Mar 5 - 11, 20

State Bank of Pakistan (SBP) is playing a key role in the development of microfinance sector. The initiative is aimed at fostering financial inclusion through robust microfinance providers supporting livelihood and entrepreneurship development opportunities.

This is also contributing to equitable economic growth and prosperity in the country. The objective is to transform microfinance into a dynamic industry, integrated with the overall financial system, which provides inclusive financial services to the underserved economic and geographic segments through self-sustaining business models and demand driven products. Efforts are also being made to maintain high standards of governance and service delivery, supported by agile regulatory environment.

Microfinance in Pakistan has come a long way since 2000 and is gradually being integrated into the formal banking system. Eight microfinance banks (MFBs) have been established, including transformation of three leading microfinance institutions (MFIs), and two of the world's largest MFIs having started their operations in Pakistan, reflecting private sector participation and institutional diversity. The policy and regulatory environment continues to improve and develop. While the industry infrastructure is expanding, most importantly, the sector's visibility has increased due to the launch of branchless banking initiatives, which leverage telecommunication and postal networks and mobile phone technology to expand cost efficient financial services to the unbanked population.

It has been realized that the effectiveness and success of any strategy hinges on growth dynamism fundamentally coming from microfinance operators themselves. The role of SBP is to develop the infrastructure, encourage the use of successful global practices, and provide regulatory and supervisory mechanism to enable MFBs to develop viable business models. The sector needs to focus on improving its financial and operating performance whilst ensuring high service standards, rather than looking for external catalysts.

Traditionally, funding to microfinance in Pakistan has been supported by donors. This type of funding is limited and unsustainable. In order to grow in a financially stable manner, permanent sources of funding are crucial. Even though MFB deposits registered 73 per cent growth in 2009, they only contribute 40 per cent of the entire funding structure. The high growth rate was the result of lower base, and also concentrated in two leading MFBs (FMFB and Tameer) and 74 per cent of the total deposits belonged to one MFB. Until recently the largest MFB, Khushhali Bank, has been funded by the GoP-ADB sponsored subsidized financing.

Prevailing inefficiency poses a serious risk to viability of the microfinance entities. Generally, MFBs have not been able to capitalize on the existing supportive regulatory framework which allows them cost-effective alternative delivery channels (ADCs). Pakistan has 95 million mobile users but only 26 million bank account holders, creating great potential for mobile phone banking. The fundamental requirements enabling the use of branchless banking are management capabilities for handling large operations, managing agents' network and using technology. MFBs need to develop their management capacity to manage the IT-led applications but also support various cost effective service delivery channels, such as point of sale (PoS), mobile phone etc.

The new Strategic Framework complements, rather than replaces, the existing strategy. There is emphasis on inclusive financial services, instead of outreach of borrowers, and demand for the industry to strengthen its fundamentals by developing infrastructure necessary for sustainable and inclusive growth. The ultimate aim of the Strategic Framework is to develop sound and growth-led institutions. To this end, the strategy will focus on following key components: 1) Accelerating outreach of inclusive financial services, 2) Promoting alternative delivery channels and using branchless banking models, 3) mobilizing deposit, 4) Up-scaling for micro-enterprise development, 5) improving governance, 6) building institutional capacity, 7) protecting consumer through financial literacy and 8) putting in place regulatory mechanism for MFIs

According to sector experts, MFIs have to move away from the credit-only approach to offering comprehensive financial services such as micro-savings, remittances, and micro-insurance. All-inclusive services can address the diverse needs of customers and provide additional revenues streams to MFBs.

In order to improve profitability, the players need to go beyond the traditional products of microcredit and savings. Home remittances are an emerging business opportunity to MFBs with possibilities for significant profits. Foreign remittances have experienced significant growth in last few years. However, a substantial proportion is still being transmitted through informal channels. Overseas Pakistani workers send their remittances to their families living primarily in remote areas of Pakistan, creating opportunities for MFBs with presence in such markets to capture the remittance business. This will also be consistent with the recent policy actions of promoting channelization of remittances through banking system.

Under the Financial Inclusion Program, SBP is encouraging new dynamic players (such as established telecommunication companies, mobile operators, and large network organizations) with impressive track record of delivering customer-focused services in remote areas to become 'super agent' of financial institutions under branchless banking.

Microfinance players enjoy a unique opportunity in Pakistan to utilize alternative delivery channels due to the presence of a sound and pro-growth regulatory framework, dense population, and high demand for financial services. The motivation for developing alternative channels for service delivery is twofold: Firstly, there is enormous scope for expanding outreach, especially to hard-to-reach rural areas. The emerging models relying on "banking agents" will greatly extend the distribution of financial services to poor and marginalized segments. Secondly, alternative delivery channels promise significant cost reduction to institutions. The traditional microfinance business is based on personal, one-on-one relationships. Thus, personnel expenses often account for a significant portion of microfinance operating expenses. The use of banking agents can help in reducing overall operating cost of the sector.

The role of technology and partnerships is pivotal in the successful use of alternative delivery channels. Comprehensive branchless banking regulations have been issued to financial institutions for developing partnerships in order to extend financial services to their clients. The regulations support the bank-led model, in which the entire control and responsibility of the product and program rests with the authorized financial institution. Consequent upon the issuance of Branchless Banking Regulations in 2008, the following important developments have taken place in Pakistan.

The First Microfinance Bank developed a partnership model with Pakistan Post to augment its delivery channels. Under this model, more than 40,000 borrowers have been reached out through 68 offices of Pakistan Post. Similarly, to mobilize deposits Kashf Bank is also opening kiosks at the premises of its sister concern Kashf Foundation.

Under the branchless banking framework, Tameer Microfinance Bank made arrangements with Telenor to offer financial services through the Telco's franchise centers. In October 2009, Telenor and Tameer launched the largest branchless banking initiative "EasyPaisa" in Pakistan. EasyPaisa allows individuals to use services such as utility bills payment, domestic remittances, and a deposit account by visiting the nearest EasyPaisa authorized shop.

While the credit side of microfinance is relatively well-developed, deposit mobilization still has a long way to go. Recently, SBP has taken some regulatory initiatives to help the sector to mobilize deposits at a grass root level. Importantly, SBP allowed the use of alternative delivery channels (ADCs) for MFBs to provide deposit services to their clients. MFBs now have the option to adopt different delivery channels, such as opening service centers within 50 km radius of a licensed branch, establishing kiosks at the outlets of a retail organization, and developing branchless banking models (PoS, Mobile phone etc.).

Under the prevailing environment, the state of Information & Communication Technology (ICT) has become one of the financial institutions' most essential and critical requirements. Technology has made it possible for the banking industry to offer a wide menu of services such as e-banking, branchless/mobile banking, electronic clearing systems, electronic funds transfer, smart cards, plastic cards of various forms etc.

As is evident, branchless banking has made it possible for banks and the mobile operators to use technology as the primary tool for expanding their outreach to the remotest of geographical locations to reach the unbanked and underserved population. Today, it is very heartening to see the steady growth and expansion in branchless banking as stronger and experienced players have entered the industry.

Presently, the agent network under the branchless banking umbrella has exceeded 20,000 agents, who have helped to channelize 50 million financial transactions worth more than Rs190 billion. These Agents Outlets/Touch Points are spread across several cities, towns, and smaller villages in Pakistan. The average number of transactions a day through branchless banking is around 180,000 and the average size of a transaction comes to Rs3700. The total number of accounts opened now stands at over 800,000 while the number of bank branches at present is slightly over 10,000.

Branchless banking has also proved to be an effective instrument in channelizing the Government to Persons (G2P) payments in trying times like serving internally displaced persons (IDPs), devastating floods, and rains for the last two years. The Benazir Income Support Program (BISP) beneficiaries are also being served effectively through this mechanism.

In the coming days, this channel is expected to continue playing an important role towards the promotion of financial inclusion and the management of Government to Persons (G2P) programs like salary disbursements, pensions, BISP, Watan Cards, Pakistan Cards, and tax collections services etc. The existing branchless banking deployments can cater to the needs of over 10 million potential beneficiaries of G2P payments in Pakistan.