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Risks to Microfinance in Pakistan


The Pakistan microfinance landscape, what once started off as a handful of institutes offering basic microcredit to the country’s unbanked population, has evolved into a complex microfinance market operated by more than forty microfinance providers. The sector has grown, diversified, innovated and is now emerging as a mature industry on the global microfinance horizon. The uptake in the Pakistan microfinance sector has occurred on the back of various initiatives and developments over the past decade; the emergence of new players, branchless banking initiatives, product innovation, enhanced geographic footprint and access to guarantee funds have all played a role in stimulating sector outreach.

Nevertheless, managing risk is a complex task for any financial institution, and increasingly important in an environment characterized by growth and innovation. The rapid progression of the Pakistan microfinance sector can pose serious challenges for microfinance retail players, many of whom are operating without an adequate understanding of the multitude of risks they face.

The top ten risks according to the survey conducted by Pakistan Microfinance Network in the risk assessment survey are as follows:

  • Natural Disasters
  • Profitability
  • Macro-Economic Trends
  • Credit Risk
  • Competition
  • Interest Rates
  • Political Interference
  • Liquidity
  • Security
  • Managing Technology

The survey highlights risks from natural disasters and profitability as the utmost concerns for stakeholders in the microfinance industry. Practitioners working inside Pakistan, as well as, donors and consultants perceive the risk from security to have subsided as a result of the improving law and order situation in the country.

The survey also shows a change in perception pertaining to liquidity risk, which climbed up the ranks to be considered among the top ten risks of the sector. The fastest trending risks according to the survey are competition and credit; the ranking of competition has not budged since the previous risk survey.

Managing Technology is still a major risk with MFIs struggling to find a right technology partner to take care of their IT needs by providing a highly available and scalable system.

In terms of risk profiling, macro-economic trends is a primary concern for the sector. In line with other stakeholders, researchers are also pessimistic about the sector’s profitability and rising competition.

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