MICROFINANCE IN PAKISTAN
S.KAMAL HAYDER KAZMI,
Research Analyst, PAGE
Dec 21 - 27, 2009
Pakistan is one of the few countries in the world, which has a separate legal and regulatory framework for microfinance institutions.
At present, six microfinance banks (MFBs) are operating in the country, and a few more banks are expected to be licensed in the near future. Besides, there are about 100 NGO-MFIs engaged in provision of micro credit to the poor.
However, total number of clients of MFBs and NGO-MFIs is around half a million, which is less than 10% of the potential market of 6.5 to 7 million poor households. A multi institutional approach is required to tap huge un-served/underserved market.
MICROFINANCE BY COMMERCIAL BANKS
In Pakistan, commercial banks have a huge branch network across the country with more than 3,000 branches in rural and semi rural/peri-urban areas. This branch network, coupled with access to stable sources of funds and well established systems, could be effectively utilized to extend microfinance services to the low income population, which would bring additional revenue streams for the banks.
PHYSICAL STRUCTURE OF MICROFINANCE SECTOR
. PERSONNEL BRANCHES . 2004 2005 2006 2007 2004 2005 2006 2007 MFBs 1376 1932 2996 3899 80 108 226 295 MFIs 507 859 1675 2374 62 81 173 259 RSPs 883 1335 2489 3214 203 339 652 600
The commercial banks may enter into MF market through variety of institutional arrangements including establishing MF counters in the existing branches, standalone MF branches established either through conversion of existing branches or opening new MF branches, establishing independent MF subsidiaries with independent and professional board and management, developing linkages with MFBs licensed by SBP and NGO-MFIs that are not licensed by SBP to extend wholesale funds for on-lending etc.
The commercial banks interested in building MF portfolios should review the different institutional/organizational arrangements and select the mode based on their organizational culture, capacity and overall objectives.
Currently, the microfinance banks/institutions have a key role to play in creating economic opportunities for the poorest sections of the society by broadening their outreach. The regulatory role develops infrastructure of service delivery from researching and encouraging use of successful global practices, and guides the provision of rules and oversight that would enable microfinance institutions build sources of public funding and deposits.
In developing economies, the symbiosis between the regulators and the operators will be a critical underpinning for this vital function to pull its weight as a major solution to poverty. The SBP is facilitating setting up a microfinance-exclusive credit information bureau to reduce risks associated with microfinance operations and their clients.
INDUSTRY GROWTH RATES (%)
GROWTH RATES 2006-07 2007-08 Total Assets 30 45 Total Debt 44 53 Total Equity 6 25 Offices 9 10 Personnel 30 21 Active Borrowers 52 34
Several initiatives have been taken by the SBP to support micro financial development. These include measures to address most common causes of banking exclusion; to facilitate and create an enabling environment for banks to address needs of under-served and un-banked segments through dedicated prudential regulations, and through guidelines for microfinance, SME finance, agricultural finance and other areas; and to provide alternative finance models such as Islamic banking which can operate in parallel with conventional banking.
The MFI Ordinance-2001 has been instrumental in catalyzing growth, creating investor confidence and protecting depositors. State Bank has recently amended the Prudential Regulations for microfinance banks removing regulatory bottlenecks pointed out by the industry. SBP increased ceiling on lending limits for MFBs and relaxed borrower criteria. MFBs can now extend micro loans of up to Rs 150,000 for general purpose and Rs 500,000 for housing-loan.
ASSET COMPOSITION OF THE MFIS
. CY01 CY02 CY03 CY04 CY05 CY06 CY07 H1-CY08 As percent of total financial assets MFIs 0.1 0.1 0.1 0.1 0.2 0.2 0.2 0.2 As percent of GDP MFIs 0.0 0.1 0.1 0.1 0.1 0.1 0.1 0.1
Microfinance banks/institutions are specialized financial institutions, which cater to the financial needs of the low income group. Commercial banks and other financial institutions are neither mandated nor find it profitable to serve the microfinance market. They perceive serving this market as risky, costly and difficult to be reached and therefore seem uninterested to micro financing.
The NGO-MFIs and the specialized programs therefore remain the major providers of microfinance perhaps all over the world.
The concept of formal microfinance banks in Pakistan, having capacity to provide a range of financial services to low income group on easy terms has emerged in mid 90s and since then it has been gaining growing acceptance of the getting-aware market.