WHY DO MICROFINANCE LOANS TURN NON-PERFORMING? EVIDENCE FROM PAKISTAN'S MICROFINANCE BANKING SECTOR

Abstract

This study aims at exploring the causes of high non-performing loans in the Microfinance Banks (MFBs) in Pakistan. The main objective of the study is to identify the causes of non-performing loans of MFBs in Pakistan. The findings have been gathered using face-to-face in depth semi structured interviews from five MFBs, researchers and members of rating agencies. The findings reveal that main root causes of the Non-Performing Loans (NPLs) are high cost of borrowing, lack of technological awareness, lack of mitigating measures to control the natural calamities, lack of insurance coverage, high weightage consumption loans, delayed accounting for provisioning, insufficient government support and regulatory gaps. These factors are the primary barriers preventing MFBs from expanding their lending portfolios. To avoid NPLs and mitigate risk, MFBs increasingly prefer investing in government securities over supporting financial inclusion.