A program aimed at poverty reduction


Jan 05 - 11, 2004



After Khushhali Bank and the First Micro-finance Bank operating with 35 and 10 branch networks respectively, a number of private sector micro-finance banks are in the pipeline with a motive to growing rate of poverty in Pakistan.

It is interesting to note that contrary to the results of macro level advances, the rate of recovery in the micro-financing sector has been experienced highly positive, as the middle class or the poor segment of the society always avoid to be declared as the defaulter under the social set up in our country. The commercial banks as a result of non-performing loans obviously extended to high ups of the society had to bear an aggregate impact around Rs.18 billion as a result of rescheduling of the non-performing loans and write offs.

As compared to the micro-financing which is initial stage in Pakistan, one of the major problems faced by the banking industry was the high level of non-performing loans. In order to help banks to clean up their balance sheets and realize maximum recoveries, State Bank had developed a set of guidelines entitled "New guidelines on Write-offs." These guidelines were finalized after detailed deliberations with the representatives of the five big commercial banks and trade bodies so as to make them practical. While direct impact of the scheme as on June 30, 2003 has been recoveries and restructuring of non-performing loans was estimated at Rs.18 billion, its aggregate impact may extend considerably once banks settled all the referred cases.

An effective campaign for micro-financing scheme may lend really a big helping hand in the government's agenda to reduce poverty level in Pakistan. A large number of youngsters are sitting idle in the absence of employment opportunities and lack of finance to do their own business. The micro-finance scheme has already been produced great results to check the growing rate of poverty in the countries like Bangladesh, Malaysia and Indonesia. The micro-finance scheme in Pakistan is at an evolutionary stage with low outreach. Narrow institutional base, limited retail capacity, and a perception of micro-finance as more of a social service than a commercially viable financial preposition.

Commercial banks in general, are neither structured nor geared to extend their micro-finance exposure beyond experimental forays while the segment does not form a part of the target market for Development Finance Institutions (DFIs). Non-government organizations (NGOs) have shown appreciation for the nature of micro-finance demand emanating from poor through effective targeting, participatory approaches, capacity building, and gender sensitivity. However, their micro-finance operations are unlikely to attain financial self-sufficiency with limited capacity to reach a larger segment of the population. While recognizing the importance of micro-finance towards poverty alleviation and considering the ongoing banking and financial sector reforms, government has formed a comprehensive Micro Finance Sector Development Program (MSDP) with the assistance of Asian Development Bank (ADB). The infrastructure, promoting and strengthening micro-finance institutions (MFIs) and providing institutional development support. A legal framework for establishment of MFIs in the private sector, known as MFIs Ordinance 2001 has been enacted, which inter alia stipulates the functions, capital requirements, ownership structure, terms and conditions for establishing micro-finance banks/institutions in the country, audit and disclosure requirements and winding up procedures. It allows establishment of three categories of MFIs that is MFIs having operators on the national level, MFIs operating in a province and those operating in a specified district with minimum capital requirements of Rs.500 million, Rs.250 million and Rs.100 million respectively. The prospective MFIs are required to be incorporated as limited liability companies under the Company Law, before applying to State Bank of Pakistan for an MFI hence, SBP, being the only regulatory and supervisory agency for all deposit taking institutions, has been entrusted the responsibility of regulation and supervision of MFIs. Related regulatory framework has been developed by SBP in consultation with all the stakeholders and the support of both domestic and international micr-finance experts and practitioners.

SBP has already issued two licenses to Khushhali Bank (KB) and the first Micro-finance Bank in the private sector to operate as countrywide micro-finance institution. KB has established an extended branch network of 35 branches spread all over the country while first Micro-finance Bank established in January 2002 has also been allowed to open 10 branches during the year 2003.

While KB and first Micro-finance Bank are expected to play an important role in development of the sector, a number of other institutions would also be allowed to operate as MFIs to increase the outreach of micro-finance services and fill the existing gap between demand and supply of related services.