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Microfinance Banks in Pakistan continued to struggle with aggregate profitability, marking the fifth consecutive year of losses as of 2023. According to the “Financial Stability Review” by the State Bank of Pakistan (SBP), the sector reported pre-tax losses amounting to Rs. 10.8 billion, an improvement from Rs. 21.6 billion in the previous year. This slight recovery is attributed to diminishing impacts of the COVID-19 pandemic and consecutive years of rain and flooding in 2022 and 2023.

The sector faced persistent challenges stemming from the pandemic, natural disasters, and macroeconomic pressures, exacerbated by stringent economic policies aimed at tackling inflation. Despite these obstacles, a few microfinance banks such as Habib Microfinance Bank, U Microfinance Bank, Mobilink Microfinance Bank, and Telenor Microfinance Bank managed to maintain profitability.

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Administrative expenses surged to Rs. 74.8 billion in 2023, primarily due to extensive branch expansions undertaken by several banks. These expenses, inherent to the microfinance model with its broad borrower base, highlight a universal operational challenge. However, advancements in technology offer potential avenues to mitigate operational costs.

Financial indicators for the sector showed a mixed picture: Return on Assets (ROA) improved to -1.5% from -3.4% in 2022, while Return on Equity (ROE) also saw improvement at -26.4% compared to -42.9% in the previous year. Operational Self Sufficiency, measuring financial revenue against expenses, stood at 78.8% in 2023, up from 69.8% in 2022.

The sector’s income was bolstered by a significant increase in Net Interest Income (NII), which nearly doubled to Rs. 54.8 billion by the end of 2023, driven by higher interest rates. Net Interest Margin (NIM) rose to 12.2% in 2023 from 10.1% in 2022. Non-interest income expanded by 39.7% to Rs. 33.6 billion.

The growth in the asset base was supported by a 15.8% increase in deposits, amounting to Rs. 81.3 billion, while borrowings fell by 57.3% due to reduced investment activity. Sectoral analysis revealed increased lending to agriculture and livestock sectors, partially due to government initiatives such as the Prime Minister’s Youth Business and Agriculture Loan Scheme and the Kisan Package-2022.

Looking forward, microfinance banks need to reassess their business models to streamline operating costs and bolster profitability. They must also enhance risk management capabilities amidst heightened credit risks due to inflation and stabilization policies. Fundraising through stable sources will be crucial to sustain profitability and support financial inclusion goals effectively.

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