IMPACT ON POVERTY
MARIAM NASIR, Manager Research
May 21 - 27, 2007
Poverty line fell from 34.5% in FY01 ñ 23.9% in FY05
Number of poor people fell from 49 in FY01 - 37million in FY05 (absolute terms)
Unemployment Rate declined from 7.7% FY04 - 6.2% FY06
The Microfinance Institutions Ordinance 2001 was broadcasted by Government to support development of microfinance sector. The Government has designed a microfinance policy in June 2000 to develop a pro-poor pecuniary system. Paid-up capital requirements for Microfinance Institutions are set lower than commercial banks at Rs250 million whereas for Regional Microfinance Banks is of Rs150 million with the intention of obtaining license for five adjacent districts with this prescribed minimum capital requirement. The policy emphasizes uphold microfinance by encouraging private sector entering into microfinance to ensure modernism and suppleness.
The State Bank has espoused international standards to create requirements for capital adequacy, maximum loan size, credit and operational risks etc. Pakistan has invested in the early growth and development of a microfinance industry over the last few years.
INDUSTRY SCALING - GLOBALLY AND REGIONALLY
Micro-finance is an emerging financial service. It fills an important gap for consumers by providing them with a risk management tool that, when properly designed and delivered, can reduce the vulnerability of low-income households. There are tremendous opportunities for micro-finance institutions to explore the credit market for small and medium enterprise, especially the smaller and micro-enterprises. SMEs are credit constrained and smaller enterprises are even more credit constrained than the larger ones. The main reasons for the credit rationing of SMEs by large lending institutions in the formal sector are largely due to lack of physical collateral that SMEs can offer as guarantee for loans as well as a lack of access to credible information about the SME on the part of the potential lender. Micro-insurance is not merely downsized versions of existing insurance products; however it is a subset of insurance that provides the poor with financial protection against certain risks in a way that reflects the cash constraints and coverage requirements of the low-income market.
COUNTRY COMPARISON OF MICROCREDIT PROVIDERS
Number of MFBs
Number of active borrowers (000)
Active borrowers as % of population
Total gross loan portfolio (US$ Mn)
per borrower (US$)
*'Poverty & Social Impact Assessment: Pakistan Microfinance Policy' May 2006 Oxford Policy Management.
Despite MF sector in Pakistan is relatively young compared with other countries, it is definitely in the same league as many of them. In terms of the number of borrowers, the notable exception is Bangladesh, which is more than twice as big as all the other countries in the sample put together. Of the rest, Pakistan has many borrowers than Afghanistan, Nepal, and Sri Lanka. In terms of borrowers as a percentage of the population, however, Pakistan is ahead of India, as well as Afghanistan but well behind the rest.
Globally it is estimated that there are 13 million micro credit borrowers worldwide, with US$7 billion in outstanding loans. With repayment rates at 97%, it is no surprise that the industry has been growing at a rate of 30% annually. According to World Bank estimates, currently there are over 7,000 MFIs, serving approximately 16 million poor people in developing countries. The total cash turnover of MFIs worldwide is estimated at USD2.5 billion and the potential for further growth is outstanding.
The success of the microfinance sector can also be gauged from its progress in developing nations like Bangladesh and India. The examples given below shed some light on the potential of microfinance institutions in poverty reduction and human resource development:
*In Bangladesh, The incomes of Grameen members were 43% higher than incomes in non-program villages.
*In India, half of SHARE Microfin Limited clients graduated out of poverty.
*In El Salvador, the weekly income of FINCA International clients increased on average by 145%.
*In Indonesia, the average income of Bank Rakyat Indonesia borrowers increased by 112%.
According to research, approximately 15 million families benefit from such facilities in Bangladesh alone and 40% of the poverty reduction was due to microfinance. In India, ICICI Bank, the second-largest commercial bank, has aggressively doubled its rural microfinance and agri-business loan portfolio over a period of nine months (from PKR52 bn to PKR100 bn). Simultaneously, the bank has also increased its partner strength of MFIs, from 49 to 102, over a period of one year and is planning to further increase partner strength to 200-250 MFIs, serving three districts in the country.
INDUSTRY — PERFORMANCE SUSTAINABILITY
According to the State Bank of Pakistan's second quarterly report of FY06, the market size for microfinance is estimated to be approximately one-third of the total households in the country. However the estimate is very low, based on the fact that it does not include the population near the poverty line. In Pakistan 6.5 million households require access to microfinance services; Market penetration is quoted at 5%.
In December 2006 microfinance sector closed to one million mark to reach 997,778 active borrowers comparing July — Sep 06 was recorded 921,559 showing a ongoing increasing trend. Saturation rate between the active borrowers and potential microfinance market, Lahore district were recorded the highest saturation rate i.e. 13% followed by Chitral district 7%, Mardan, Malakand, and Tharparkar 6%, while Gujranwala, Karachi and Khairpur districts 4%. The present government aims to increase the size of active client coverage till 2010 were 3 million. For this strategy government try to focus on building the human resource base, lift up assets to fund growth and guarantee sustainability of retail microfinance providers MFPs. The outreach has increased from 100,000 clients in 1999 to 500,000 in 2005; The gross loan portfolio is Rs. 5 billion and active borrowers are 510,000.
Issues in microfinance include limited outreach and lack of clear vision and a focused business plan.
There is a formally recognised Pakistan Microfinance Network (PMN). The PMN is a network of organizations engaged in microfinance and dedicated to improving the outreach and sustainability of microfinance in Pakistan.
SEGMENTS IN PAKISTAN
The microfinance sector of Pakistan can be divided into five segments, namely:
* Microfinance Banks (MFB)
* MFIs, Rural Support Programmes (RSP)
* Non-Governmental Organizations (NGO)
* Small Non-Governmental Organizations (SNGO)
* Commercial Financial Institutions (CFI)
Microfinance Banks account for the largest share in terms of active number of borrowers of Pakistan's microfinance market. MFBs have the highest contribution in the sector, in terms of assets, equity, as well as gross loans portfolio. Currently there are 18 MFBs in Pakistan which comprise of 99.5% of the microfinance market in Pakistan, in terms of outreach (credit and saving) and scale (loan portfolio and savings amount):
GROSS LOAN PORTFOLIO
MICRO FINANCE BANK
First Microfinance Bank
Rozgar Microfinance Bank
Network Microfinance Bank
MICRO FINANCE INSTITUTIONS
Orangi Pilot Project
RURAL SUPPORT PROGRAM
Sungi Development Foundation
COM. FINANCIAL INSTITUTIONS
Bank of Khyber
MICROFINANCE FUNDS IN PAKISTAN
In 2001 GoP has set up four important funds for unrelenting microfinance services.
MICROFINANCE SOCIAL DEVELOPMENT
Fund - Worth $40 million intended for building social capital to develop demand side of microfinance market. Increase creating participatory institutions/ mechanisms n line with creating more opportunities for poor. Community capacity building based organizations in terms of social consciousness in context with management of income generating behavior.
Investment Fund - Worth of $20 million, objective of which to increase admittance of deprived communities in order to raise their standard of conditions via efficient and prolific use of resources.
RISK MITIGATION FUND -
Worth of $5 million, to help poor in case of loss of income generating assets due to unforeseen events beyond their control.
DEPOSIT PROTECTION FUND -
Worth of $5 million, to endow with long term source of funding for social intermediation to expand the microfinance flea market.
MICRO CREDIT INSTITUTIONS/ DONOR'S AND NGO'S
Various public and private organizations such as the Pakistan Poverty Alleviation Fund, Khushhali Bank and a range of other Microfinance Banks and NGOs have also invested at least US$400 million into the provision of these services. Statistics show that this investment has initiated growth from 60,000 active borrowers in 1999 to more than 600,000 in 2005. Pakistan has made notable strides in industry development with expansion of services to more clients. The growth has been done efficiently with the costs of service delivery being lowered to levels below the rest of the world. The sector in Pakistan represents a diverse set of institutions including 20-25 NGOs, 6 microfinance banks, 4-5 commercial financial institutions and 4-6 rural support programmes.
In Pakistan's context, the utilization for microfinance holds particular importance for the agricultural sector. The poor farmers need credit for agricultural inputs like seeds, fertilizer, pesticides, etc. Input requirements tend to be cyclical, and so does farmers' income — however the two cycles do not always coincide. Hence, the undeniable need for microfinance. Currently, there is no unanimous standard to estimate the potential of the microfinance market.
INSTITUTIONS IN PAKISTAN
Govt. Subsidized Small Farmer Lending
First NGOs: AKRSP, OPP
Bank of Khyber
Kashf & PMN
PPAF & Khushhali Bank
First Microfinance Bank
Pak Oman Microfinance Bank Ltd
Tameer Microfinance Bank Ltd
DONOR'S IN PAKISTAN
The World Bank,
The Asia Foundation
Asian Development Bank, Pakistan
Australian Agency for International Development
Department for International Development
Pakistan Poverty Alleviation Fund
International Labour Organization
Swiss Agency for Development and Cooperation
Micro-Finance Social Development Fund/Community Investment Fund
European Union - Delegation of the European Commission in Pakistan
South Asia Partnership Pakistan
The microfinance market in Pakistan is small by international standards. It has so far been limited by a narrow range of products and a focus on credit, ignoring the potential of savings, insurance and leasing. The sector needs scaling up, product and market diversification in order to ensure greater sustainability (and possibly profitability), effectiveness and risk management. One factor that may facilitate the growth of MFIs is the ability to learn from the informal financial markets. Study of informal finance markets can help the microfinance institutions in understanding their market, in developing their core niche, in exploring the options for cross-subsidization between markets and in developing viable and demand-driven products and practices. This can help the sector outgrow its current small outreach to a more sustainable size.