabar analysis, almost 141.5 million total financial accounts have been opened in Pakistan between fiscal year 2017 and fiscal year 2014. Of this, two thirds had no branches, thanks to the two telecommunications players who historically have taken advantage of the microfinance licenses of their subsidiaries for deposits.
“The largest opportunity area is to open the mandate of internal remittances for microfinance banks and bring incentives along with the programmed institutions”
In the same way, in regards to the advances, the scheduled bank is absolutely no microfinance match in terms of volumes, with the latter with 9.28 million borrowers from 2024, of which 1.7m were rural. In contrast, the first had 4.56 million pending loans in the same period, despite having an asset base almost 55 times.
There, Mobilink Microfinance Bank Limited (MMBL) is one of the industry leaders, which represents more than 18 percent of the total assets and net progress in RS185.4bn and RS74.9bn, respectively. Unlike his brothers in the license, he has somehow managed to address the problems of the sector much better, as reflected in a 19.16PC capital adaptation relationship by 2024. However, it has not been immune to them and, for the first time in many years, registered a lower red line.
While the idea of social improvements is powerful and good, sponsors are probably more concerned about monetary yields and would probably would like to reap some dividends after years of investments. Can microfinance provide a way to that, despite recent problems? Mr. Chaudhary seems to think so.
“After Covid-19, we have seen that two main changes occur in the industry, that is, the wave of digitalization driven by the wallets and the growth of the Nano loans. Although some banks have capitalized in these better than the rest, they present a general opportunity for anyone that anyone generates sustainable, even, if not the mouth mouth, the margins of earnings,” he says, he added, ” 18pc, which is very reasonable, “if it is very reasonable.”
“However, for this to happen, the industry needs to improve its risk management and profile practices,” he warns. Although the reform playing book can be obvious, most existing sponsors have not shown the willingness to make the investments required in technology, systems and distribution and, therefore, continue to be dragged even more in the disaster. It is not surprising that the regulator is attentive to find new promoters and lately has achieved the sale of farm and Advans to the Pakistani and Egyptian Fintechs, Abhi (in association with TPL) and MNT Halan, respectively.
All probability, the same recipes as Mr. Chaudhary identified. There is no doubt about the potential to combine wallets with nano loans to generate good returns, but what does that about the future of more traditional microfinance say? Despite doing better on those fronts, MMBL continues to grow its branches, which reached 113. A reason is probably the wide abyss between the average deposit balances of an Versus Digital brick and mortar customer. To be clear, this is not limited to microfinance banks or Pakistan.
This scope of microfinance, either through branches or without branches, can serve as a distribution arm for scheduled banks. After all, the last financial inclusion strategy of the SBP has established ambitious objectives, which will certainly not be achieved if the greats of Chundrigarh Road maintain their status quo. For Mr. Chaudhary, such associations are critical and can open new monetization opportunities.
“The largest area of opportunity is to open the mandate of internal remittances for banks without branches and microfinance and bring the incentives along with the programmed institutions. This can significantly help the industry to be much more stable,” he concludes.
The writer is co -founder of Data Drabar and works for the Karachi Business and Leadership School
Published in Dawn, The Business and Finance Weekly, July 21, 2025
