Microfinance Focus April 19, 2011: A recent study commissioned by Pakistan Microfinance Network titled ‘Estimating micro businesses’ ability to pay’ attempts to assess the ability of micro-businesses to pay interest rates charged by microfinance providers (MFPs) in Pakistan. The findings of this report have been researched by ShoreBank International Limited – Pakistan (SBI-P).

The core analysis in this study involved an in-depth look at the financials of 124 businesses across the five main economic sectors serviced by Pakistan’s MFPs: trade, agriculture, livestock/poultry, services, and manufacturing.

This study concludes micro-businesses are able to afford the financial costs currently being charged quite comfortably. The average effective rate for the participating MFPs stood at 35.9% whereas the average profitability of businesses measured through ROA ranged from 79% (for the livestock/poultry sector) to as high as 226% (for the services sector), said the report.

Further the report claims that there is sufficient evidence to conclude that although the average interest rates charged by microfinance providers appear to be high, the businesses that ultimately bear the burden of the financial costs have sufficient potential not only to bear the financial costs, but to generate savings after taking into account all the costs that accrue to the business.

Sector wise findings:

• Businesses observed in the trading sector were profitable with the second highest average monthly income. The sector’s effective APR was PKR 11,545 (35.9%), while the ROA was PKR 165,740 (98%).
• All businesses observed in the livestock/poultry sector were profitable. The sector’s effective APR was PKR 6,709 (35.9%), and the ROA was PKR 131,576 (79%).
• The average monthly income (net profit) of businesses in the services sector was the highest. The sector’s effective APR was PKR 11,473 (35.9%) and the ROA was PKR 186,674 (226%), also the highest among sectors.
• All businesses observed in the manufacturing sector were profitable. The effective APR of the sector was PKR 9,494 (35.9%), and the ROA was PKR 159,799 (154%).

The report however acknowledges that these results are the representative of the best-case scenarios for each business category as these samples were selected by the MFPs. “In order to get more representative average profitability ratios, bigger samples must be examined for each business category where enterprises are selected using random sampling that includes previous MFP clients who have since dropped out, said the report.

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