PAKISTAN NEEDS A ROBUST MICROFINANCE SYSTEM
COMMERCIAL BANKS ARE YET TO EXPLORE THE LOCAL CURRENCY LENDING TO MICROFINANCE INSTITUTIONS.
SHABBIR H. KAZMI
Mar 5 - 11, 2012
Around the world, an economy of any country is driven by small and medium enterprises (SMEs). Equally important are micro enterprises, which are mostly owner-operated. Since all these enterprises employ the largest percentage of total work force, the respective governments also follow supportive policies.
As such, people in Pakistan have limited access to financial institutions. On top of that, the country does not have enough DFIs and investment banks and even leasing companies are facing extinction. Therefore, the entire burden is on commercial banks. Heavy borrowing by the government from commercial banks hardly leaves any funds to be disbursed to the private sector.
Realizing the inadequacy the State Bank of Pakistan (SBP) has been following 'Financial Inclusion program'. Under this program, an amount of £10 million has been provided under the Institutional Strengthening Fund (ISF) spread over 5-year from 2008 to 2012.
The ISF is designed to develop capacity of the microfinance industry to enhance potential for growth and depth in outreach by improving human resource quality, improving quality of services, and increasing the services available to potential clients.
The ISF will provide resources for the following priority areas: a) generating resource through commercial credit, equity investments or deposit mobilization strategy; b) improving governance mechanisms, internal management controls and functions including human resource base; c) enhancing strategic direction of the organization through preparation of business plans, branding, trainings and ratings; d) employing cost reduction mechanisms for increasing outreach in rural and remote areas through product innovation, development or use of technology; e) providing business development services to MFI clients or improving quality of services; and f) developing capacity for transformation of microfinance institutions into licensed microfinance banks.
The government has also granted licenses for microfinance banks with the mandate to cater to the needs of a specific area, province, and the entire country. These institutions have been sponsored by commercial banks, NGOs, and the groups working on poverty alleviation. However, a point is very clear that these institutions are not the charity houses but commercial enterprises, which have to be managed professionally.
The first ever microfinance bank, Khushhali Bank in which most of the leading commercial banks had provided the 'seed money' and acquired equity. However, after the privatization of these commercial banks the new stakeholders were not keen in retaining their stake. Lately, MCB Bank was busy in negotiating a deal with United Bank for the sale of its stake in the bank.
Historically, microfinance banks have been suffering from liquidity crunch, as they have to rely on equity mainly in the absence of credit lines. Commercial banks are reluctant in extending credit lines and international financial institutions were also hesitant to lend in the absence of sovereign guarantees. In the absence of short-term credit lines and lack of collaterals, microfinance banks have been charging high interest rate. At time, the rate was nearly double the rate being charged from corporate entities.
In order to incentivize the channeling of funds to the microfinance sector, SBP has designed a Microfinance Credit Guarantee Facility (MCGF). The facility aimed at achieving a variety of objectives. The guarantees are expected to help in building links between micro borrowers and formal financial institutions. The familiarization of the bank with the client should eventually lead to the "graduation" of the borrower. The SBP will provide Partial Guarantees (pari passu or on equal footing) to cover the principal amount in default or First Loss Default Guarantees to cover the first loss, limited to a certain percentage on the principal amount only, to banks/DFIs to minimize the perceived risk premium by covering part of the losses incurred on funds made available to MFBs/MFIs with the advantage of leveraging the guarantee fund a number of times.
Banks/DFIs will evaluate the prospective recipient microfinance bank or microfinance institution according to their internal due diligence criteria. The credit enhancement facility will serve the banks/DFIs to develop their own sense of the risks involved in microfinance. The guarantees will facilitate resolution of regulatory issues that limit unsecured lending by banks/DFIs and would bring the loans to MFBs/MFIs under compliance with banking regulations.
Under the facility, the SBP will provide guarantee cover of up to 40 per cent of the principal amount in default in case of Partial Guarantee or up to 25 per cent of disbursed amount in case of First Loss Default Guarantee on the credit facility extended by the lending institution to an eligible borrowing institution. The guarantee cover shall commence from the date of first disbursement to the MFB/MFI and shall run through the agreed tenure of the credit facility, which shall not exceed a period of five years and 120 days initially and in the event the loan facility is extended for any reason by the lending institution then for a period, which covers any such extended period plus 120 days provided such extension period, is approved by the guarantor.
Keeping in view the important role of microfinance in developing countries, the SBP has been encouraging banks/DFIs to provide funding to viable microfinance banks/NGOs/microfinance institutions to enable them to achieve the outreach targets. However, it has been observed that apart from few instances, where funds have been provided to a few MFBs/MFIs, the commercial banks are yet to explore the local currency lending opportunities.
At present, Pakistan faces the challenge of reducing poverty and microfinance banks are playing a major role by helping poor households to meet basic needs and protecting them against risks. Use of financial services by low-income households leads to enterprise stability and growth. By supporting women's economic participation, microfinance empowers women, thereby promoting gender-equity and improving household well being. Microcredit helps in reducing poverty by providing the poor with credit facility to start a small business. It not only supports the economic condition of the poor people but also has positive impacts on their social life through better standard of living with greater access to education and health facilities and empowerment to participate socioeconomic developments.