MICROFINANCE IN PAKISTAN

Is it producing results yet?

A.M. TALHA
May 21 - 27, 2007

The Economic Survey for the fiscal 2005-06 (FY-06) claimed that poverty has come down by 10 per cent from 34.46 per cent in FY-01 to 23.9 per cent in FY-05. The World Bank later disputed the above claim and observed that reduction of poverty has taken place to the extent of 5 per cent only and not by 10 per cent.

A group of economists is of the opinion that the continuous high growth of GDP brings reduction in the poverty level- the "trickle down" theory. This theory, however, could not gain universal acceptance because of the practical experience in various countries. For continuous high GDP growth to bring a dent in the poverty level, it is imperative that equitable system for distribution of national wealth, including rationalized taxation structure, is also present which is not the case in Pakistan. Therefore, in existing circumstances, the benefit of high economic growth befalls on the top echelons of the populace. The high growth can prove partially meaningful to the poor sections of society only when it could create massive employment opportunities through establishment of labour-intensive industries. However, in the era of modernization, the industrial undertakings are being refurbished by sophisticated machinery requiring lesser labour. Our industrialists do not seem much interested in the labour-intensive sectors like ready-made garments etc. and we are much behind India and Bangladesh.

The strategy of our planners in the matter of inviting foreign direct investment (FDI) is also misplaced. For instance, in the telecommunication sector, we are spending over $ one billion on the import of cellular phones instead of setting up phone manufacturing industry in the country with FDI/ imported technology.

The chances of massive employment opportunities, even in the scenario of persistent high economic growth, being scant, the planners have to initiate measures to provide self-employment opportunities to the people by providing credit on easy terms. Recently, the President's Rozgar Scheme has been launched by the National Bank of Pakistan (NBP) but it has yet to reasonably pick up.

Another option to get the poor people engaged in the self-employment, particularly in the rural areas where there is higher concentration of poverty, is the "micro-finance". Micro-finance is believed to have helped enormously in reducing poverty and income gap between various sections of society in different countries.

However, the rural population is largely illiterate and its poverty does not permit it to furnish security/collateral to the lending banks for availing of credit. It is due to this reason that the commercial Banks did not come forward in the past to provide small loans to the poor people waiving the stringent security/collateral requirements. The need for creation of the specialized institutions to cater to this section of the populace was felt by the government. Pakistan, however, entered this field too late. Pakistan Poverty Alleviation Fund (PPAF) was created in 1999. The purpose of the PPAF is to improve access of the communities to the financial services. The first Micro-Finance Bank- Khushhali Bank- was established in the year 2000 in the government sector through "Khushhali Bank Ordinance" to carry out micro-finance activities in the country. Later on, Micro-finance Institutions Ordinance was promulgated in the year 2001 in order to provide legal framework for establishment/operation of the Micro-finance Banks (MFBs). Necessary amendments in the Micro-finance Ordinance were introduced through Finance Bill in 2006.

Later on, 4 MFBs were established in the private sector by the end of 2005 i.e. First Micro-Finance Bank Limited [established by the Aga Khan Foundation], Tameer Micro-Finance Bank Limited, Rozgar Micro-Finance Bank Limited and Network Micro-Finance Bank.

The Khushhali Bank Limited, First Micro-Finance Bank Ltd. and Tameer Micro-Finance Bank Limited are operating at national level while Rozgar Micro-Finance Limited and Network Micro-Finance Bank Ltd. are working at district level.

The sixth micro-finance bank i.e. Oman Micro-Finance Bank became functional by the end of June, 2006.

In the year 2006, permissions were given for the establishment of two more micro-finance banks.

In addition to the MFBs, non-governmental organizations (NGOs) and Rural Support Programmes (RSPs) are also active in the field of micro-finance. The share of the NGOs and RSPs is put at 17 per cent by the State Bank of Pakistan (SBP) while MFBs cover the rest 83 per cent.

The Khushhali Bank Limited is operating mostly on the Asian Development Bank Line of credit arranged for the purpose by the government. Other MFBs are also depending on the borrowed funds for their operations as their deposit base is smaller. We append Table "A" showing Assets/liabilities structure of the MFBs.

TABLE "A"
ASSETS/LIABILITIES OF MICRO-FINANCE BANKS.

Year / Item

2001

2002

2003

2004

2005

ASSETS: [ PERCENTAGE SHARE]

Cash & balances with treasury Banks

5.7

6.8

15.9

12.6

6.5

Balances with other banks

1.7

3.5

14.6

15.2

20.1

Investments

80.3

63.7

43.1

21.7

18.5

Advances

5.9

16.0

16.6

27.1

26.7

Operating fixed assets

4.7

3.8

2.8

3.5

3.6

Other assets

1.7

6.1

7.0

19.8

24.5

Total assets (Rs billion)

1.9

3.1

4.4

5.7

8.5

LIABILITIES: [PERCENTAGE SHARE]

Deposits

0.0

12.1

21.0

15.0

13.3

Borrowings

70.0

75.6

75.2

83.3

84.7

Other liabilities

30.0

12.3

3.7

1.6

1.9

Total liabilities(Rs billion)

0.1

0.5

1.9

3.1

5.1

Source: Table 5.7 page 101 SBP's Financial Sector Assessment (FSA)for 2005.

The quantum of "advances/ Investment-2005" [out of assets valuing Rs 8.5 billion] worked out on the basis of above percentages comes to Rs 2.27 billion and Rs 1.573 billion respectively. This is indicative of the fact that the lending portfolio of the MFBs is at much lower level. It seems that these banks are diverting their efforts more on the "Investment" than concentrating exclusively on reaching out the poor people for granting small loans which is the basic aim/objective for which they were established.

The amount of borrowings-2005- being 84.7 per cent of Rs 5.1 billion works out to Rs 4.3 billion. Is such a heavy borrowing justified when the lending portfolio is merely half of that.

Let us now examine how far the MFBs could reach the poor communities. A glimpse is contained in Table "B" appended:

TABLE 'B'
OUTREACH OF MICRO-FINANCE BANKS.

 

2002

2003

2004

2005

2006*

No. of branches

39

56

75

91

253@

No. of borrowers

56,939

95,090

177,648

248.091

266,720
(51,819)**

No. of Depositors

2,773

10,150

18,589

32,577

35,888

Advances (Rs million)

493

736

1,537

2,258

2,739

Deposits (Rs million)

64

392

469

680

746

NPLs/advances ratio

1.59 %

7.57 %

7.20 %

4.4 %

-

Source: SBP's annual report for 2005-06 vol.II, Banking sector Review (BSR)/ FSA for 2005.* upto June,2006. ** Female borrowers included in 266,720. NPLs=non-performing loans. @Branches 112+service centres 141.

By the 30th June,2006, a seven year period since the first MFB had commenced operations, the MFB's outreach is 266,720 borrowers which shall be deemed as "poor" in the softest terms. The advances portfolio of Rs 2.7 billion as of the said date also does not tell any triumph story.

The need, therefore, is of redoubling the efforts to reach the poor and expand the lending net instead of diverting the efforts towards "investment" which is not the real function of the MFBs. A large potential exists in Pakistan for extending micro-finance to the poor- particularly in the rural areas- as over 46 million Pakistanis [29 per cent of the population as per the World Bank assessment] are living in the abject poverty. According to SBP estimates, the potential micro-finance clientele in Pakistan is 25 to 30 million poor people; however, the coverage so far is slightly above one per cent.

There is also a need to focus on bringing the female borrowers as their clientele to date is too small.

PERFORMANCE OF MFBS IN BANGLADESH.

Bangladesh is a pioneer in the field of micro-finance in South Asia. The Grameen Bank founded by Professor Dr Muhammad Yunus, a quarter century back, tells the glaring story of success. His success in the micro-finance field earned him the Nobel prize in 2006.

Dr Yunus honoured us with his visit a few weeks back. The Grameen bank is mainly focusing on the females. Over 90 per cent of its borrowers comprise females. The methodology adopted by Grameen Bank is innovative. The borrower is not required to come to the counter of the bank as, in the opinion of Dr Yunus, this wastes the working day of the poor borrower and consequently his day's earning. The bank's officials call on the doors of the borrowers for receiving loan applications, making disbursement, receiving the installments of the principal amount and the interest on the due date.

During his visit to Pakistan, Dr. Yunus was appreciative of the regulatory framework put in place by the SBP but was not satisfied with the pace of our in-the-field progress.

He offered the services of the Grameen Bank to establish some model branches in Pakistan on Build, Operate and Transfer basis.

The Pakistan government/State Bank of Pakistan should accept the offer so that our bank officials may learn from the experience of the Grameen Bank.