President & CEO Tameer Micro Finance Bank

May 21 - 27, 2007

More than three billion people in the world seek access to basic financial services essential to managing their lives. Micro-finance is an essential but not the only tool in the reduction of poverty. In many countries, like Bangladesh, Indonesia and Bolivia, access to basic financial services like loans, low-cost housing, savings and micro-insurance has empowered millions of people to get their way out of poverty.

The Consultative Group to Assist the Poor (CGAP) has developed 11 principles to assist governments and practitioners to establish enabling frameworks. Let us examine some of these principals, determine how Pakistan is performing against these principles, and then discuss a roadmap for the use of micro-finance as a powerful poverty reducing tool.

•Micro-finance, the building financial systems serving the poor, will reach its full potential only if it is integrated into the country's mainstream financial system

•Micro-finance can pay for itself, and must do so if it is to reach a large number of poor people. Unless micro-finance providers charge enough to cover their costs, they will be limited by scarce and uncertain supply of subsidies from governments and donors

•Poor people need a variety of financial services, not just loans. In addition to credit, they want saving, insurance and money transfers

•The government's job is to enable financial services, not provide them directly. Governments can almost never do a good job of lending, but they can set up a supporting policy environment

Pakistan has a population of about 160 million. However, the country's commercial banking system comprising 34 commercial banks and six Islamic banks lend to only 3.2 million people. This situation is made more acute by the fact that the bulk of the existing customers are concentrated in five major cities and that we do not have any cooperative banks, credit unions, rural banks or postal banks. Institutions which specifically cater to micro-finance include specialised micro-finance banks, NGOs and national and rural programmes. The combined outreach of these institutions is around 800,000. If we assume that one-third of our population lives below the poverty line and if we include people above the poverty line whom the commercial banks do not cater for, we have a minimum un-banked population of 50 million.

If we wish to use micro-finance as one of the tools to reduce poverty, we must aim to have at least 10 million active micro-finance customers over the next ten years. This is not an easy undertaking if we bear in mind that Bangladesh, the pioneer of micro-finance, took over 30 years to reach its outreach level of 24.6 million. In order to achieve the target, micro-finance needs to become a mainstream activity and all models of outreach ó i.e., commercial banks, specialised micro-finance banks and NGOs ó need to be supported and a more enabling environment established. If we start with the commercial banks we find that not a single one has any meaningful micro-finance activity. Given that the commercial bank industry made an after-tax profit of $1.5 billion in 2006, the rationale for not participating starts to become clearer. With this industry making exceptional profits, there is no motivation for it to move out of its established target market.

It is unlikely that Pakistani commercial banks will enter the micro-finance field on a voluntary basis. Despite the State Bank's being a free-market advocate, there is no solution other than a directed credit requirement by it to induce this sector to enter this market and accept the social responsibility, albeit on a commercial basis. The central bank in Lebanon has mandated that the commercial banks invest 5% of their statutory reserves in micro-finance. If they do not meet this requirement then, they do not earn interest on 5% of their reserves. As a result, some commercial banks have started lending to creditworthy NGOs in dire needs of commercial funding to expand their portfolio, while others are looking at establishing their own operations.

The CGAP's second principle states that in order to be sustainable micro-finance must achieve scale and charge an interest rate which covers their operational and financial costs. Five specialised micro-finance banks are privately owned while one is a public/private entity. Of the five private banks three are national while two are district-based. It is unlikely that with their small capital base the district-based micro-finance banks can make a major impact on the targeted outreach number. The three remaining private banks with the national presence could make the largest impact if the enabling environment is further strengthened.

There are three principal needs. Firstly, the State Bank or the government should provide avenues for raising funds on a commercial basis as the largest constraint for fast growing banks is always funding as their deposit base usually lag their loan growth. Secondly, like any nascent industry that the governments wishes to support, it should provide a five-year tax holiday, so that more investors are attracted to the establishment of new micro-finance banks. Thirdly, the State Bank needs to take another look at its capitalisation requirements. A 15% capital adequacy ratio and the absence of the ability to raise tier two capital will clearly hamper the banks' achieving scale. Lastly, while all the private banks' charge an interest rate that covers their costs, the partially owned government micro-bank is not allowed to charge a commercial rate. If this bank is to contribute towards the target it must be allowed to charge a commercial rate.

The CGAP's third principal states that the low income group's needs are not limited to credit. Research indicates that small-value mortgages are the second biggest need after working capital requirements. Unfortunately, the outreach in this segment is even smaller than the micro segment, with commercial banks only targeting the higher end customers. The State Bank needs to make a special arrangement for the micro-banks to allow them to lend up to Rs1 million for housing construction and home improvement purposes, as opposed to their current limit of Rs100,000. Like commercial banks, life insurance companies need to take another look at this market. Other than credit life which they already provide they must develop term life and livestock insurance. Existing micro-banks and NGOs can be a useful distribution channel. Lastly, the awaited private pension programme should be approved by the SECP so that appropriate products may be developed for this market

The last principal states that the government should provide an enabling environment as opposed to be in the business itself. The government did a great job in establishing the first public/private micro-bank. However, since it does not have a commercial view, the bank has yet to achieve sustainability because its operations are not managed on a commercial basis. Given the government's successful track record of privatising public sector banks, it is time that Khushhali Bank was privatised as well so that it can leverage its network.

Email: nadeem.hussain @tameerbank.com