Microfinance’s downward spiral

Ever since venture capital (VC) started flowing into Pakistan, the local ecosystem has seen polarising debates on whether the companies being built are sustainable, given their generally questionable unit economics. From unbelievably high losses to calls for investigating lax corporate governance mechanisms, the space receives a high dose of flak, both fair and unfair, that may be disproportionate to the underlying scale. But there’s another sector that’s going through a somewhat similar situation that has avoided scrutiny for the most part — exceptions include a few reports in the press here and there. Pakistan’s microfinance banking has been undergoing its share of troubles in the last few years with a scale of losses that could, to an extent, rival VC-backed businesses and their capital revenue issues. According to the State Bank’s Financial Stability Report, microfinance banks cumulatively posted a red bottom line for the fourth year straight. The post-tax loss of the sector reached Rs17.2 billion in 2022, significantly worsening from Rs8.08bn in 2021.