MICROFINANCE - AN EFFECTIVE TOOL TO ALLEVIATE POVERTY
'Microfinance is relatively a new concept in Pakistan as compared to other countries in the region.'
KANWAL SALEEM, Lahore
May 21 - 27, 2007
Recognizing microfinance as an important poverty alleviation tool, the federal government has adopted a microfinance policy that mainstreams the concept of sustainable microfinance, recognizes the private sector's role in poverty reduction and encourages its entry into banking with the poor.
The government has enacted a legal framework, the Micro Finance Institutions (MFIs) Ordinance-2001, for establishing microfinance banks (MFBs) in private sector and also facilitated establishment of Khushhali Bank, a public-private partnership, with twin objective of substantially increasing outreach of microfinance services in the medium term and giving a model institution to the private sector to follow.
According to renowned economist Faisal Bari, microfinance may be defined as the financial services needs, including credit, savings, insurance and payment transfers, etc, of the poor households and their micro enterprises. The microfinance institutions are specialized financial institutions, which cater to the financial services needs of the poor.
The commercial banks and other traditional financial institutions are neither mandated nor have the capacities to serve the microfinance market. They perceive the poor as high risk, high cost and difficult to serve market and keep themselves away from them. The NGO-MFIs and the specialized poor focused programs, therefore, have been the major providers of micro finance both domestically and internationally. The NGOs alone, however, given their resource constraints- financial and managerial- are not likely to substantially increase the outreach of MF services to the poor in the foreseeable future. The concept of formal microfinance banks (MFBs), having capacity to provide a range of financial services to the poor on self sustainable and commercial basis has, therefore, emerged since mid 90s and gaining increased acceptance in most parts of the world, including Pakistan, he added. 'Micro finance in Pakistan is relatively a new concept as compared to other countries in the region. The NGOs and Rural Support Programs have been the major player in the sector covering about 5% of over 7 million poor households in the country,' Bari said.
The MFIs Ordinance-2001 inter-alia stipulates the functions, capital requirements, ownership structure, terms and conditions for establishing microfinance banks/institutions in the country, audit and disclosure requirements and winding up procedures. The provisions of the ordinance are applicable on microfinance institutions mobilizing savings from public to finance their operations. The operations of NGOs and other programs providing micro credit and allied services through sources other than public deposits/savings are not covered under the ordinance.
The licensing, regulation and supervision of MFBs established/to be established under MFIs Ordinance-2001 has been entrusted to State Bank of Pakistan under MFIs legal framework. No institution/person could commence operations as micro finance bank unless granted license by the State Bank under Section 13 of the MFIs Ordinance. Any person or group of persons, Pakistani or foreign national, having requisite financial and managerial capacity and exposure and understanding of dynamics of the MF sector as well as established integrity levels may apply for a license under the MFIs Ordinance. However, any person (s) having any of the following disqualification shall not be eligible to be a Director on the Board of MFB:
a) has been convicted by a court of law in Pakistan or abroad for a criminal offence;
b) has been associated with any illegal activity especially contravention of banking and corporate laws.
c) has failed to meet his/her obligations to banks and other financial institutions. The Sponsors/Directors shall furnish names of the banks/DFIs and their branches with which they have had dealings along with the reports from such banks/DFIs.
d) has defaulted in payment of taxes- each director and sponsor shall indicate his/her national tax numbers.
e) is or has been associated as director/chief executive with the corporate bodies whose corporate and tax record including customs duties, central excise and sales tax has been unsatisfactory. They shall name the corporate bodies, their bankers and disclose their tax numbers and dividend record. Those not so associated with corporate bodies would be required to indicate their occupation/profession/trade and highlight their achievements.
f) is member / office bearer of any political party or member of Senate, National/provincial assembly / assemblies
g) In the opinion of the sanctioning authority maintains adverse reputation regarding integrity and performance. Under the SBP regulations, no MFB shall commence business as micro finance bank unless it has a capital of Rs.500 million, Rs.250 million and Rs.100 million, respectively for countrywide, specific province-wide and specific district-wide microfinance banks (MFBs).
The NGOs/projects already providing micro credit and allied services to the poor, may apply for a license under the MFIs Ordinance. They may contribute up to 50 percent of the required capital in the form of their existing portfolio of micro-credit and other assets (net of losses) after due diligence by a reputed chartered accountancy firm on the SBP's panel of auditors. The remaining 50% will, however, be contributed in the form of cash or government securities. The promoters or sponsor members shall subscribe at least 51% of the minimum capital and the shares subscribed to by the sponsors shall remain in the custody of State Bank and shall not be transferable nor shall encumbrance of any kind be created thereon without prior permission in writing from SBP.
Prime Minister Shaukat Aziz, while chairing a meeting to review the strategy prepared by State Bank of Pakistan (SBP) to increase the coverage of microfinance sector in Pakistan, had approved the strategy to expand microfinance outreach from one million to three million households by 2010.
According to official sources, Pakistan has come a long way in introducing and familiarizing the microfinance concept. However, strategic steps are being taken and multiple approaches already adopted for substantive up-scaling of microfinance facilities to benefit the people belonging to the resource deficit areas. They further said the government was focusing on improving the standard and quality of life of common man, adding, lack of capital can be a major impediment in their efforts to live a better life. 'Micro credit facility is an effective tool to generate economic activities, reduce poverty and improve living standards. It will provide them opportunities to augment their income and move up the social ladder.'
Analysts, however, emphasized the need to promote public-private partnership and said civil society organizations and enterprising philanthropists need to come forward and involve themselves in organizing microfinance credit to the marginalized sections of society. They said Pakistan has in place a sound legislative framework, which should facilitate achieving the target to bring three million households in microfinance network in three years.
They appreciated the hard work done by the State Bank of Pakistan for preparing the microfinance strategy and asked the Governor SBP to prepare a timeframe for its implementation. Commercialization of microfinance is critical for financial and social sustainability of the sector, they added. Moreover, the government has asked the private sector to come forward and make investment for setting up microfinance banks at district, provincial and national levels. This is very viable preposition which will help promote cottage industry in the country, said Advisor to the Prime Minister on Finance, Revenue, Economic Affairs and Statistics, Dr. Salman Shah.
He maintained that the government is taking measures to increase outreach of micro-finance banks for low income groups, development of the payment systems, financial diversification to cater to variety of consumers and their needs and preparing the regulation for the changing role. He further said that detailed discussions were held with Dr Mohammad Younas, Noble Prize winner, during his recent visit to Pakistan and he described the SBP regulations for microfinance banks as the best one. He maintained that State Bank of Pakistan and Ministry of Finance would extend all out cooperation to the private sector for setting up microfinance banks.