Apr 28 - May 11, 2008

LAHORE: Micro finance is often considered one of the most effective and flexible strategies in the fight against global poverty. It is sustainable and can be implemented on the massive scale that is necessary to respond to the urgent needs of those living on less than $1 a day, the World's poorest.

To most, micro finance means providing very poor families with very small loans (micro credit) to help them engage in productive activities or grow their tiny businesses. Over time, micro finance has come to include a broader range of services (credit, savings, insurance, etc.) as we have come to realize that the poor and the very poor who lack access to traditional formal financial institutions require a variety of financial products.

Around 1.2 billion people around the planet lack access to basic necessities and micro finance could be their pathway out of despair. Although, Pakistan government has shown commitment in micro finance sector for poverty alleviation and uplift of poor but still a lot is to be done to achieve the desired results.

Pakistan needs to ensure access to micro credit to all poor to achieve desired result in the right direction. In Bangladesh, 80-percent poor have access to micro credit, but this rate is not so encouraging in Pakistan, analysts told Pakistan and Gulf Economist (PAGE).

Micro finance consists of making small loans, usually less than $200, to individuals, usually women, to establish or expand a small, self-sustaining business. For example, a woman may borrow $50 to buy chickens so she can sell eggs. As the chickens multiply, she will have more eggs to sell. Soon she can sell the chicks. Each expansion pulls her further from the devastation of poverty, they said.

Talking about the government's role in supporting micro finance, they said the governments had a complicated role when it comes to micro finance. Until recently, governments generally felt that it was their responsibility to generate development finances' including credit programs for the disadvantaged. Now the micro finance has become quite popular, governments are tempted to use savings banks, development banks, postal savings banks and agricultural banks to move micro credit. This is not generally a good idea, unless the government has a clear acceptance of the need to avoid the pitfalls of the past and a clear means to do so, they said.

Moreover, the Government of Pakistan and the Asian Development Bank (ADB) have recently signed a US $ 2 million grant agreement that aims to use micro finance to help improve the lives of the countryís poor people. Agreement to this effect was signed by Peter Fedon, ADB's Country Director in Pakistan on behalf of the bank while Muhammad Saleem Sethi, Joint Secretary Ministry of Economic Affairs and Statistics inked it on behalf of the Government.

According to the agreement, the grant from ADB's Japan Fund for Poverty Reduction (JFPR), financed by the Government of Japan, will be used to develop innovative savings products for micro finance banks that will initially benefit about 2,000 people. In addition to lower transaction costs and improving the access to financial services for the poor, mobile banking and mobile phone-based technology will be explored as delivery channels.

First Micro finance Bank will pilot these in the North-West Frontier Province, the Northern Areas, and Sindh with the aim of reaching about 15,000 people. The objective of the project is to promote the development of micro finance by expanding micro finance outreach to the poorest in the country. The grant will support the piloting of innovative products and delivery mechanisms, and will explore options for developing savings products specifically aimed at poor households. The poor need deposit services to better manage emergencies, smooth consumption, meet expected demands for large sums of cash, and take advantage of investment opportunities. The demand for appropriately designed savings products may far outstrip the demand for micro loans among the poorer households. In addition, mobile banking will bring financial services to poor, rural people who normally do not have access to these services.

SBP BB REGULATIONS: With a view to encouraging innovation and increasing outreach of the banking system, State Bank of Pakistan (SBP) has issued Branchless Banking (BB) Regulations, which will be applicable to all banks including Islamic and Micro finance banks with immediate effect.

The objectives of these regulations are to define branch-less banking activities as a new delivery channel to offer banking services in a cost effective manner, to broadly outline activities which constitute BB, to provide a framework for offering BB services and to serve as a set of minimum standards of data and network security, customer protection and risk management to be followed by the banks desirous to offer mobile banking services.

According to these regulations, only authorized Financial Institutions (FIs) can provide Branchless Banking services. Before applying for such an authorization, FIs should thoroughly prepare themselves in the light of these regulations.

The process should start from top level strategic decision of entering into branchless banking activities. Once the decision is made, preparation of necessary policies and procedure manuals, strengthening of existing risk management and audit functions as required and identification of partners, service providers and agents should be done. The FI may then approach SBP for a formal authorization to conduct BB.

Banks wishing to provide branchless banking services or to bring in substantial changes in underlying technological infrastructure will have to submit to the State Bank an application describing the services to be offered / infrastructure modifications and how these services fit in the bank's overall strategy. This will be accompanied by a certification signed by FIs Presidents/CEOs to the effect that the FI has complied with the some minimum pre-conditions: -- an adequate risk management process is in place to assess, control, monitor and respond to potential risks arising from the proposed branchless banking activities-a manual on corporate security policy and procedures exists that will address all security issues affecting its branchless/e-banking system in line with these regulations- a business continuity planning process and manual have been adopted which will include a section on electronic banking channels and systems.

These regulations have been issued as part of the broader strategy to create enabling regulatory environment to promote Bank-led Model of branchless banking. However, as financial institutions cannot take on BB without the help of other market players like telecom companies, technology service providers, agents etc., knowledge of these regulations is also helpful for other parties to understand their roles and responsibilities.

Under these regulations, permissible BB models and activities have been outlined. At present only bank-led model of branchless banking is allowed at present which may be implemented in different ways.

Firstly, it can be implemented either by using agency arrangements or by creating a joint venture between Bank and telecom firm/non-bank. Further, the mobile phone banking which make up for large part of branchless banking can be implemented by using one-to-one, one-to-many and many-to-many models or alternate channels. It is the responsibility of the FI to carry out detailed analysis of pros and cons of each model before offering any of them. In addition, these regulations also prescribed several BB activities including opening and maintaining a BB Account, account-to-account fund transfer, person-to-person fund transfers, cash-in and cash-out, bills payment, merchant payments, loan disbursement/repayment and remittances.

Under these regulations, BoD and senior management of banks are required to ensure that the scope and coverage of their internal audit function has been expanded to commensurate with the increased complexity and risks inherent in branchless banking activities and the Audit department has been staffed with personnel having sufficient technical expertise to perform the expanded role.

It is also incumbent upon the BOD and FIs" senior management to take steps to ensure that their FIs have updated and modified where necessary, their existing risk management policies and processes to cover their current or planned branchless banking services. The integration of branchless banking applications with legacy systems implies an integrated risk management approach for all banking activities. These regulations also deal with consumer protection and consumer awareness. Appropriate customer protection against risks of fraud, loss of privacy and even loss of service is needed for establishing trust among consumers as trust and customer confidence is the single most necessary ingredient for growth of BB. As banks will be dealing with a large number of first-time customers with low financial literacy level, they need to ensure that adequate measures for customer protection, awareness and dispute resolution are in place.

Likewise, customer awareness is a key defense against fraud and identity theft and security breach. Customer awareness program should cover, at minimum, usage of Branchless-Banking account, account activities and protection against fraud, SIM/account blocking procedures in case of mobile is lost / snatched. To be effective, banks should implement and continuously evaluate their customer awareness program.