As the economic crisis arising from the COVID-19 pandemic unfolded in Pakistan, the operations of microfinance institutions (MFIs) were severely restricted. Some MFIs were even forced to temporarily close down.
In its latest report, “Finance for an Equitable Recovery”, the World Bank states that the Pakistani government’s Kamyab Pakistan Program, rolled out in September 2021 to provide subsidized or interest-free loans to Small & Medium Enterprises and agricultural workers, could also have a mixed impact on the stability and future growth potential of the microfinance sector by distorting the price of credit and increasing the moral hazard of strategic future default.
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Many MFIs, however, quickly acted to initiate business continuity plans to ensure the health and safety of staff and clients and work around lockdowns. Besides, digital financial services and branchless banking surged.
In the first year of the pandemic, the number of active branchless banking accounts increased by 53.7 percent, from 27.7 million to 42.6 million. From March 2020 to March 2021, regulators enacted a debt moratorium to ease the financial crunch on borrowers caused by lockdowns and a decline in economic activity.
In addition, nonbank microfinance companies (NBMFCs) were shielded by federal guidelines, asking commercial banks and other lenders to MFIs, such as the Pakistan Microfinance Investment Company, to reschedule wholesale lending to the sector. Anecdotal reports also suggest that handshake agreements with other MFI lenders extend repayment terms, as well as the continued availability of wholesale funding for creditworthy MFIs, helped buoy the sector.
Overall, these measures appear to have averted a liquidity crisis among Pakistan’s MFIs in the short term, particularly those regulated, deposit-taking, and digitally enabled. Indeed, during 2020 loans totaling approximately $635 million in the sector were deferred or rescheduled, the report said.
