By: Malik Mirza
Microfinance in Pakistan has emerged as a critical tool for financial inclusion, extending access  to credit and essential financial services to millions who remain unbanked. The industry operates within a structured regulatory framework involving two key regulators, namely State Bank of Pakistan for micro finance banks and the Securities and Exchange Commission of Pakistan for Non-Banking Micro Finance Companies, that oversee its activities. Additionally, certain non-financial institutions (NFIs) support the ecosystem (money lenders, shops providing buy now – pay later schemes etc.), while established forums facilitate industry discussions and collaboration including Pakistan Micro Finance Network, Pakistan Micro Finance Investment Company etc.
The sector boasts a robust infrastructure, consisting of 12 Microfinance Banks (MFBs) and 25 Non-Bank Microfinance Institutions (NBFIs), collectively spanning 135 districts. These institutions operate through an extensive network of 4,500 branches and 3,500 branchless banking agents, ensuring accessibility even in remote areas.
With a client base of approximately 12.5 million clients at the end of year 2024, microfinance is playing a significant role in uplifting small entrepreneurs, farmers, and underprivileged communities by providing them with necessary cash flows they need to manage working capital cycle, buying of assets or in many cases, meeting emergency cash needs. Out of these clients, around 6.5 million are nano-finance clients (very small loan size from Rs. 5,000 to Rs. 20,000), with the remaining 6 million classified as micro finance clients, highlighting the industry’s potential for further expansion to cater to millions of people still unbanked.
Microfinance Ecosystem
The microfinance industry in Pakistan operates under stringent audit and oversight mechanisms, with auditors and regulatory bodies ensuring transparency and compliance. Investment interest in the sector remains strong, with impact investors and venture funds actively participating in its growth as evidenced by entry of Halan Group (Egypt) and LOLC Group (Sri Lanka) in the micro finance banking sector.
Currently, the sector employs approximately over 50,000 professionals. Workforce projections suggest an expansion to accommodate the growing demand. However, HR development and IT capacity enhancements are necessary to support this growth, particularly in digital finance. These two areas are consider critical for future expansion of the sector. The integration of 1predictive analytics and artificial intelligence in risk assessment will be crucial to improving financial sustainability.
Funding sources for microfinance institutions are diverse, with contributions from institutions such as the Asian Development Bank (ADB), the World Bank, and the Pakistan Microfinance Investment Company (PMIC). Additionally, discussions with the State Bank of Pakistan (SBP) are underway to explore mechanisms allowing MFBs to lend to MFIs, thereby enhancing sector liquidity.
Future Strategy & Growth
Looking ahead, microfinance is poised for substantial growth. The number of nano-finance users is expected to reach 10 million, while the overall client base is projected to expand to between 18 and 20 million in next five to seven years. The sector’s portfolio is anticipated to increase from PKR 80 billion to PKR 110 billion, underscoring the increasing demand for microfinance services.
To achieve these ambitious goals, the industry will require significant funding, estimated between PKR 250-300 billion in debt and equity. Additionally, an estimated 40,000 new employees will be needed to sustain the expansion. The shift towards branchless and digital finance will further streamline service delivery and enhance financial inclusion. This also leads to a critical question: How will the resources be acquired for growth and expansion in the sector?
Risk Factors & Sustainability
Small farmers and micro-entrepreneurs are among the most vulnerable to climate change. Events like floods, droughts, and unpredictable weather patterns can destroy crops, reduce income, and make it difficult for borrowers to repay their loans.
Many microfinance institutions (MFIs) offer crop or livestock insurance, but insurance alone may not be enough. The question is: Are there other risk mitigation tools that MFIs can offer besides insurance? Some possible solutions include:
- Flexible Loan Repayment Plans: Borrowers affected by climate-related losses could benefit from loan restructuring or repayment moratoriums to give them time to recover.
- Weather-Linked Credit Models: Loans that adjust based on climate patterns or harvest cycles could help reduce financial pressure on farmers.
- Disaster Relief Funds & Emergency Loans: MFIs could establish special funds to provide quick assistance to borrowers affected by natural disasters.
- Climate-Smart Agriculture Support: Offering training and financial products for climate-resilient farming techniques (e.g., drought-resistant seeds, solar-powered irrigation) could help borrowers adapt to changing conditions.
If these alternative risk-mitigation tools are not developed, Pakistan’s microfinance sector could face increasing defaults from climate-affected borrowers. This issue may become critical in the future as extreme weather events become more frequent.
Microfinance institutions (MFIs) operate differently from corporate banks that focus on large businesses and capital-intensive projects. MFIs primarily serve small businesses and individuals with tiny loan amounts, which makes profitability a challenge.
Most MFIs struggle due to High Operating costs at times. Consider this: Processing a Rs. 20,000 microloan by an MFI may cost more than processing a Rs. 20,000,000 business loan by a corporate banker owing to stringent field visits, verification, risk assessment and monitoring needed for the smaller loan. Further, in the micro finance segment, borrowers have irregular incomes: Unlike businesses with steady revenues, micro-entrepreneurs often have fluctuating incomes, leading to delayed or missed payments.
Need for a balanced approach
To ensure both financial sustainability and social impact, Pakistan’s microfinance sector needs a hybrid model—one that blends social support with financial viability. Potential solutions include:
- Longer-Term Loan Products: Rather than short-term loans with high repayment pressure, MFIs could offer low-interest, long-term financing for sustainable business growth.
- Blended Finance: Combining donor grants, impact investments, and commercial funding could help MFIs stay financially stable while supporting vulnerable borrowers.
- Technology-Driven Cost Reduction: Digital banking, mobile wallets, and AI-based credit assessments could lower operational costs and improve efficiency.
- Public-Private Partnerships: Government-backed microfinance programs could support businesses that struggle to access commercial loans.
 Comparative Learning & Reflection
Lessons from Bangladesh and India offer interesting insights for Pakistan’s microfinance sector. Both Bangladesh and India have successfully diversified their microfinance models by integrating savings, insurance, remittance services, and SME financing alongside traditional microloans. In contrast, Pakistan’s microfinance sector remains largely focused on credit-based services, limiting its ability to cater to broader financial needs.
- Bangladesh’s Example: Institutions like ASA and BRAC have diversified into agriculture finance, social enterprises, and impact-driven investments, allowing them to cross-subsidize financial services while remaining profitable. Further, it is worthwhile to note that there is only one regulatory authority in Bangladesh i.e. Microcredit Regulatory Authority (MRA), established in 2006 (as compared to SECP in Pakistan, regulating NBMFCs and SBP, regulating MFBs). Every MFIs must obtain a license from the MRA to operate. Further, Licensed MFIs are permitted to accept deposits from their members, with the MRA setting guidelines to ensure depositor safety.
The MRA focuses on balancing financial inclusion with depositor protection. It has implemented regulations to prevent exploitative practices and ensure transparency in the microfinance sector. However, at the same time, it should be noted that the microfinance sector in Bangladesh has faced scrutiny due to allegations against certain prominent figures, leading to discussions about the need for stricter regulations to prevent abuse and ensure the sector’s integrity.
- India’s Example: Regulatory shifts have allowed MFIs to transform into Small Finance Banks (SFBs), enabling them to offer savings accounts, fixed deposits, and investment products, thereby reducing reliance on external funding.
The point to learn from regional experience and past trend is to make funds available to the sector players, non-banking micro finance companies in particular.
For Pakistan, regulatory support in expanding microfinance banks (MFBs) into multi-product financial institutions can help ensure long-term sustainability. Encouraging partnerships with FinTech, mobile money operators, and insurance providers could lead to product diversification that better serves low-income communities.
Microfinance clients are inherently vulnerable, and ensuring long-term financial stability requires a combination of contingency planning and patient capital. Additionally, integrating microfinance into corporate structures remains a critical question—how can microfinance institutions sustain their social mission while ensuring financial profitability?
Key reflections include:
- Can microfinance be integrated into corporate financial structures without losing its core objective?
- How can sustainability be maintained amid economic fluctuations?
- What lessons from Bangladesh and India can be applied to strengthen Pakistan’s microfinance sector?
Conclusion
In Pakistan, political instability, inflationary pressures, and climate risks significantly impact microfinance repayment cycles and institutional sustainability. Learning from Bangladesh and India, Pakistan’s MFIs should focus on developing risk-mitigation strategies, enhancing liquidity management, and offering climate-adaptive financial solutions to sustain operations in volatile economic conditions.
Pakistan’s microfinance sector has achieved significant milestones, yet there remains a long road ahead. Addressing funding gaps, expanding digital finance, mitigating climate risks, and learning from international experiences will be crucial in shaping the future of microfinance in the country. With sustained investment, innovation, and strategic coordination, the industry can further its mission of financial inclusion and economic empowerment.
Malik Mirza is a chartered accountant (Fellow member of the Institute of Chartered Accountants of Pakistan) and a certified expert in micro finance from School of Frankfurt, Germany. He is on the Board of two companies and working as CEO of Finman Group, a consulting and advisory firm. Mr. Mirza is partner of a chartered accountant firm.
