MICROCAPITAL STORY: Pakistani Microfinance Institutions Charged with Deceiving Borrowers

Pakistani Microfinance Institutions (MFIs) found themselves in heavy criticism at a workshop on the state of microfinance held in Islamabad. The workshop was organized by the Planning Commission of the Government of Pakistan to revisit the policies in place for MFIs and determine recommendations for the future of the industry.

As reported by TheNews.com, a group of farmers visited the workshop and accused MFIs of misleading them into taking loans by promising that tube wells, roads, and schools would follow. The farmers said that while the MFI’s promises have gone unfulfilled, the borrowers are now trapped in a cycle of debt and required to pay what they feel are exorbitant interest rates of 25 to 30 percent. These interest rates, although they would seem high to newcomers to the industry, are fairly close to the worldwide average microfinance interest rate, which this World Bank paper estimated to be 25 percent for non-governmental organizations (NGOs).

The farmers lamented that each of them began with loans of USD 125 for a duration of six months, and after five years are in debt between USD 745 to USD 1242. In order to meet their payments, the farmers had to sell their produce and other assets. In the intervening period, they were required to borrow from MFI National Rural Support Programme (NRSP) at a 100 percent mark up to repay the original loan. According to the article published by TheNews.com, the MFIs responded to the criticisms by saying that beyond these stories of failure, there are also success stories.

According to the MixMarket, the microfinance information clearinghouse, the National Rural Support Programme (NRSP) is an NGO that was established in 1991. It had 292 thousand borrowers with an average loan size of USD 183 in 2007. Its gross loan portfolio was USD 53.6 million. NRSP had USD 60.1 million in total assets in 2007, a return on assets (ROA) of 0.24 percent, and was 101.18 percent operationally self-sufficient.

Besides NRSP, two other MFIs were identified by the farmers as having deceitful practices: First Microfinance Bank (FMFB) and Khushhali Bank. FMFB was founded in 2002 as an NGO and has since transitioned to a non-bank financial institution (not fully commercial, but can provide additional financial services besides loans, such as savings products). MicroCapital reported on the transition in this article. MixMarket‘s profile for FMFB indicates that in 2007 it had 101 thousand borrowers with an average loan size of USD 196, and 80 thousand savers with average savings of USD 314. Seventy-six percent of its clients lived on less than one dollar per day. In 2007, FMFB had a gross loan portfolio of USD 19.6 million and USD 25 million in total savings. It had USD 45 million in total assets, a -1.87 percentROA, and was 90.43 percent operationally self-sufficient.

The MixMarket reports that the Khushhali Bank was established in 2000. It also operates as a non-bank financial institution, though it does not provide savings services. It had 284 thousand borrowers in 2007 and an average loan size of USD 152. It had a gross loan portfolio of USD 43.1 million. In 2007, Khushhali Bank had 108.8 million in total assets, a ROA of -3.86 percent, and an operational self-sufficiency of 79.7 percent.

Another criticism that arose at the workshop regarding MFIs in general was that many of them have overlapping loan portfolios. In other words, people are borrowing from more than one MFI at once. There is often a danger for borrowers with multiple credit lines to become over indebted. These problems, it was stated, are perpetuated by MFIs racing to sell their loan products in order to achieve financial sustainability, without regard for the borrower’s sustainability.

Although the farmer’s cases are likely extreme, they highlight an important issue in the microfinance industry; that is, there is little conclusive evidence on what the overall impact of microfinance has been in the battle against global poverty. For a recent article on efforts to measure the impact, please refer to this MicroCapital article.

By Ryan Hogarth, Research Assistant

Additional Resources:

Khushhali Bank: Home

Government of Pakistan Planning Commission: Home

MicroCapital article, October 3, 2007: “First MicroFinanceBank and Pakistan Post Agree to Collaborate”

MicroCapital article, February 26, 2009: “Grameen Foundation and Oikocredit Offer Progress out of Poverty Index as Cornerstone of Socially Motivated Microfinance Investment Guidelines”

“Microfinance Meets the Market”, by Robert Cull, Asli Demirguc-Kunt, and Jonathan Morduch, the World Bank: May 2008

MixMarket: Profile for the First MicroFinance Bank (FMFB)

MixMarket: Profile for the National Rural Support Programme (NRSP)

MixMarket: Profile for Khushhali Bank

National Rural Support Programme (NRSP): Home

TheNews.com: “Farmers accuse MFIs of fleecing borrowers”, by Khalid Mustafa