By Ayesha Saba

Pakistan’s microfinance banking sector remained under pressure in 2025 despite a sharp reduction in losses, according to the Financial Stability Review 2025 released by the State Bank of Pakistan (SBP).

The report indicates that the sector’s overall asset base contracted by 3.7% during the year, mainly due to the transition of a microfinance institution into a full-fledged digital bank. However, after adjusting for this structural change, the sector still recorded a moderate growth of around 7.3%, reflecting some recovery in underlying operations.

Financial performance showed improvement compared to previous years, with aggregate pre-tax losses declining significantly to around Rs2 billion from Rs25 billion in 2024. This reduction reflects efforts to stabilize operations and improve efficiency, although the sector continues to face profitability challenges after several years of sustained losses.

Despite the improvement in losses, the sector’s capital position remained weak, with the aggregate capital adequacy ratio falling to negative 1.2%. The erosion of capital buffers highlights the financial stress faced by microfinance banks, which have been affected by a combination of external shocks, including the COVID-19 pandemic, floods, high inflation, and the broader economic slowdown in recent years.

Asset quality indicators showed slight improvement, with the infection ratio declining to 9.1% from 9.7% in the previous year. At the same time, provisioning coverage increased significantly to 138.1% from 95.2%, indicating that institutions have strengthened their capacity to absorb potential losses and manage credit risk more effectively.

The SBP noted that the sector plays a critical role in promoting financial inclusion by providing financial services to low-income and underserved segments of the population. Despite its relatively small share of total financial sector assets, the microfinance sector has a large customer base and remains essential for supporting poverty alleviation and economic participation.

To address the challenges faced by the sector, the SBP has taken several policy and regulatory measures, including facilitating the restructuring and recapitalization of distressed institutions. The central bank has also revised prudential regulations to support stability and sustainability, while continuing engagement with stakeholders to strengthen the sector.

In addition, targeted initiatives have been introduced to support microfinance lending, particularly in vulnerable segments such as agriculture. These measures aim to enhance borrowers’ resilience and improve the overall viability of the sector.

The report highlights that while recent improvements in financial performance are encouraging, the sector continues to face structural challenges related to profitability, capital adequacy, and exposure to economic shocks. Sustained recovery will depend on continued policy support, improved risk management, and a stable macroeconomic environment.

Strengthening the financial health of microfinance institutions remains important to ensuring continued access to financial services for underserved populations and supporting broader financial inclusion objectives.

Credit: INP-WealthPk