KARACHI: The first half of the current fiscal year has seen a worrying trend in the financial sector, with Non-Bank Financial Institutions (NBFIs) receiving no lending, mainly due to high interest rates.

NBFIs offer diverse financial services like investment finance, leasing, and housing finance. However, their contribution in Pakistan remains relatively small, with the current high interest rates further impeding their ability to secure loans from banks for investments or ventures.

This decline is evident when compared to the previous fiscal year — while the first half of FY24 (from July 1 to Jan 12) saw a net debt retirement of Rs45.5 billion, bank lending to NBFIs was a robust Rs215bn during the same six-month period of the preceding fiscal year, the State Bank data showed.

The lack of lending in the current fiscal year raises concerns about the future of these institutions, with some potentially facing closure, although none have been reported so far.

The NBFI sector showed significant growth during the calendar year 2022, driven primarily by mutual funds and activities in Real Estate Investment Trusts (REITs).

However, the interest rate hikes and escalating macroeconomic risks have led to a downturn, especially in the mutual fund sector, where money market and income funds have seen notable sales.

In the lending segment, Non-Bank Microfinance Companies (NBMFCs), primarily operating in rural areas, were also impacted by floods, resulting in increased classified assets.

Since the 2008 economic crisis, NBFCs have been integral in fulfilling the credit demands not met by traditional banks. In Pakistan, the sector witnessed an accelerated growth trajectory in 2022, with its asset base expanding by 27 per cent, outpacing the 19pc growth in 2021. This growth was largely fuelled by the asset management segment, particularly mutual funds and REITs.

“The economy is not performing as it requires. The growth was negative in FY23 and the current fiscal year is expected to see 2pc growth. It will surely hurt the entire sector, including the NBFIs,” a banker said.

On the other hand, banks in Pakistan have managed to reap profit by investing in government papers, with commercial banks emerging as the government’s largest lenders.

The government’s inability to reduce interest rates or cut borrowing needs, mainly due to high inflation, has exacerbated the situation.

Published in Dawn, January 27th, 2024