Microfinance dilemma

LAHORE: While both Pakistan and Bangladesh have made significant strides in microfinance, the latter’s sector is more mature, with better regulatory frameworks, higher penetration, and greater product diversity. Pakistan still faces challenges in regulation, outreach, and innovation.

It was in fact microfinance that was initially instrumental in reducing poverty in Bangladesh. Muhammad Yunus, an economist and banker who founded Grameen Bank, which pioneered fighting poverty with microloans, has returned to Bangladesh to head the new government. He was awarded the Nobel Peace Prize in 2006 for his work on microfinance.

When microfinance gained popularity in Bangladeshi society, it empowered women and rural poor. Numerous microfinance institutions in the country replicated the microfinance model of Yunus.

Though microfinance in Pakistan has experienced significant growth over the past few decades, aimed at alleviating poverty and promoting financial inclusion, it faces several challenges.

There are numerous microfinance institutions (MFIs) in Pakistan, including microfinance banks (MFBs), rural support programmes (RSPs), and non-governmental organizations (NGOs). The sector has expanded its outreach, with millions of active borrowers, particularly women. There has been an increased focus on digital financial services to enhance accessibility and efficiency.

The challenges to the effective success of microfinance in Pakistan includes its ineffective regulatory environment: While there is a regulatory framework in place, compliance and enforcement remains inconsistent. Interest rates in Pakistan’s microfinance sector are relatively high, which burdens borrowers. Issues such as political instability, security concerns, and natural disasters impact operations.

But various initiatives by the government and international donors aim to strengthen the sector. There are efforts to introduce new products and services, such as micro-insurance and Islamic microfinance.

Bangladesh is often considered a pioneer in microfinance, largely due to the success of institutions like Grameen Bank and BRAC. The sector has a more mature regulatory framework and extensive reach, with millions of clients benefiting from diverse financial products.

Microfinance in Bangladesh was first introduced in the 1970s, with Grameen Bank’s model being a globally recognized success story. Microfinance in Pakistan began developing later, gaining momentum in the 1990s and early 2000s.

The Microcredit Regulatory Authority (MRA) regulates the sector in Bangladesh, ensuring stability and compliance. The State Bank of Pakistan regulates microfinance banks in Pakistan, while other institutions are overseen by different bodies, leading to a fragmented regulatory environment. The regulation is fragmented.

Microfinance in Bangladesh has higher market penetration with a larger proportion of the population served by MFIs. In Pakistan though microfinance is growing, the sector’s outreach is still more limited compared to Bangladesh.

Microfinance in Bangladesh is dominated by large, well-established institutions like Grameen Bank and BRAC, with extensive networks and resources. Whereas in Pakistan it is a mix of various types of MFIs, including smaller NGOs and rural support programmes, alongside larger MFBs.

Bangladesh offers a wider range of products, including savings, credit, insurance, and remittances. In Pakistan, the sector primarily focuses on microcredit, with gradual diversification into other financial products.

Bangladesh is the early adopter of mobile banking and digital financial services, with successful implementation. Digital finance in Pakistan is growing but is still in the development phase compared to Bangladesh.