MICROFINANCE

AQEEL KHAN, Research Associate
May 21 - 27, 2007

BASIC FACTS

* Microfinance helps very poor households meet basic needs and protect against risks;

* Use of financial services by low-income households is associated with improvements in household economic welfare and enterprise stability or growth

* Supporting women's economic participation, microfinance helps to empower women, thus promoting gender-equity and improving household well-being

* Estimates of the global demand ranges from 400 to 500 million households of which only around. Although many poor and low-income people do not yet have access to financial services, the number of customers that use microfinance, has grown between 25 and 30 percent annually over the past five years

* The definition of microfinance includes low income households with those below the poverty line. There are a significant number of low income households that are not below the poverty line, but which even so have limited access to financial services.

SCALE AND OUTREACH

To develop the financial services in rural areas the microfinance innovation and outreach programme was projected US$ 30.5 million, for this approach the International Fund for Agriculture and Development is finance a US$ 26.5 million loan for this project in Pakistan. Also the IFAD support the pilot projects for the poor (especially women) to help generate income, test and develop microfinance product like micro-leasing, micro-insurance and Islamic financing as well as employment opportunities for fresh graduates.

Improving Accesses for Financial Services Program (IAFSP), government of Pakistan with the collaboration of ADB will finance US$ 320 million. The purpose of this programme was to make and broad financial sector, support economic growth and improve efficiency by utilizing latest technology.

MICROFINANCE RATING AND ASSESSMENT FUND

This rating fund is a multi-donor, funded by IDP and Consultative Group to Assets the Poor (CGAP). The rating fund offers financial support to microfinance providers for up to 80% of the cost of a performance evaluation.

MICRO CREDIT PROVISION IN PAKISTAN 2006

INDICATOR

JULY - SEP

OCT - DEC

No. of branches/Units

1,113

1,115

Gross Loan Portfolio (millions)

10,119

10,743

Avg. Loan Balance (PKR)

10,980

10,759

No. of Loans Disbursed

253,457

359,463

Disbursements (millions)

3,171

5,308

Avg. Loan Size (PKR)

12,512

14,766

MICRO-SAVINGS PROVISION IN PAKISTAN 2006

INDICATOR

JULY-SEP

OCT-DEC

Value of Saving (million)

2,194

2,610

Avg. Saving Balance (PKR)

1,548

1,573

For period Oct-Dec 2006, the microfinance sector closed to one million mark to reach 997,778 active borrowers, as compared to the period of July-Sep 06 it was recorded as 921,559 showing a continuing upward trend, with net increase of 76,219 of active borrowers i.e. a growth rate of 8%. At the same time the total numbers of active savers were increased by 17% i.e. 1,659,051 in Oct-Dec 06 period while July-Sep it was 1,417,572 a net increase of 241,479.

In 2005 market share of Total active borrowers by peer group of Specialized Banks /NGOs stood at 55% much higher compare to Rural Support Programme which was 35% rest contributed 10% of total institution type

MICRO-FINANCE PROVIDERS IN PAKISTAN

* KHUSHHALI BANK

The Bank established in 2000 to support the government's Poverty Reduction Strategy and its Microfinance Sector Development Programme. Its mandate is to retail microfinance services and act as a catalyst in stabilizing Pakistan's microfinance sector.

PERFORMANCE AND GROWTH

The Bank's shareholders are 16 commercial banks, including two multinational banks. The Government obtained a loan of $150 million from the Asian Development Bank to support the operations of Khushhali Bank. The Bank now serves nearly 230,000 clients, with cumulative disbursements of over Rs 6.0 billion through its branch network in 74 districts with high poverty incidence. The majority of bank's clients are in rural areas (60%) and includes the very poor majority of them are women's.

FUNDS AND LOANS

The Bank offers two endowments find throughout the country i.e. Microfinance Social Development Fund and Community Investment Fund with the alliances of NGOs. Introducing the group lending methodology loans are made directly to individuals in the group, but if one member of the group defaults then all members of that group becomes ineligible for loans. The Bank offers micro loans of between Rs3000 — Rs30, 000. Loans are offered for investments in agriculture, livestock and micro enterprises. In addition to loans, the bank has started offering equity sharing in small infrastructure projects to interested community organizations.

* FIRST MICROFINANCE BANK

The first private sector specialized microfinance bank with a network of 36 branches/units in the country established in 2002. Initial sponsors of the bank included Aga Khan Rural Support Programme and the Aga Khan Fund for Economic Development.

PERFORMANCE AND GROWTH

It has $11 million of capital. AKRSP accounts for 46%, AKFED 30% and international finance corporation 24% of the ownership. The Bank built upon the rural development model shaped by AKRSP. The Bank's provides deposit, lending and other financial services.

LOANS AND SCHEMES

The Bank's offers a range of loan products that include individual loans, group loans in rural areas, business committee loans, urban group loans and business group loans with a service charge between 10-16%. The Bank's beneficiary loan base has increased to 41,000 in September 2006. Women loan beneficiaries are 28% of total borrowers. The Bank offers a number of saving and deposit schemes, micro insurance, funds transfer facility, cheque collection etc. More than 80% of the depositors are from lower income segment having less than Rs400 average balance in the account.

* PAK OMAN MICROFINANCE BANK LTD

The Bank was established in May 2006 with the collaboration of Government of Sultanate of Oman and Pak

Oman Investment Company with shareholding of 67% and 33% respectively. The main objective of the Bank's is to eliminate poverty by creating sustainable income opportunities for the lower strata of the population, particularly women.

GROWTH AND PERFORMANCE

The Bank's operated their operation in Karachi, Hyderabad, Rawalpindi, Islamabad, Mirpur Khas, Tando Allayar. Number of borrowers stands at 4354 as of September 15, 2006. The Recovery rate of the Bank's is 100%. No collateral. It is the group guarantee of the borrower

LOANS AND SCHEMES

The Bank's provides a host of services, micro business loans for running capital, micro agriculture loans for agri-inputs, micro asset loans for asset building, micro loans for new business and livestock loans for goat and sheep rearing.

* TAMEER MICROFINANCE BANK LTD

Under the Microfinance Ordinance 2001, the Bank set up as a private commercial microfinance bank licensed by the State Bank of Pakistan. Provides services to the economically active poor. It serves low income, salaried, self-employed and micro entrepreneurs with a range of financial products eg. Tameer-e-Ghar, Tameer-e-Karobar, Tameer-e-Bacchat and Tameer-e-Khazana.

* KASHF FOUNDATION

The Foundation has started their operation in 1996. The foundation focuses on to help the low income women by their products offers pro-women and pro-poor. It is the first MFI in Pakistan to introduce a micro insurance product; this covers the death risk of the client by insuring the entire loan balance. The Bank's offers access to small loans and micro deposit services to its customers. Loans are extended without collateral or personal guarantee. Loan approval is subsequent to the formation of a group of 20 25 women who ensure that loan repayments are regularly made.

MICROFINANCE PRODUCTS

For financial and social sustainability of microfinance industry three basic microfinance products are:

LOANS

•Mostly short term working capital
•Larger loans for fixed assets
•Housing

SAVINGS

•Compulsory savings used a loan guarantee as protection to the lender. Most micro credit operations and MFIs cannot mobilize deposits without a license from the Central Bank. Member societies can mobilize savings from their members.

•Savings are often a more appropriate financial product for the very poor than credit. This implies working with formal financial sector institutions, ROSCAS6 and member societies.

INSURANCE

•Loan insurance.

•Common ways of providing loan insurance are: purchased by the borrower when taking a loan as a percentage of the loan; establishing an emergency fund in village banks, community loan associations and other groups; and compulsory savings.

Sorces: Pakistan Microfinance Network (PMN) 2006

MFBs: Microfinance Banks
MFIs: Microfinance Institutions
RSP: Rural Support Programme
NGO: Non-Government Organization
CFI: Commercial Financial Institution

Peer Group: A number of companies that compete in the same industry, and are relatively equal in market capitalization, provides a benchmark by which to study how an individual company performs within its industry.