Micro solutions for macro problems?

More than a decade ago, Pakistan’s banking industry saw a highly unusual transaction. Failing to meet the capitalisation requirements, Khadim Ali Shah Bukhari (KASB) Bank was sold to BankIslami for a price of Rs1,000. To this day, this transaction remains a topic of discussion among nerdy individuals and is surely an interesting nugget in the sector’s history. While it may have been controversial, KASB was somewhat easy to manage, for it was among the few bad apples in an otherwise healthy industry. What should the regulator do when an entire sector — almost a trillion rupees of assets — is on the same path and refuses to show any signs of improvement? This has been the predicament facing microfinance banking, which has recorded aggregate losses every year since 2019 and continued that ritual in Q1FY25 with a net income of negative Rs2.3 billion. As a result, its capital buffers have been depleting for 12 quarters straight and now stand at 1.2 per cent of total risk-weighted assets, well short of the 15pc required by the State Bank of Pakistan.