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Getting Credit
Pakistan has a solid foundation for increasing access to credit, but risks and costs are unnecessarily high. They can be lowered, but success will require work in a number of areas. Large businesses generally have little trouble obtaining the finance they need. Their complaints tend to be limited to high interest rates or slow processes. Micro-enterprises are increasingly being served by various micro-finance institutions, but perhaps no more than 10% of the micro-finance needs are currently being met. For SMEs, there is a very large gap between supply and demand, with an estimated 90% of the market as yet unreached. When disaggregated by gender, the numbers for women are even worse.
Women receive the lowest percentage of microfinance loans in the region and constitute only 10% of the formal workforce; few women are able to get formal loans. Many are forced to depend on informal lending for their needs, and these arrangements come with exorbitant interest rates. A large percentage of Pakistani women, especially in rural areas, do not even have personal identity cards and are therefore essentially invisible to the formal market. Add in lower education, less business experience, and some cultural biases against women in the formal markets, and there are very high barriers to access to credit for women. Better access is needed for the entire economy, but particularly for women if they are to play a larger role in Pakistan’s economic growth.
While Pakistan has tremendously improved its lending environment over the past ten years, risks in the lending market keep rates high. These risks arise primarily from lack of dependable enforcement and lack of sufficient credit information about borrowers. These problems also result in some unnecessarily high costs of lending. Unsophisticated SME businesses cannot provide reliable financial information, thus making it difficult for them to convince banks of their debt service capacity—information that is essential to any evaluation of a borrower’s creditworthiness.
(Note: This information was taken from the Getting Credit chapter of the 2008 Pakistan BizCLIR report. For more information, please see the report.)
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