KARACHI - Despite popular criticism directed at micro-finance institutions for charging high interest rate, the clients in general did not have reservations regarding the interest charged and were primarily concerned with the availability of credit, reveals an SBP survey report. Report further points out faced with constraints like inadequate infrastructure and limited resources, micro-finance is generally restricted to the provision of micro-credit in Pakistan. Other instruments such as saving products, emergency loans, skill development and micro-insurance are not very popular with both the regulated and unregulated sectors. One of the key reasons for limited micro-finance products range in the country is the high underlying transaction cost and absence of well-structured risk mitigation tools. The report tilted Towards Achieving Social and Financial Sustainability: A Study on the Performance of Micro-finance in Pakistan conducted by State Bank of Pakistan in collaboration with International Labour Organization. This report is based on the findings of a survey of microfinance providers in Pakistan. According to the report, one of the commonly cited reasons for not availing micro-finance loan is high interest rate and small loan amount. However, during the survey most of the interviewed micro-finance institutions officials justified charging high interest rate by linking it to the high operational cost and it still being lower than the interest rate charged by money lenders. From clients side perspective one of the reasons for poor people willing to pay high interest rate is that the poor are more concerned with the access to credit than the cost of it. Comparing interest rates requires borrowers to have some understanding of financial literacy, which does not exist widely even in some developed countries. Survey findings revealed that due to low literacy level microfinance clients were unable to fully understand the procedure underlying interest calculations. It is worth highlighting that most of the MFIs do not make satisfactory efforts to communicate the mechanism behind interest rate calculations. As a result borrowers can only compare instalment size on loans of similar amount and duration leaving them with insufficient information to make a decision. Poor people are generally willing to pay interest rates that a larger business would not. Economic theory of 'diminishing marginal returns to capital resolves this paradox that suggests, at low levels of capital, production and output increases significantly. At higher levels of capital the increase in output will decline. However, above 70pc of the respondents expressed that if an alternative loan is offered on a lower interest rate, they would accept it. Contrary to the views of microfinance clients, most of the interviewed field managers indicated that interest rate differentials neither provided enough reason to cause existing clients shift towards new providers nor persuade new clients to enter the market. This highlights the need for promoting financial literacy and product innovation to cater to the needs of microfinance clients. By facilitating the entrance of new players and encouraging competition microfinance clients can be provided better service at lower price. Survey results verified the general perception that the interest rate of microfinance institutions though higher is still lower than the interest rate charged by the informal moneylenders. Microfinance institutions charge lower interest rates as compared to the local moneylenders because of the use of joint liability lending and economies of scale. However, the interest rate pattern varies upon their structure and area (urban or rural) of operation. High loan recovery rate of microfinance institutions is regarded as one of the greatest achievements of microfinance sector. Survey findings supported this claim as results indicate that the recovery rate of all surveyed microfinance institutions was above 90 percent. This is remarkable as there is no strict requirement of formal collateral. The use of joint liability contracts, aggressive monitoring and continuous repayments were cited as the reasons for high repayment rate. The findings highlight key institutional and operational issues facing this sector. According to the survey findings there is a practice of securing loan on behalf of others by using their national identity card. Lack of skilled staff is one of the factors affecting the efficiency of microfinance providers. According to the survey findings one field officer is dealing with approximately 200 clients. Limited female workforce has restricted the access to female clientele affecting the outreach of MFIs. It is interesting to observe that a very small percentage of respondents mentioned Islamic factor as a reason for not availing a loan. According to a microfinance bank official the compliance of Islamic principles might be an influencing factor in areas of NWFP, that have unfortunately not been covered in this study due to limited time and resources. In general microfinance providers prefer female clients based on the assumption that women are less likely to default and in certain instances to promote women empowerment. However, it has been observed that, in most of the sample observations, once loans were obtained by women they were later used by men. This practice appeared to be voluntarily. Despite this, since women are provided the loan this has led to some empowerment which cannot be quantified. In Pakistan micro-finance lending is mainly conducted through group-based model, especially by the unregulated sector. While social collateral has proved to be an effective tool leading to lower default rate, it deprives people without collateral to benefit from microfinance. Micro-finance institutions prefer to finance running businesses to ensure repayment.