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Micro-finance institutions

May help developing a strong cottage industry base in Pakistan

By AMANULLAH BASHAR
July 30 - Aug 05 , 2001

The micro-finance culture being introduced under the supervision of the State Bank of Pakistan is likely to be instrumental in developing a strong base for a massive scale cottage industry in Pakistan.

So far the banking sector has been the forbidden fruit for the poor in Pakistan. The less fortunate were allowed to use the banking facilities only to deposit their hard earned money with the banks while the facility of bank advances was exclusively made available to the moneyed people.

With the promulgation of the Micro-finance Institutions (MFIs) Ordinance, a secondary but really strong financial sector at micro level is likely to emerge due to overwhelming support from the grass root level.

Under the Ordinance, any micro-finance institution could be set up with the objective of serving the poor and support poverty alleviation programme launched by the present government.

Zubair Motiwala, President Karachi Chamber of Commerce and Industry (KCCI) while appreciating the micro-finance scheme has expressed the hope that a strong vendor industry can emerge to support the manufacturing sector at the macro level.

He however suggested that initially those persons already in business or those having technical qualification be preferred to make best use of the available funds. The fresh and raw hands could be accommodated in the scheme at a later stage. He said that such scheme have already proved a great success in Bangladesh and Indonesia. The scheme not only helps overcoming the problem of unemployment but will encourage the new entrepreneurship in the country. The micro-finance institutions in fact were the need of the hour to reduce ever-increasing disparity between the haves and have-nots.

He however sounded a note of warning that all precautionary measures should be taken prior to introduce the scheme to avoid recurrence of the yellow cab scheme which turned to be a big financial scam.

The Micro-finance Institution Ordinance 2001 will regulate the MFIs, which will provide assistance to micro-enterprises and services in a sustainable manner to help the poor. These institutions have been empowered to undertake mobile banking to expedite transactions and cut costs. Five per cent of the annual pre-tax profits of the institutions and profits earned on investment of the PDF shall be credited to the Depositors Protection Fund. The fund shall be invested in government securities or deposited with the State Bank in a remunerative account. In case of liquidation of the MFIs, the Fund will be used to pay individuals with deposits up to Rs10,000, it will become operative with effect from the expiry of five years from the date of first balance-sheet and shall remain unencumbered at all times.

The MFIs would be allowed to operative at district, provincial and national levels and the amount of paid-up capital has been linked to area of its operation Rs100 million for SBP licence for a specified district, Rs250 million for a specified province and Rs500 million for national-wide operations. The size of the amount could also be raised by the central bank from time to time. The MFIs will be governed by the prudential regulations and conditions attached to the licence issued by the SBP.

The MFIs will provide financing facilities with or without collateral security to poor persons for all types of economic activities including housing but excluding transaction in foreign exchange business. An MFI will undertake the management, control and supervision of any organization, enterprise, scheme trust fund or endowment fund for the benefit and advancement of the poor.

The MFI will be allowed to buy, sell and supply on credit to poor persons industrial and agricultural inputs, livestock, machinery, implements, equipment, industrial raw materials and to act as agent for any organization for sale of such goods and stocks. These micro-finance institutions will provide professional advance to poor persons regarding investment in small business and such cottage industries as may be prescribed and to borrow and raise money and open bank accounts. These institutions under the Ordinance have been allowed to receive grants from government or any other source permitted by the State Bank.

Under the law the regulator would be the State Bank of Pakistan and the Banking Companies Ordinance and any other law in force, relating to the banking companies or financial institutions, shall not apply to micro-finance institutions (MFI) licensed under this Ordinance.

Moreover, no one would be allowed to use the name of micro-finance bank or institution suggesting that it is a micro-finance institution without registration under this ordinance.

MFI would also be allowed to invest in shares of any unit providing any micro-finance services to the poor, to provide storage and safe custody facilities and any research activity relating to the improvement of poor people's work.

It would also be eligible to advise the poor in the matter of making small investments, to provide services to the poor to hedge against any risk relating to micro-finance activities and to render managerial, marketing and related advice.