Mr Aziz offers me the obligatory cup of tea in his office and, even though I have already had five cups of tea that day, I graciously accept as “no” is just not an option in a Pakistani business meeting.  It would be like saying, “No, I don’t think I will breathe any of your oxygen for the rest of the meeting as you smell bad.”  It’s an insult mixed in with breaking some law of physics.

As my tea is served, Mr Aziz tells me that the PPAF, the Pakistan Poverty Alleviation Fund started in 2000 with the intention of breaking from the traditional microfinance mentality in Pakistan which was too non-profity for him.  He’s seen too many NGOs offer a boatload of services to poor people - how to read classes, free bednets, the kitchen sink - and just tack on microfinance as an afterthought.  The PPAF is business oriented, keeping a hard eye on the bottom line. 

PPAF doesn’t have any retail outlets (that’s geek-speak to mean that they don’t directly work with microfinance borrowers); instead they provide funds to the best organizations on the ground.  It started with a request for proposal, a call out to see which organizations in Pakistan wanted to get into the microfinance business.  They got 650 applications, picked 40 and disbursed $440M to their lucky 40 portfolio companies.  While they started with the “let 1000 flowers bloom” attitude, over time, some funded organizations did better, some did worse and PPAF kept plowing money back into the ones who did better until today 10 organizations account for 90% of their portfolio and 2 organizations account for 47% of their portfolio.

Pakastani borrowers at a PPAF funded microfinance group

They continue to toughen up their microfinance portfolio companies.  They want the smaller mom and pop type of charities out and want the commercially viable ones to stay in.   Eventually, Mr. Aziz wants to put himself out of business and have a self-sustaining microfinance industry in Pakistan.  They continue to cut people off and let the discipline of market forces determine who succeeds.  They want their portfolio companies to be moving towards self-sufficiency.

There is an official rating system in microfinance with Tier 1, 2, 3, and 4 microfinance institutions.  Deutsche Bank, in their microfinance report, detailed this quite nicely.

What Deutsche Bank didn’t detail out was what is the ideal mix to have.  Should the PPAF continue to fund forty organizations or focus resources on the 10 stellar ones?  On the one hand, some folks out there are arguing that we to concentrate on getting the Tier 3s and 4s up to Tier 2 and the Tier 2s up to Tier 1.    Other folks argue that the ten stellar Tier 1s could probably provide a greater poverty reduction bang for your buck and let’s just focus in on making a couple of mega-tier 1 MFIs. 

I think this is a very interesting conversation the industry has not yet begun to have.  It will be interesting to watch over time how this plays out.  Uncharted territory’s always interesting.

Pakistani microfinance borrowers in a PPAF funded MFI