MFR2013

In collaboration with MONDAY, OCTOBER 21, 2013 | www.brecorder.com/mfr2013

From Editor’s Desk

BR RESEARCH THE TEAM

Ali Khizar Aslam Head of Research

Sohaib Jamali Editor Research

Zuhair Abbasi Mobin Nasir

Senior Research Analyst Asst.

Editor Research

Zuhair Abbasi Sijal Fawad Research Analyst Senior Analyst

Hammad Haider Research Analyst

Sidra Farrukh Research Analyst

Javeria Ansar Research Analyst

Sobia Muhammad Saleem Research Analyst

Adil Mansoor Research Analyst

Naseem Waheed Database Officer

Murtaza Khaliq Creative Head

10 | Microfinance Review | October 21, 2013

Huge micro success That microfinance institutions (MFIs) and non-bank microfinance institutions are making big strides in the Pakistani society as a huge success story is a fact that has found its best expression in the growth of microfinance institutions with a concomitant disbursement of financial services for entrepreneurs and small businesses generally lacking access to conventional banking and related services. The journey of MFIs that formally began in Pakistan over a decade ago seems to have crystallized into a sustained and genuine movement that seeks to reach out to people representing poor or near-poor households to have access to a range of quality financial services such as credit, savings, insurance and fund transfers, including remittances.

What constitutes Microfinance, particularly in the context of Pakistan? How has it fared since its inception? Has it made any contribution towards alleviating poverty in accordance with its mandate and terms of reference? Before we begin to examine these questions in light of growing significance and importance of microfinance institutions in the realm of finance, it is imperative to have a cursory look at the Microfinance Institutions Ordinance 2001 in order to have proper appreciation of this relatively new phenomenon on Pakistan’s banking scene. The law was promulgated with a view to promoting “the establishment of microfinance institutions for providing organizational, financial and infrastructural support to poor persons, particularly poor women, for mitigating poverty and promoting social welfare and economic justice through community building and social mobilization….” This law also states, among other things, that “it is essential to regulate microfinance institutions to protect the depositors and customers and to safeguard these institutions against political and other outside interference; ….”

The foregoing clearly explains the purpose and intent behind promulgation of microfinance law in the country. A look at various sources shows that micro-financing is not a new concept. According to Investopedia, small microcredit operations have existed since the mid 1700s. Although most modern microfinance institutions operate in developing countries, the rate of repayment default for loans is surprisingly low - more than 90% of loans are repaid.

The World Bank estimates that there are more than 500 million people who have directly or indirectly benefited from microfinance-related operations. Although, there are diverse views over the role of

microfinance in the developing world in relation to the question whether or not it really lifts people out of poverty, what is, however, increasingly clear and unambiguous is the fact that microfinance does enhance financial inclusion.

The arrival of “micro-finance” in Pakistan and Bangladesh in the 1970s found a generous reception through the introduction of Grameen Bank launched by Mohammad Yunus and Orangi Pilot Project by the late Akhtar Hameed Khan. These two personalities, particularly Nobel laureate Yunus, helped shape the concept of microfinance in an effective and meaningful manner in their respective countries.

A debate on the role of microfinance brings to the fore the question about confusion over the traditional roles of traditional moneylender and the aarthi (middleman) and the influence that they exert on the borrowers. They are two different institutions with different roles; and they cause different impacts on microfinance. The commonality between the two is the criticism on their roles that mainly emanates from the fact that they charge borrowers excessively high rates of interest. But both are still considered an integral part of the system. It is still a strong reality that people are prepared to pay very high interest rates for services like quick loan disbursement, confidentiality and flexible repayment schedules. It has also been seen that they do not always see lower interest rates as adequate compensation for a variety of reasons. They have also found it distasteful to be forced to pretend they are borrowing to start a business. This has earned the traditional moneylender a kind of legitimacy in our system. Insofar as the institution of aarthi (middleman) is concerned, he has multiple roles to play to fulfill important agricultural marketing functions in the marketing system. These are: middlemen as traders, middlemen as distributors and middlemen as providers. Both moneylender and aarthi, therefore, continue to pose a formidable challenge to the formal microfinance endeavor in the country.

This Microfinance Review, dear readers, discusses various aspects of microfinance and the issues related to it.

Although, there is no doubt about the fact that microfinance cannot survive without micro-insurance, the argument about directed lending still remains the object of a heated but informed debate. This publication also brings under focus the fact that although microfinance aims to reach out to poor clients, particularly

women, the poorest segment of the population does not form the majority of microcredit clients because of lack of ability to generate cash flow for loan payment. Benazir Income Support Program (BISP) has been recommended as one of the effective tools to address this particular section of population.

That 90 percent of the microfinance sector still remains untapped and therefore promises a host of opportunities to the practitioners and proponents of microfinance is a fact broadly premised on estimates that underscore the need for a faster growth because the potential market is between 25 and 40 million.

Right now, the balance sheet of the sector is said to be Rs 60 billion. This figure can multiply significantly with a corresponding growth in the industry. The same goes for job prospects in this sector; the present number of job opportunities of 12,000 is bound to multiply, but in due course. It is interesting to note that the industry profits might be close to a billion rupees this year after it showed profitability—for the first time—only last year. This sector, however, is required to pay attention to certain critical areas, particularly the one that relates to operating costs. It has been seen that microfinance sector is still struggling to achieve the economies of scale because of a variety of factors, including the fact that the operating costs are quite high: from 18 to 20 percent.

Last but not least, microfinance sector and the apex regulator—State Bank of Pakistan—must not lose sight of the Andhra Pradesh (AP) experience with a view to drawing some valuable lessons.

Reasons for failure in that Indian state are said to be profound over-indebtedness, poor operating procedures, neglect of duties and inadequate regulations. The AP crisis provides our policymakers an opportunity to think deeply about the role of MFIs and non-banking microfinance institutions in the financial sector with a view to ensuring that we have already crafted a set of ground rules that promote a level playing field, balanced product offerings, solid institutional development and insulation against political and other outside interference.

Contents Microfinance Credit Guarantee Facility (MCGF) – mobilising commercial capital for microfinance providers State Bank of Pakistan

Greatest champions of communities emerge from the communities themselves Qazi Azmat Isa CEO, Pakistan Poverty Alleviation Fund

Technology is the game changer Mohammed Asif Arif SECP Commissioner - Insurance

MOBILISING GRASSROOTS SAVINGS

Microinsurance: straight from the heart

Meeting the funding needs of microfinance industry

Faraz uddin Amjad Joint Director at the SECP

Ali Basharat Financial Analyst | PMN

PPAF and the microfinance sector in Pakistan

We’re all speaking different languages

Yasir Ashfaq, Group Head, Financial Services Group, PPAF Saqib Siddiqui, General Manager, Sector Development Unit, PPAF Ali Qureshi, Manager, Sector Development Unit, PPAF

Roshaneh Zafar Managing Director KASHF Foundation

Microfinance industry will reach scale when there is a combination of adequate funding and strong institutions

Specialised entity needed to bridge funding requirements of microfinance providers

Micro lending: women exclusion on the cards?

Microfinance sector: in search of financial sustainability

Sidra Farrukh

Sobia Mesiya

Microfinance sector should be driven by market demand; directed lending is a thing of the past

Staying focused on responsible practices in the march towards financial inclusion

Unity of purpose between SBP, PPAF and PMN behind the success of microfinance industry Rashid Bajwa Chairperson Pakistan Microfinance Network and CEO NRSP

Syed Mohsin Ahmed CEO | Pakistan Microfinance Network

Waqas ul Hasan Private Sector Advisor | Department for International Development, UK

Microfinance in numbers

Hammad Haider

Ghalib Nishtar President | Khushhali Bank

Savings mobilization by MFBs: experiences, challenges and the way forward

Microfinance industry must have 10-20 million customers to become relevant

State Bank of Pakistan

Nadeem Hussain President | Tameer Bank

Developing seamless financial system in Pakistan Inshan Ali Nawaz Kanji Director | Axes Advisory

Zahra Khalid Social Analyst | PMN

Microfinance Credit Guarantee Facility (MCGF) – mobilising commercial capital for microfinance providers State Bank of Pakistan The microfinance outreach in Pakistan is currently around 2.4 million which is less than 10 percent of the estimated market potential of 25-30 million microfinance clients. One of the key challenges in this regard is the lack of access to commercial funding for microfinance provider.

Availability of commercial funding is not

first loans from commercial banks. Once their relationship is developed with commercial banks, the use of risk-sharing facilities can be gradually phased out.

In December 2008, SBP introduced a numbers of landmark microfinance market initiatives with funding assistance of GBP 50 million from the UK’s Depart-

Number of deals by funding institutions BAL KASB

BOP

FBL

SCB

ABL

Soneri Bank

Funds mobilised Rs(mn) Tameer MFB Kashf Foundation NRSP Foundation Khushhali MFB NRSP MFB

Silk Bank

TFC (non bank)

AKBL

UBL MCB Bank JS Bank

PO Invt. Co. NBP

Syndicated*

*HBL, NBP, ABL, MCB, UBL, AKBL, NIB, FBL

only necessary for expansion in microfinance outreach to millions of unserved clients but also needed by microfinance providers to achieve greater scale and sustainability in their operations. Globally, credit enhancement/risk sharing facilities are developed to enable microfinance access to wholesale commercial funding.

Risk-sharing facilities enable well-managed microfinance providers, with limited or no equity, to secure their

6 | Microfinance Review | October 21, 2013

ment for International Development. SBP introduced a GBP 15 million risk-sharing facility for microfinance providers under the name of Microfinance Credit Guarantee Facility (MCGF). The MCGF is a market-based credit enhancement facility to enable long-term local currency commercial finance for microfinance providers. The objective of the facility is to incentivize commercial banks through risk sharing mechanism to provide

wholesale funds to microfinance banks and institutions for on-lending to poor and marginalized groups. The facility offers two risk sharing options with 25% first loss or 40% pari passu coverage to such funding. Recently, the scope of the facility has been enhanced to allow microfinance providers to mobilize non-bank financing from capital markets to, further diversify sources of funding for micro borrowers.

The guarantee has been instrumental in resolving the commercial funding constraints of the microfinance sector in Pakistan. So far, 27 guarantees have been issued under the MCGF, mobilizing close to Rs. 8 billion, which is expected to enable access to 400,000 new micro borrowers. Overall, the facility has helped develop the market and introduce the

poor borrowers to mainstream financial institutions. The facility has transformed the market in a number of ways.

First, the MCGF has helped provide the missing link between micro borrowers and formal financial institutions such as commercial banks and non-bank funders. The MCGF has guaranteed 27 transactions financed by 16 commercial funders from both banks and non-banking sectors to facilitate wholesale funding relationships with microfinance providers. Prior to the launch of the MCGF, microfinance providers largely depended on donor, sponsors and to a certain extent deposits to meet their funding needs. The commercial funding market was largely unknown to microfinance providers. Most of funders are now engaged in multiple deals with microfi-

nance providers, clearly reflecting their growing comfort with microfinance clients. The familiarization of the bank with the client should eventually lead to the "graduation" of the borrower.

Second, the objective of the MCGF was to incentivize commercial banks to evaluate the prospective recipient microfinance providers in accordance with their credit policies and due diligence criteria. This has served twin objectives; first, it discouraged moral hazard and second, it helped commercial banks to develop their own sense of the risk involved in funding microfinance.

The results reflects that commercial banks have done their homework as there has been no calls on the guarantee as of

mechanism has played a critical and timely role in enabling well-managed microfinance banks and institutions to secure wholesale loans from local commercial banks. Five of the leading microfinance providers have been regularly able to access commercial credit market, positioning them for greater scale and sustainable operations.

Tameer Microfinance Bank has been able to access non-bank funding due to its sound health upon exhausting the commercial banks risk appetite with the record of securing 8 commercial bank credit lines.

Fourth, the risk sharing options allowed funding Banks to have the flexibility to structure transactions based

Funding deals by microfinance providers Tameer MFB

MCGF was to facilitate long-term local currency funding from commercial credit markets. The MCGF allows funding deals of up to five year tenors. The MCGF has facilitated funding in all tenors starting from 1 to 5 years meaning thereby that the funders have gradually developed a

Funding mobilised (LHS) & number of deals Rs (mn)

3000 2500 2000 1500 1000 500 0

Kashf Foundation

NRSP MFB

Khushhali MFB

yet. This also reflects the fact that the risk sharing incentive is balanced and has so far handled the issue of moral hazard. In other words, the funding commercial banks are not just banking on the guarantee but their funding decisions are also based on the health of microfinance providers and microfinance fundamentals.

Third, MCGF through its risk sharing

NRSP Foundation

on their risk perception. Both options have been used frequently by funding institutions and have contributed significant funding for microfinance providers. The risk-sharing options also facilitated resolution of regulatory issues that limits unsecured lending by commercial banks.

Fifth, one of the basic objectives of

Funding mobilised & deals by risk sharing options Rs(mn) 5000

4000 3000 2000 1000 0

9 deals 25% first loss

to their high perceived risk. Although, the MCGF has a market-based cap on the interest rates charged on the credit lines facilitated, the microfinance providers have recently negotiated competitive rates than the MCGF market cap in some instances. This clearly indicates

18 deals

40% pari passu

1 Year

2 Years 3 Years 4 Years 5 Years

longer term view of the microfinance sector. On the other hand, this has also facilitated the microfinance providers in easing their liquidity constraints through ensuring longer term funds as most of the funding mobilized is in the 2 to 5 year tenors. This also allowed microfinance providers to experience multiple loan cycles establishing their credibility in credit markets and viability of their microfinance clients.

MCGF has facilitated funding in all tenors starting from 1 to 5 years meaning thereby that the funders have gradually developed a longer term view of the microfinance sector. On the other hand, this has also facilitated the microfinance providers in easing their liquidity constraints through ensuring longer term funds as most of the funding mobilized is in the 2 to 5 year tenors.

increased confidence of the microfinance providers and comfort of the commercial funders in financing the microfinance sector establishing good benchmarks for healthy institutions.

Finally, the MCGF has allowed the microfinance providers to offer small ticket sizes for retail investors through issuance of Term Finance Certificates (TFCs). Tameer MFB has recently issued two TFCs mobilizing PKR 1 billion from retail investors. This has offered small retail investors an alternate channel for investing their savings and earning relatively higher returns, encouraging the concept of micro-savings.

Conclusion

Sixth, historically, commercial funding for microfinance providers in Pakistan and other developing countries has been provided at very high interest rates due

First, MCGF has demonstrated that funding microfinance through wholesale channels in emerging markets is becoming viable and increasingly present.

Second, while lenders must develop standardized procedures for originating, underwriting and servicing microfinance loans and create performance histories to enable wholesale funding, developing the wholesale funding channel may stimulate competition from large financial service providers such as commercial banks to downscale to serve the micro and small enterprises, enhancing credit to lower income segments.

Last but not the least, given the required effort in structuring wholesale transaction and the high cost of funding from secondary sources, the wholesale channel will remain a secondary source of finance to retail deposits for institutions with a mandate to collect deposits.

For comments and suggestions please write to noor.ahmed@sbp.org.pk

Microfinance Review | October 21, 2013 | 7

Greatest champions of communities emerge from the communities themselves Qazi Azmat Isa | CEO, Pakistan Poverty Alleviation Fund

BR RESEARCH What does the PPAF’s institutional memory tell about the role of microfinance in improving lives and livelihoods of the marginalized communities and individuals?

Qazi Azmat Isa: Access to financial services plays a pivotal role in creating dynamic, inclusive and market-oriented economic growth, employing the growing work force, improving livelihood and promoting development in the macro-economic context.

PPAF initiated operations in 2000, as a national apex institution that was funded by the World Bank, IFAD and the Government of Pakistan.

As the sector developer and primary source of debt funding for the microfinance market, PPAF has transformed the microfinance sector in Pakistan, with growth of over 60,000 clients to more than 2.4 million borrowers in about ten years. Recent evaluations have validated that the provision of financial services results in an increase in income as well as a general improvement of the poor.

Three research studies undertaken by Gallup Pakistan on PPAF’s microfinance programs in 2002, 2005 and 2009 have consistently led to the conclusion that provision of microcredit leads to improvement in personal and household incomes.

PPAF realised the immense role that microfinance can play in building sustainable income streams not only for individuals but entire communities. As a result, financial services remain core to PPAF’s operations, with presence in over 90 districts through 50 leading MFBs and MFIs; disbursement of more than Rs80 billion and more than 5.5 million loans since 2000.

In addition, focusing on the women and rural areas has remained central to our philosophy of inclusive and holistic financial services, as witnessed by over 53 percent loans to women and 74 percent loans in rural areas.

BR RESEARCH

Poverty in rural areas has an inherent link with the absence of productive assets, such as farmland and livestock. How can rural entrepreneurship be encouraged, while employing the on-ground presence of microfinance providers (MFPs) and community organisations (CO)s?

QAI: PPAF strongly feels that the greatest champions of communities emerge from the communities themselves. It is for this reason that microfinance plays a crucial role in fostering, developing and providing the skills and assets to support rural entrepreneurship.

Over 60 percent of microfinance loans have thus far been channeled to agriculture and livestock, and 35 percent for commerce. PPAF plays a fundamental role in empowering the ‘institutions of the poor’ and one of its main objectives is to support the ‘creation of organisations of the poor’.

Social mobilization is integral to PPAF’s philosophy and the core value underlying all PPAF supported interventions. PPAF recognizes that in order for its initiatives to be successful, institutions have to be built at the micro level.

Consequently, community and village-based and local support organisations adopt a crucial role in determining the community’s priorities resulting in demand-driven and need-based initiatives.

PPAF strongly supports the idea that social mobilisation is key to ensuring that projects are demand-driven, locally-managed and sustainable over time. This is also reflected through PPAF’s extensive grassroots network of over 349,000 cooperatives and groups, with presence in 121 districts through 114 partner organisations in Pakistan.

It is through this extensive and unparalleled network across the country, that PPAF has played a crucial role in building entrepreneurial ventures, some of which include the Women’s Livestock Cooperative Farming Program, dairy value chains and agri-value chains.

8 | Microfinance Review | October 21, 2013

BR RESEARCH What are some of the major challenges faced by the microfinance sector? What kind of policy responses can help address those challenges?

QAI: Despite the tremendous growth in the microfinance sector over the past decade, there are still numerous challenges that exist, such as high operating costs, corporate governance, restriction in geographical coverage based on deteriorating security situation in KP and Balochistan and a lack of legal recourse.

However, critical among these challenges remains the inability of MFIs and the sector to attract commercial funding (local and international) in the form of debt, deposits and equity. PPAF is extremely cognizant of these challenges, and as the sector developer, has taken numerous initiatives to support MFPs in accessing financial markets.

PPAF is aware of the nature of requirements for funds that would emerge from the sector.

The long-term goal for bringing these funds to the microfinance sector is to link them up with local and international financial markets. Through the provision of security/collateral against credit facilities extended by banks to MFPs, PPAF has been able to draw in $38.7 million from commercial banks for the sector.

This was achieved through the provision of financial advisory services and technical assistance to MFPs. We have also strengthened the balance sheets of mid-tier MFPs through the injection of equity amounting to $8.1 million, thereby enhancing the comfort level of commercial banks. However, for the sector to continue to grow going forward, commercial funding has to be enhanced.

PPAF’S EXTENSIVE .

GRASSROOTS NETWORK BR RESEARCH How can more space be created for MFPs when middlemen and aarhtis exercise considerable influence on agricultural heartlands and rural markets?

with presence in

349,000 Cooperatives and groups

Districts through 114 partner organizations in Pakistan.

QAI: The middleman exists in numerous segments, such as milk, agriculture, and can influence various stages of production, leading from higher input costs – fertiliser, seed, and technical inputs – to lower market prices at the final stage of the product. Rural and poor borrowers are dependent on the Aarhti for the provision of various inputs, and as a result end up with lower profits compared to the actual market value of these products.

PPAF has realised that the most optimal way to face these challenges is to promote a market-based system – linking the rural farmer or livestock owner, directly with the end market – and has built corporate linkages to ensure that the aarhti is no longer needed.

These value chains are integral in empowering these rural communities and giving them linkages to markets.

PPAF has developed a dairy-value chain in Nankana Sahib, and an agri-value chain in Sheikhupura. These are merely the first steps: a lot more needs to be done, and MFIs have a critical role to play, in representing their communities at various forums, forging strong partnerships with the corporate sector to ensure that market linkages can be developed, and ensuring that competitive prices are o ered to their microfinance borrowers.

In order to dismantle traditional dependence on aarhtis, microfinance practitioners should build products to meet the funding requirements of clients. This necessitates improving the risk mitigation framework, making more funds available and developing tailored cash flow-based products to meet the needs of clients. But the institutions are wary of their role, so they will not be able to replace the aarhtis as expeditiously as we would have preferred.

BR RESEARCH What does the emergence of the budding branchless banking service mean for the future of poverty alleviation e orts in Pakistan?

QAI: Branchless banking has the potential to transform the microfinance sector. Its ability to utilise alternate delivery channels to expand outreach and penetration in the most rural parts of Pakistan is unparalleled.

Branchless banking can play a significant role in changing the way microfinance borrowers think about loan repayments and deposits, and promises to o er an array of holistic and diversified financial products and services to the individuals in their communities.

Realising the natural synergies that exist in branchless banking and microfinance in reducing costs of the clients and increasing outreach, PPAF piloted a successful initiative on branchless banking that catered to over 50,000 transactions on a daily basis with Telenor and UBL Omni, and five partners for loan repayments. New applications of branchless banking services are being explored to foster and improve savings services as well as develop other applications for the technology.

BR RESEARCH On what fronts does the PPAF engage with the MFPs? QAI: PPAF’s core focus remains on financial inclusion, and ensuring that the poor and marginalised have access to inclusive, transparent and sustainable financial products and services. At the policy level, PPAF’s role in catalysing innovations in microfinance and bringing forth the new era of microfinance plus, is driven by its membership of SBP’s Microfinance Consultative Group and the Access to Finance Study (A2FS).

PPAF takes an integrated approach to poverty alleviation, and has contributed expertise as part of the Financial Literacy program and by virtue of its role on the SBP’s Steering Committee for Financial Literacy.

As the sector developer and primary source of debt funding for microfinance in Pakistan, PPAF engages with the MFIs at the micro, meso and macro levels. As a key input to the sector, PPAF engages in active supervision of MFPs. We like to believe that partnership with PPAF is symbolic of a seal of quality.

This is achieved through bi-monthly supervision visits and three layers of audit which consist of visits by the internal audit unit of PPAF, robust external audits through audit firms on the Quality Control Review (QCR) list of ICAP and visits by PPAF’s external auditors to 30 percent of Partner Organizations who represent 75 percent of the portfolio.

PPAF also commissions third-party assessments of MFPs to generate independent, operational assessments along with roadmaps to remove bottlenecks. PPAF has ensured adoption of international best practices in the sector as part of the supervision mandate.

In addition, PPAF has invested more than $70 million in the form of grants into various institutions. The investments were made with the intention of establishment of a robust infrastructure for the provision of microfinance services to the masses. In the initial years, the provision of grant was focused on capital and operational costs, allowing institutions the opportunity to establish scale and scope for viable business.

Presently, the focus has shifted to the development of systems, procedures, controls, adoption of international best practices, improving financial management, oversight and transparency. Through these investments, institutions have been able to hire external auditors listed on the QCR list of ICAP. In addition to this, the governance structures of institutions have been improved by inclusion of qualified individuals on the BoD. As the sector develops, PPAF is striving to ensure that the focus remains on providing value-added, niche, customized financial services, such as branchless banking, micro-insurance, renewable energy, among others.

Innovation remains central to microfinance, and keeping this in view, we have piloted the first-ever weatherindexed crop insurance products and hybrid live-weight livestock insurance products in Pakistan.

These products are currently available to communities in Khushab and Chakwal, and are an e icient risk management tool for the rural communities to mitigate risks from natural disasters and climate hazards. At the policy level, PPAF is a key member of the SECP’s Micro-Insurance Working Group for formulation of Micro-Insurance Regulations in Pakistan, which many feel will be akin to the growth of microfinance market in Pakistan.

Interview by Hammad Haider

Microfinance Review | October 21, 2013 | 9

Technology is the game changer Mohammed Asif Arif | SECP Commissioner - Insurance When it comes to the role of microinsurance in microfinance industry, the message is simple, according to Mohammed Asif Arif: “Microfinance cannot survive without microinsurance”.

Thus began the conversation between the Commissioner of Insurance Division at the Securities and Exchange Commission of Pakistan and BR Research, at a recent meeting at the regulator’s Karachi office.

Elaborating on his assertion, Arif highlighted that microinsurance reduces the vulnerability of microfinance, making it a more feasible offering. “Microinsurance helps manage the physical risk, for instance of death or, in non-life segment, risks stemming from natural hazards,” he says.

“Until and unless a mechanism for sustainable microinsurance is available microfinance cannot really move forward.

This is because if microfinance institutions start adding the risk premium to the mark-up they charge, then the mark up rate will be exceptionally high and it will not be feasible for the microfinance borrower,” Asif explains.

When questioned whether the additional cost of insurance would make the proposition dearer for borrowers, the commissioner responded that this increment would still be lower than the risk premium charged in mark-up in the absence of insurance. “The banks do not have the reinsurance mechanism; insurance companies have a reinsurance mechanism where the risk spreads-out. It’s a number game; the larger the better it is,” according to him.

Quite naturally the conversation digressed to insurance industry as a whole.

Arif maintained that throughout the country’s history non-life insurance was mainly limited to corporate sector and other businesses, aside from some compulsory transactions like getting insurance for mortgaging property.

He added that while insurance has grown with the onset of new generation and more educated businessmen, non-life insurance has not grown beyond corporates and businesses - and that too is confined to five or six large cities.

10 | Microfinance Review | October 21, 2013

“Globally, nearly 70 percent of the business comes from personal lines, and 30 percent from commercial or business lines. In Pakistan personal line is almost nonexistent,” he concedes.

First things first: OUTREACH But the commissioner dispelled the assertion that cultural and religious factors make personal insurance a taboo. “It is true that many Muslims hold the belief that insurance is forbidden in Islam. But at the other end, the question is whether insurance is even available to the common man or not. A low income person who has just bought a motorcycle and wants to get it insured, how will he get it done, does he have access?So the question is whether we are even giving them an option in the first place or not,” he points out.

Elaborating on the issue of limited insurance outreach, he said that high distribution cost is the main limiting factor.

“Insurance industry uses only one channel; the agency channel. In that channel, you have a field force and you pay high commissions to them, and when you give such a big amount in commission then you are left with little,” he explains.

This is where bancassurance comes into play. He elaborated that life insurance sold via banking channels had increased to Rs18 billion in 2012 from zero five years ago.

“This became the major impetus for growth for life insurers, he said adding that because of bancassurance, the life segment became bigger than non-life segment in the last two years ago, whereas in the preceding 62 years non-life had always been bigger than life insurance.

But has bancassurance solved the problem of limited outreach? The commissioner believes it has not. “Banc assurance is still urban centric but it has shown the way.

Today, revenue from selling bancassurance is the highest contributor in the non-banking income of the banks,” he highlights referring to the incentive banks have to use their far flung branches as distribution outlets for insurance as well as micro insurance.

The game changer: TECHNOLOGY “What other options exist for boosting outreach microinsurance?” we ask. Asif Arif’s response is once again rapid and concise; “Technology is the game changer”.

“Microfinance banks, technology, telecommunication, branchless banking model are all game changers. Now, the big banks and insurers that never used to talk about these things are also talking about it.

This is here to stay and this will be the growth driver in the future,” the industry veteran predicts.

He adds that “in insurance too, people are now thinking of new ways to sell insurance over telephone. But we need to think through as regards what kind of products can be made;what will be its premium payment mechanism,what will be claim mechanism and so forth.”

But Arif added that the bottomline in microinsurance has to be simple products with minimum ifs and buts and conditions.

“It has to be simple so that a common man can purchase it. There has to be simple mechanism for taking premium and simple mechanism for claim settlement,” he lists the conditions, adding that the SECP is already working along these lines to facilitate the industry.

The challenges: ILLITERACY AND LACK OF AWARENESS However, since a microfinance customer is normally on a lower end of the income strata, there are more chances that they will not be very literate and will lack product understanding. So on one hand the regulator is devising simpler mechanisms for paying premiums and settling claims.

On the other hand, “SECP is also working on regulations and rules to ensure consumer protection so that they are not cheated, or taken for a ride.”

Giving a hint of things to come, he reveals that the commission is coming up with microinsurance rules, which, amongst

other things, will take care of elementary stuff like what falls under microinsurance and how to ensure customer protection.

The SECP is also studying the distribution channels utilised by other countries where microinsurance has taken off successfully. Pointing out that “studies show that globally microinsurance is led by societies and cooperatives who they sell it to their members”, the commissioner says that such initiatives are also being considered for expanding outreach of microinsurance in Pakistan.

Arif is adamant that comprehensive efforts to raise awareness must reach beyond current borrowers of microfinance.

“In the last flood, about 300,000 cattle were lost,” he reminds, adding that many affectees lost their livelihoods to the deluge.

“So here comes the role of microinsurance. The cattle owner should have this microinsurance option available in good times, so he may protect his herd, or small business, or shop, or whatever else the case is,” he said.

Innovations on the cards: LOCALISED SOLUTIONS Three pilot projects for offering crop insurance based on varied criteria are already in the works. The commissioner highlighted one of these projects, in which annual rainfall is measured and compared to the average rainfall over the past three decades. If the year’s precipitation tally is higher or lower than the 30-year average, farmers insured under the scheme become eligible to receive a claim. Another pilot project that will be launched soon uses the weight of cattle as a key criterion for determining claims.

Asif Arif expresses confidence that such innovative schemes coupled with the harnessing of technology and knowledge sharing are all set to propel the microfinance and microinsurance sectors of Pakistan on a journey of rapid success and growth.

Interview by Sohaib Jamali

MOBILISING GRASSROOTS SAVINGS

Hammad Haider

Availability of funding seems to be the greatest challenge facing Pakistan’s microfinance industry. Skeptics maintain that the funding issue may come in the way of doubling or trebling the current industry footprint of less than ten percent.

In fact, a recent study by Pakistan Microfinance Network, State Bank and Pakistan Poverty Alleviation Fund highlights the need for over Rs80 billion in new funding – which is more than twice the industry’s current balance sheet – to cater to the borrowing needs of some 3.2 million borrowers over the next five years.

Despite these pressing liquidity pressures, there is consensus among policymakers and practitioners that funding sources for this industry must be diversified in nature for sustainable growth. Talking about sustainability brings to fore the industry’s internal funds generation mechanism: micro savings.

Again, the stakeholders agree that a large and growing deposit-base is crucial for long term viability of the industry.

Deposit mobilisation in microfinance industry is essentially about reaching out

Yet only 8 percent of them save their money in bank accounts – they mostly resort to informal channels, like saving cash at home, purchasing livestock or land, and forming committees.

A look at the micro savings mobilised by the industry thus far gives a positive picture. Last few years have seen a steady growth in industry’s deposits. PMN’s statistics show that about 4.68 million depositors were holding savings of nearly Rs25 billion as of December end last year.

Interestingly, depositors are twice the number there are borrowers – which could mean that microfinance providers have acceptance as legitimate savings institutions (not just as loan agencies) among the grassroots. That augurs well for the future of micro savings in Pakistan.

However, the industry’s deposit mobilisation from females seems to be at odds with the generally held view that females are the ‘savers’ in a household.

Currently, females make up only 40 percent of total micro savers, and they only contribute 21 percent to the industry’s deposit base in value. To

Programmes and microfinance-NGOs. As per SBP statutes these organisations cannot play the role of financial intermediary as is played by the MFBs, but they can mobilise savings on behalf of their clients and place them with the licensed commercial banks.

Non-banking MFIs hold bulk of the depositors (60 percent) because their footprint is greater than that of the MFBs. Yet the small size of individual deposits they attract is a big challenge for them.

The PMN data shows that the average saving balance of RSPs was Rs652, while for a microfinance-NGO it was Rs819.

However, the average saving balance for an MFB stood much higher at Rs12,167.

The success of MFBs in raising large-size deposits compared to the MFIs explains why the former are generally against a directed lending policy which the latter often demand.

MFBs are expected to lead the micro savings portfolio in the future, as they come up with innovative savings products and increase their outreach, and as more MFIs get converted into MFBs.

Deposit mobilisation in microfinance industry is essentially about reaching out to the grassroots or bottom of the pyramid, and scouring for funds, however small they may be in value to the grassroots or bottom of the pyramid, and scouring for funds, however small they may be in value. This is in consonance with the central bank’s stated goal of financial inclusion, which requires service providers to offer a complete suite of financial services to the unbanked and under-banked Pakistanis.

Grassroots savings may be smaller in size, but they are large in volume. The largely informal and unbanked nature of monetary dealings in the country means that a lot of liquidity is outside the banking system, locked up in assets that may not be productive.

It’s been a while since, but the “Access to Finance Survey” done in 2008

by PMN and SBP pointed out that about 56 percent of adult Pakistanis are ‘savers’.

change that, MFBs first need to study what factors weigh in a female’s decision to pool her resources in informal channel(s), and then build savings products around that.

While the industry leaders recognize the need to mobilise deposits to complement other funding sources, they caution against relying entirely on deposits to meet the micro clients’ borrowing needs.

Yet the Microfinance Banks (MFBs) seem particularly focused on the deposit-led funding approach. That is why they hold 93 percent of the industry’s total deposit base by servicing just forty percent of the industry’s depositors.

Rest of the deposit base is with the non-banking Microfinance Institutions (MFIs), which include Rural Support

The rapid growth of branchless banking (BB) in Pakistan is expected to help the microfinance industry raise low-cost funds for credit disbursements. The BB sector seems well-grounded now. Between January and December last year, it generated over 120 million transactions worth a sum of Rs492 billion. The sector boasted of nearly two million mobile wallets, which are future drivers of micro deposits as well as spending. The sector’s own deposit-base touched the billion rupee mark in December last year.

Since a bank-led BB model is operative in Pakistan, telcos have either acquired MFBs or started them from scratch. Focused on an alternate revenue stream in the lucrative mobile financial services segment, the risk-averse telcos

are expected to play a larger role than the stand-alone MFBs in raising deposits. The combination of convenience (mobile account transactions) and incentives (attractive deposit rates) will work in favor of telco-led MFBs. Tameer Microfinance Bank’s ‘Easypaisa’ has shown the way by recently launching its savings product, “Khushaal Munafa”. The product offers Easypaisa mobile account customers a profit of up to 9 percent on saving Rs2,000 or more.

Profit is calculated on a daily basis and transferred to the mobile accounts at the end of each month. Tameer has adopted another approach, too, to mobilise micro savings. In partnership with the Pakistan Mercantile Exchange Limited, Tameer will soon offer a gold-based investment product. The product’s small lot size (around 0.001 Tola) is expected to generate interest from micro savers.

As it appears, it will be beneficial for stand-alone MFBs and MFIs – who may be looking at the BB sector as a mere alternate delivery channel for loan disbursements and repayments – to collaborate with the BB service providers in order to lower their delivery costs and raise funds from the market.

Micro savings form an important part of the financial ecosystem at the bottom of the pyramid, and cannot be ignored.

Besides branchless banking, there are other ways through which the drive for grassroots deposit mobilisation may pick pace. Voluntary savings can be increased by simply offering attractive profit rates.

Industry players can also market their savings products by setting up kiosks at retail outlets. Progress in expanding the industry’s footprint to currently underserved territories in Baluchistan, parts of Khyber Pakhtunkhwa and interior Sindh will automatically lead to an increase in the industry’s deposit base.

The writer is a Research Analyst at Business Recorder.

He can be reached at: hammadshah24@gmail.com

Microfinance Review | October 21, 2013 | 11

Savings mobilization by MFBs: experiences, challenges and the way forward State Bank of Pakistan The promulgation of Microfinance Institutions Ordinance in 2001 allowed establishment of a new tier of institutions i.e. Microfinance Banks (MFBs) in Pakistan as an alternative to conventional banking to cater to the holistic financial services needs of the poor and marginalized segments of society. This approach led to mainstreaming microfinance into overall financial system with the following inherent advantages:

Providing a wide range of financial services, and not just micro-credit as offered historically by the non-governmental organizations, microfinance institutions (NGO MFIs) Using deposit mobilization as a sustainable funding source for onward lending to poor and low income entrepreneurs.

Building up strong institutions Ensuring pro-consumer policies and practices, disclosure and transparency Creating strong governance and management structures Promoting robust risk management policies and system In line with the above-mentioned fundamentals of the policy approach, microfinance in Pakistan has experienced substantial expansion, innovation, and transformations since 2001. This article however focuses only on savings mobilization efforts of MFBs in Pakistan, highlighting key challenges in mobilizing small deposits from a vast market of unbanked and under-banked populations, and outlines recommendations to promote micro-savings. In conclusion,

12 | Microfinance Review | October 21, 2013

the paper reflects on the positive evolutions so far, and raises expectations that microfinance banks (MFBs) would continue the momentum, and accelerate growth in micro-savings.

Contrary to the general perception that poor people need only credit and not deposits, the Access to Finance Survey (A2FS) confirmed that 59% of the unbanked population saves money at home, demonstrating both will and capacity to save. Interestingly, 23% of the

people save through the “committee system,” a popular and convenient way of collecting members’ savings. Such informal ways of saving mobilization emerged because of lack of interest by commercial banks which focused only on corporate banking, shying away from expanding their retail banking operations to rural and remote areas of the country.

Despite its vast potential, microsavings’ mobilization through formal banking channels has proved to be challenging. It is worth mentioning that in their initial seven to eight years (200108), MFBs could not build up any significant deposit base and associated infrastructure. Their initial business model was constrained due to overly dependence on conventional brick and mortar branches, limited HR and MIS capacity, and credit-only products. The high costs of establishing and operating the branches severely undermined the distributional capacity of the MFBs and thus restrained their outreach. Further, the availability of substantial donor funds kept these MFBs in their comfort zone.

After this initial stage characterized mainly by experimentation, microfinance banking started to make a fundamental shift in their structural & operational orientation in the last four to five years.

This new market evolution, characterized by efficiency and sustainability, has been well-supported by SBP-driven regulatory framework and program-based interventions aimed to promote institutional and market developments. Importantly, the capitalization of the MFBs has been strengthened in recent years as a result of entry of competent and dynamic

players both domestic and international.

Three out of total ten MFBs are now owned by the largest mobile network operators (MNOs) in the country.

Similarly, the technological developments have catalyzed the advent of alternative delivery channels such as mobile phone and agent-based banking.

This shift has provided the much needed quantum leap to the industry in terms of achieving cost efficiencies and thus making the business case for microfinance on more viable and sustainable basis. A impact has also been visible on saving mobilization. During years 2011 and 2012, MFBs have registered an average annual growth of 50% in deposits, which reached Rs23 billion (USD 230 million) as of 31st December 2012. This indicates that MFBs are now positioning themselves to mobilize deposits as a stable, low cost funding source, in addition to a highly valued service for customers.

The recent developments sound positive, and provide a basis to MFBs for going after deposit mobilization in a big way. Considering the wide demandsupply wide gap especially at the lower end of market, the MFBs can target to increase their deposit base to Rs. 100 billion (USD 1 billion) in the next five years. In order to achieve this target, the MFBs would require deepening their strategic capabilities and enhancing their operational readiness to manage millions of low saving balances, and billions of small-size transactions of their clients who lack experience in accessing formal financial services.

Some MFBs lack commitment at their higher level to build a high deposit base.

Few MFBs do not have adequate skilled resources necessary for functions such as cash management, clearing and settlement, liquidity management, and handling core banking systems.

Challenges In pursuit of such mobilization, MFBs will however face many challenges, mostly relating to cost and capacity.

Some of them are:

MFBs incur cost in building branch infrastructure such as installing fire-proof vaults, deploying security guards, and obtaining appropriate cash insurance. These considerations sometime make it difficult to open branches in rural and remote areas.

Some MFBs lack demand-driven products to transform the behaviour of their target clientele by changing the way they have been saving up till now (under the mattress, in custody of some friend etc.).

Most of Pakistan’s unbanked population is illiterate or semi-literate or remain hesitant in opening accounts with banks. Even those who have accounts are not aware of their rights and responsiblities.

Hence do not derive optimal benefit from banking services. This segment is also hesitant to open and use mobile phone accounts (m-wallets) which are available at banking agents (grocery shops).

As a new set of institutions, MFBs do not enjoy the level of public trust that commercial banks do.

Each MFB needs to develop an appropriate business model that focuses not only on the strategy for deposit mobilization but also takes into account other fundamentals relating to its other business consideration and institutional capabilities.

Recommendations It is important for each MFB to assess its operational readiness for managing deposits. The requirements will become more intensive as the level of transactional activities and size of portfolio gets larger. A few recommendations are as follows:

MFBs must foster a strong governance system and corporate culture in their institutions. The role and responsibilities of every manager must be clearly laid out, and incentives should be based on performance. If there are ‘social’ ethos and mission, the MFB must ensure that it does not adversely affect its professional culture and institutional viability.

As MFBs are financial intermediaries, building financial assets depends on their ability to mobilize deposits. An MFB desirous of developing a healthy loan book will keep pursuing strategies to mobilize deposits. It will thus be important for MFBs to make progress towards strengthening credit portfolio, methodologies, and products.

A distinct advantage of MFBs is the availability of their channels at locations which are in close proximity to their target market. In particular, the MFBs with a branchless banking model or partners have an immense potential of using non-banking retail stores and a real-time mobile phone technology-based infrastructure. In Pakistan, branchless banking agent network has already exceeded 50,000 as against 11,000 branches of banks. There is a need of developing a large eco-system and deepening linkages between microfinance players and branchless banking providers to extend saving account facilities to low-income groups. In this respect, the SBP has already developed various forums for sharing of ideas and concerns by the stakeholders.

So far, MFBs have been largely offering products to their target market similar to those being offered by commercial banks. There is a need of developing innovative products that are based on market research. The products may contain other features such as insurance, loan, remittance etc. to capture interest of target clientele. Similarly, branchless banking providers may accelerate efforts towards increasing the uptake of products such as mobile wallet and card-based accounts.

MFBs will have to make investment in hiring and training staff, developing core banking system, and creating organization-wide effective control environment.

Conclusion

Within overall financial sector in Pakistan, MFBs are emerging as an important segment to mobilize deposits especially from low end market. Recent growth in deposits has proved that mobilizing micro-savings through formal banking channels is possible.

This growth also provides evidence of the internal capabilities developed by the MFBs. Further, the MFBs have built collaboration with key stakeholders including banks, telecoms, and MFIs to reach out to larger unbanked population. As a regulator, SBP has also emphasized the need for MFBs to continue strengthening their institutional capacities, and catalyzing market development.

In a nutshell, market is growing gradually and positively. It is important at this stage for all players especially MFBs to keep up the momentum and accelerate growth in micro-saving.

For comments and suggestions please write to qazi.shoaib@sbp.org.pk Microfinance Review | October 21, 2013 | 13

Unity of purpose between SBP, PPAF and PMN behind the success of microfinance industry Rashid Bajwa,, Chairperson Pakistan Microfinance Network and CEO NRSP Dr. Rashid Bajwa is the Chairperson of Pakistan’s national-level association “Pakistan Microfinance Network”. He is also Chief Executive Officer of the largest Microfinance Institution (MFI) in Pakistan, the “National Rural Support Programme”. BR Research recently sat down with Dr. Bajwa in Islamabad for a discussion on microfinance sector for this publication. The following are excerpts from that encounter.

Funding: the fuel for growth The PMN Chair opens the discussion by saying that though the microfinance sector has progressed over the years, this progress is slowing down. “If you look at this sector, you will be surprised to see an amazing link between the growth of the sector and the ease of borrowing by the sector.” Bajwa adds that microfinance started to grow as soon as the Government of Pakistan set up the Pakistan Poverty Alleviation Fund (PPAF), which has remained the apex fund for the sector.

Later, DFID and SBP joined hands to set up the Micro Credit Guarantee Facility (MCGF) that provided majority of the sector’s liquidity needs. Microfinance banks (MFBs) set up by the SBP started offering deposit services, which partly addressed the need for liquidity of the MFBs. IFAD too supported PPAF to partly address the equity and liquidity needs of

the sector, especially the NGO MFIs. “However, despite all this, if one looks at the sector’s statistics in real terms, growth has been muted on two counts.

Firstly, the average loan size has not increased as compared to inflation and its real value has actually decreased.

Secondly, the growth, in terms of active borrowers, remains slow as compared to the demand,” he emphasises.

Currently, all the facilities available to the microfinance providers (MFPs) are finite and barely address the needs of their existing clients, maintains Dr. Bajwa.

“The issue is that if you are expecting the sector to grow, then you need multiple sources of long term financing that can enable the MFPs to make and implement medium-to-short term growth plans.

While the PPAF, SBP MCGF and IFAD facilities have been great opportunities for the sector, these too do not cater to the growth needs of the sector.”

14 | Microfinance Review | October 21, 2013

Dr. Bajwa compares the current state of the microfinance sector to a highway where a number of vehicles are lined up to be driven but are unable to attain an optimal speed or even move forward, due to limited fuel supply. Lack of funding makes for a similar predicament for the microfinance sector which, he claims, has all the necessary ingredients to grow.

A directed credit policy “A policy option that begs serious consideration is ‘directed credit’ for the microfinance sector through which commercial banks are mandated to disburse a certain portion of their total lending portfolio to the MFPs. This could be similar to the Agriculture Committee under Governor SBP, that sets annual target for Agri-lending and reviews its progress. I know there are others within the PMN who do not agree with directed credit, but as I see it, this is a sure way of providing the necessary fuel as indicated above,” he submits, noting that directed credit policy regime is there in other countries, including India.

He finds it ironic that when Pakistan did have a directed credit policy especially for the agriculture sector, there were very few “takers” and today when MFIs have come up as vehicles for delivery of directed credit, the policy has been done away with.

“The sector is covering less than eight percent of potential clients. Should we just stop here? Over the last decade, strong and credible organizations have been operating in the sector, which have the capacity to expand. In the absence of support from the policymakers to unleash liquidity from the commercial banks, the sector is bound to grow slowly or even show regressive effects as explained earlier,” he cautions.

He reiterates that Pakistan is fortunate to have MFPs that follow the classic ‘purpose lending’ approach which focuses on creating assets. But the industry veteran expresses concerns that the asset-based lending has become static in Pakistan, if not regressive, due to inflationary impacts.

“When we started microfinance in 1997, a bag of urea cost Rs700. But today it costs four times higher. However, MFPs have been unable to increase their loan size commensurate with inflation due to inadequate funding.” Therefore, he is not surprised when borrowers, in order to cater to their needs for farm inputs, or for raw materials in case of small businesses, resort to multiple borrowing from more than one MFI. The NRSP CEO maintains that in the business . of microfinance, it is not just the amount of liquidity that matters, but also the time horizon over which that liquidity can be tapped into. He states that availability of liquidity in the short-term (upto one year) doesn’t help in business planning and expanding loan portfolios.

“For sectoral expansion both horizontally and vertically, there has to be certainty and confidence that liquidity will be available for at least three to five years. That can happen either when the government starts borrowing more from the World Bank (it has already borrowed $1 billion) or when there is a mechanism available for micro lending, as is available for agriculture and exports in Pakistan.”

Bringing MFIs into the regulatory fold Dr. Bajwa praises the role of regulations in the growth of the sector, especially that of the central bank in setting up of the MFBs. He asserted that other MFIs also need to be regulated so that the objective of “responsible microfinance can be achieved”.

Towards that end, he refers to the positive contributions of the SECP; supported by the SBP,

PPAF and PMN, which may result in regulations that will help in improving governance structures of the MFIs. He points out that consumer protection is an area where the unregulated MFIs need to be engaged, for the entire sector is eventually characterized after any negative events.

The microinsurance expert also calls for “truth in lending” which translates into more transparency on the effective interests charged by the institutions.

Disaster protection fund

Today PMN is a recognised body both domestically and internationally and provides key services to its members as well as policymakers

Cognizant of the need for a disaster protection fund for the microfinance sector, the PMN Chair suggests that all stakeholders – including MFPs, commercial banks and government – should be a part of that initiative. He calls for all MFPs to set aside a certain portion of their net incomes every year after such a fund is created, so that the devastating impact of frequent calamities on the microfinance clients can be minimized.

Knowledge management He appreciates the role of PMN as the sole voice of the sector and its role as the repository of knowledge management. “Today PMN is a recognised body both domestically and internationally and provides key services to its members as well as policymakers. The role of PMN to initiate the “credit bureau” will go a long was in promoting transparency in the sector,” he adds.

of the sector. He highlighted that the promulgation of the Microfinance Banking Institutions Ordinance followed with a proactive and leadership role played by the State Bank of Pakistan led to setting up of a number of MFBs, and through them unleashed the “branchless banking” revolution.

He has also credited the Government and the WB for devising national strategies for microfinance and for the transformation of institutions like NRSP. “SECP’s role is crucial in providing a regulatory cover to MFIs, PPAF’s for providing the fuel that has been fundamental in the growth of the industry, and the PMN for its role in coordinating, promoting transparency and knowledge management. I fully appreciate the role of donors especially the World Bank, DfID, IFC and IFAD who have played a key role in the promotion of the sector,” he acknowledges.

However, despite all the above, he stresses that if the sector is allowed to grow as was the case in the past through policy decisions, one can witness a huge increase in businesses and productivity both in the rural as well as urban areas. “Creation of productive asset is the best recipe for tackling the menace of poverty in Pakistan and MFPs have a key role to play in that regard,” he concludes.

Microfinance: a case study on institutional collaboration The best thing about the sector seems to be that different institutions are on the same page, opines Dr. Bajwa. He appreciates the roles of GoP and the World Bank in establishing the PPAF that led to the strengthening and growth

Interview by Hammad Haider

Microfinance Review | October 21, 2013 | 15

PPAF and the microfinance sector in Pakistan Microfinance can be defined as provision of loans, savings, insurance, remittance or other financial services to the poor.

Various research studies undertaken globally have reinforced the direct link between access to finance and increased borrower well-being, including higher income, food consumption and better decision-making along with a more positive outlook to life. Additionally, access to financial services plays a pivotal role in creating dynamic, inclusive and market-oriented economic growth, providing self-employment to growing work force, improving livelihood and promoting development in the macroeconomic context. The realization by the Government of Pakistan that microfinance can be an effective and holistic poverty alleviation mechanism, led to the establishment of Pakistan Poverty Alleviation Fund (PPAF), as a public-private partnership in 2000. It is incorporated as a limited by Guarantee Company under the Companies Ordinance 1984, wherein, management and policy supervision rests with an independent Board. PPAF is under the regulatory superintendence of the Securities and Exchange Commission of Pakistan. With members of its BoD having diverse experiences in economic development, banking and finance, academia, corporate sectors and seasoned bureaucrats, the stage was set since its inception for an impressive governance structure.

The core operating units of the PPAF deliver a range of development interventions such as support to social mobilization, community physical infrastructure, water, energy and disaster management, livelihoods, capacity building, health & education and environment and social safeguards at the grass roots/ community level thus priming the microfinance market through a network of more than 100 Partner Organizations (POs) across the country.

Genesis of the Apex The microfinance sector was in a nascent state when PPAF entered the market in 2000. The market stood at 60,000 clients with a handful of organizations providing microcredit (Micro Finance PractitionersMFPs). PPAF’s entry at the early stages was geared towards sector development and attempting to develop institutions and

16 | Microfinance Review | October 21, 2013

communities that foster financial inclusion through the provision of credit. Due to investments in the sector made by PPAF and other stakeholders, the microfinance market now stands at 2.4 million loan clients, 3.9 million savers and 2.6 million insurance policy holders with 50 POs robust and dynamic institutions geared for sustainable growth.

PPAF currently holds almost 50% market share of the Microfinance Sector in Pakistan as compared to the 90% share in 2000. This is part of its deliberate efforts to diversify the funding sources and increase the number of financiers and investors for the sector. PPAF’s primary mandate is to alleviate poverty. Throughout the past decade, it has adopted a holistic and sustainable approach to microfinance.

PPAF’s far-reaching impact in the sector can be seen by its role not only as the sector developer, the market leader, but also by the level of commitment in equity injections, capacity building of partner organizations, ensuring women and the marginalized remain a key focus; and striving to innovate through its valueadded financial services.

Through relentless capacity building, ample funding for on-lending, support for new products and a robust monitoring system, what started as a nascent sector has been transformed into an innovative and fast-growing industry in less than a decade. The “Global Microscope on the Microfinance Business Environment 2012” report by the Economist Intelligence Unit (EIU) ranks Pakistan as one of the top countries for overall microfinance business environment1. In fact, Pakistan is one of the few countries in the world that has a separate legal and regulatory framework for microfinance banks, and key stakeholders have been successful in ensuring a progressive environment for the sector.

Not only did PPAF create the market for microfinance, it also played the role of lender of the last resort, and stood by partners impacted by the torrential rains in Sindh in 2011, floods of 2010 and earthquake in 2005. In this journey PPAF has immensely benefitted from the experience of The World Bank and IFAD. 1 “Global Microscope on the Microfinance Business Environment 2012”. Economist Intelligence Unit, 2012.

Nurturing Growth One of the key areas of focus for PPAF remains that of wholesale financial intermediation. With over USD 800 million and 5.2 million loans served, PPAF has remained the primary source of funding in the microfinance market. The effect of PPAF’s financial intermediation has been to groom institutions in the sector and catalyze growth. Investments for women remain a cross-cutting theme across all investments made by PPAF. Last year, 78% of total funds for microfinance were disbursed to women and 53% of all microfinance investments since inception went to women.

PPAF’s holistic approach to microfinance has ensured that not only has it provided funding to the diverse microfinance institutions that include 50 Partner Organizations, comprising Micro Finance Banks (MFBs), Microfinance Institutions (MFIs), NGOs, RSPs among others, it has also taken strong strategic steps to build the capacity and governance structure of its partner organizations. PPAF has invested over USD 67 million as grants into institutions. The investments were made with the intention of establishment of a robust infrastructure for the provision of microfinance services to the masses. In the initial years, the provision of grant was focused on capital and operational costs allowing institutions the opportunity to establish scale and scope for viable business. Presently, the focus has shifted to the development of systems, procedures, controls, adoption of international best practices, improving financial management, oversight and transparency.

Transparency and accountability have remained a central theme in all of PPAF’s Microfinance Operations, and as a result, the same focus has been ensured in PPAF’s partner organizations. This has resulted in high recovery rate and establishment of credit discipline.

PPAF has supported its partner organizations by acting as a medium and platform to link these Institutions with the local and international financial markets.

Through the provision of security/collateral against credit facilities extended by banks to MFPs, PPAF has been able to draw in USD 37.5 million from commercial banks for the sector. This was achieved through the provision of

financial advisory services and technical assistance to MFPs. PPAF has also strengthened the balance sheets of mid-tier MFPs through the injection of equity amounting to USD 8.1 million enhancing the comfort level of commercial banks when providing these institutions with banking services.

Based on rigorous international and local research studies PPAF has modified its approach, and ensured that it continues to work on innovative, new financial products and services and delivery mechanisms that can make a difference in the lives of the marginalized. This has led to development of new microfinance products that are customized, tailor made, niche based, inclusive and in line with the needs of communities. Under the Microfinance Innovation and Outreach Programme, 25 innovative products and delivery mechanisms including value chains, village banking, branchless banking, business revival loans in flood affected areas were introduced. One of the products introduced under the program, “Women’s Cooperative Livestock Farming”, received international acclaim by winning IFAD’s 2010 Innovation Marketplace award.

PPAF provided support for development and testing of the Credit Information Bureau (CIB) for MFPs in municipal areas of Lahore. Following the successful completion of the pilot, PPAF, PMN and State Bank of Pakistan provided support for launching the MF-CIB at a national level.

Meeting Demands of the Communities Micro-Insurance products: Through a strategic partnership with the SECP, PPAF has designed the first ever index-based crop insurance and live-weight livestock insurance products in Pakistan. These products have been developed after extensive data collection from the MET department and Livestock Research Institute, based on international models, and is directly in line with the needs of the communities. New insurance products are being developed.

Branchless Banking & Savings: PPAF realized the need to bridge the gap between the underserved and technological advancements through branchless banking pilots.

Pilots in branchless banking with 5 partners were carried out, in collaboration with UBL’s “Omni’ and Tameer-Telenor’s “Easy Paisa” initiatives to collect loan repayments on behalf of the microfinance institutions. With the fast paced growth in the branchless banking industry, coupled with higher consumer awareness. Over 200,000 clients, with transactions of more than PKR 200 million every month, are now being served. PPAF is also pioneering a ‘super-agent’ model for branchless banking, which will enable communities access full-fledge banking services. This model is expected to revolutionize micro-savings, and provide access to diverse financial services to millions of microfinance borrower.

Renewable Energy: PPAF has launched pilots on Solar and Biogas Energy projects financed through microfinance in order to gauge opportunities, barriers, costs, and impacts associated with MFP lending portfolios that have integrated energy into their products.

Value Chains: The challenge of rural finance lies in our ability to complement a financial market orientation, one that focuses on financial institutions, the products they deliver, and the constraints and distortions they confront—with a product market orientation—one that

focuses on rural enterprises, the value chains they participate in, the opportunities and constraints they face, and the most critical financial services they demand. PPAF has already developed many value chains in enterprises, agriculture and dairy sectors, which have resulted in improved productivity, efficiency and transparent market mechanisms.

Seal of Excellence: PPAF is testing the application of the Seal of Excellence in Pakistan through a strategic partnership with the Microcredit Summit Campaign.

The Seal certifies MFPs who meet a set of indicators that demonstrate significant outreach to the poor as well as a strategic approach and success in helping a portion of these clients move away from poverty.

The seal takes into account all aspects of institutional, financial, client protection, social performance and several additional indicators. The seal ensures that rights of clients are protected and focus remains on impact and the double bottom line.

Managing Future Challenges Three research studies undertaken by Gallup Pakistan on PPAF’s microfinance program in 2002, 2005 and 2009 have consistently led to the conclusion that provision of microcredit leads to improve-

ment in personal and household income.

With 20-30 million potential clients, access to finance in deprived areas remains a formidable challenge. In order to ensure that incentives for MFPs remain in line with PPAF’s objectives the pricing strategy has been realigned through interest rate rebates in priority areas.

Operational and capital grants have also been diverted to less penetrated areas.

This approach has led to improved efficiencies in microfinance institutions.

As of 2010, the market as a whole broke even and now has started accumulating surpluses. Individual institutions are now better positioned to provide inclusive and holistic financial services to the poor than at any point in the past while improving outreach to neglected segments. The apex continues to work towards promoting efficiencies that would ultimately result in lowering costs incurred by microfinance clients and communities.

Nonetheless a huge funding gap still persists to satisfy the needs of the underserved areas.

PPAF has built effective relationships with stakeholders at all levels, and in many areas it acts as the common platform where all these stakeholders can address issues faced by the microfinance sector.

By using PPAF’s influence and credibility,

the sector can derive greater benefit from stakeholders who hold the key to the environment in which MFPs operate and the subsequent financial and operating performance of the sector as a whole can be affected. Thus the effective management of stakeholder relations is growing as a key focus. PPAF now has strong relationships with the SBP, SECP and PMN. The PPAF continues to contribute to all policy discourses and actions endeavoring to further improve the operating environment for institutions and services for the population at large.

Together we continue to shape the future of the microfinance sector in Pakistan. In addition, the PPAF continues to represent the microfinance sector at international platforms through partnerships, linkages and advocacy, championing the call for provision of inclusive and holistic financial services to the population retaining a focus on neglected and underprivileged communities.

Contributed by: Yasir Ashfaq, Group Head, Financial Services Group, PPAF Saqib Siddiqui, General Manager, Sector Development Unit, PPAF Ali Qureshi, Manager, Sector Development Unit, PPAF

Microfinance Review | October 21, 2013 | 17

Specialised entity needed to bridge funding requirements of microfinance providers Waqas ul Hasan Private Sector Advisor | Department for International Development, UK Waqas ul Hasan is managing the financial sector portfolio within the Private Sector team of DFID Pakistan. Currently, he is leading on the Financial Inclusion Programme (£50 million), being implemented through the State Bank of Pakistan. He is also in the process of designing the programme of Pakistan Enterprise Fund (£85 million), which, in partnership with the Gates Foundation and KfW, will focus on financial inclusion, youth-centric job-creation and assets for the poor. The following are excerpts from his recent sit-down with BR Research in Islamabad for this publication:

Evidence on microfinance

The funding challenge

“Global evidence for the effect of microfinance on the poor is mixed.

Therefore, DFID would be exercising the policy of caution for doing blanket microfinance programmes for the poor,” Waqas Ul Hasan started off, while noting that providing microfinance to the poor – who do not have sustainable cash flows, or means of living, and who do not have assets for survival – may not be beneficial for them.

“It makes sense to have microfinance for the transitory poor.

For the very poor, or chronic poor, cash transfers and handouts would

be more beneficial. In Pakistan, the industry has started applying this caution already. Microfinance providers (MFPs) are now using Credit Information Bureau to check levels of indebtedness. They prefer to lend to clients who have the capacity to service their loans through some source of sustainable cash flows and are not using it merely for consumption purposes.

For the chronic poor, microfinance may actually increase their poverty severity – however, for the transitory poor, who borrow to finance their microenterprises, studies show that

While noting that the microfinance sector is well-positioned now to achieve higher growth rates, he sheds light on some of the challenges the sector has been facing, and will continue to face. “One of the major issues is the funding gap.

To address this gap, DFID’s FIP introduced two main instruments. One was a Microfinance Credit Guarantee Facility (MCGF), which was initially worth £10 million and was later raised to £15 million. The guarantee is being implemented by the State Bank of Pakistan.

Its objective was to incentivise the commercial banks to lend to both MFBs and MFIs. The guarantee provided two facilities: twenty five percent first loss and forty percent pari passu.

18 | Microfinance Review | October 21, 2013

their rates of returns vary from 79 percent to 226 percent,’’ he noted.

Waqas expresses satisfaction with the progress microfinance sector has made in Pakistan thus far.

“Markets pass through different phases. Six to seven years back, the microfinance sector was unregulated, subsidy-based, and donordependent. In the last five years, the sector has graduated to a marketbased and a largely central-bankregulated sector. The share of microfinance banks (MFBs) by Gross Loan Portfolio had risen from 31.5 percent in 2008 to 55 percent by

Both were generous, as it was the option of the commercial bank to avail either of the facilities.

The MCGF has done well, till now, and more than Rs6 billion have already been leveraged. This is projected to touch the mark of Rs9 billion in the next six months, which would be nearly one-third of the entire debt financing of the microfinance sector,” he says.

Waqas commends the SBP for doing a great job in terms of developing this market and giving market the confidence. “DFID charged the MCGF up front, to give assurance to the market that the money is available with the SBP. There have been no calls on the guarantee, yet, and the design is such that there may be no

the end of 2012, and going forward, they will be responsible for most of growth and innovation in the sector.

There is substantial change that has been happening, and with new structure, microfinance has become scalable in Pakistan. MFBs now have access to deposits, which lowers their cost of capital. They can manage their asset and liability sides themselves rather than being reliant on others for aid to finance their portfolio. It is a duly regulated MFB that gives confidence to the commercial lenders to put their money into them,” he maintains.

calls till a borrowing institution declares bankruptcy, which is an unlikely event unless there is a sector wide crisis. There is a cap of KIBOR+2 percent that a commercial bank (CB) can charge to an MFB, which both a CB and an MFB find manageable,” he says.

But success of this guarantee would be, when it won’t be used. When the bankers are comfortable lending to the microfinance sector on their own, probably at a higher rate, then that means they understand the market well enough not to require guarantee and earn additional basis points which they have to currently let go because of price cap,” he adds.

Microfinance Debt Fund

Waqas feels that there still is a need for a financial institution that can act as a bridge between financial markets and the MFBs. He strongly supports the creation of a Microfinance Debt Fund (MDF), which will essentially be a specialised player that understands the due diligence of MFBs and MFIs, knows the inherent risks involved in the business model, exercises some leverage over the microfinance sector, and eventually becomes a standardsetter for the sector.

“Commercial banks cannot be expected to bridge all the financing needs of the microfi-

nance sector, because their size is relatively very small to capture the former’s attention and resources. Therefore, there is a need for an entity like MDF that can take funds from the CBs, institutions such as pension funds, or from other institutional investors, to leverage the asset side of the microfinance sector” according to him.

He adds that, “MDF can also have the ability to do TFCs to raise money from private sector.

The proposition is that this Fund wants to understand the business of microfinance sector, but is operating at a commercial level. It could be a stepped-up version of PPAF, which

He argues against putting a directed credit policy regime in place for microfinance, and favors market forces to determine the financial architecture for the sector. “Dominant evidence is that market forces can work more e iciently in the sector. How allocations are made by the market players has to be determined by demand and market forces. If the sector is attractive, capital will find its way. I am not in favor of directed lending, as it has its own risks involved. In India, one of the reasons of the crisis was the directed lending policy.

The commercial banks there found it easier to lend to the MFIs to meet their targets. Initially, the returns were being made, but then a lot of capital went into weaker institutions that did not have the capacity to manage their portfolio. Eventually, the crisis unfolded.”

However, he also suggests that the national policy setting agencies need to look at whether financial institutions are acting as real financial intermediaries for the economy or merely collecting deposits from general public for state’s deficit financing.

Directed credit policy

Operating costs

Waqas feels that the effective interest rates in the sector are high, hovering around 36 percent.

“These are high, rather indefensible, interest rates. MFBs will have to bring their operating costs down to lower their interest rates.

There are low-cost models available, even in low-tech environs such as Bangladesh.

Role of the middlemen

The missing middle

MFIs face a tougher job accessing financial resources than MFBs do, since the former are not regulated by the central bank, and have a loose corporate governance framework.

Waqas favors transitioning MFIs into MFBs over a period of time so that the provision of microfinance is integrated with market and reputation risk can be mitigated.

“SECP has done some work with PMN’s help in bringing the unregulated MFIs under some form of regulatory oversight. For savings, there has to be caution. There are still corporate governance issues in MFIs. SBP is a much more rigorous regulator, and deposit-taking is a serious business, so the reputation risk for the whole sector cannot be ignored. An ordinary client cannot distinguish between an MFB and an MFI. If there is one crisis, it would put the entire industry at risk. For deposit-taking for MFIs, there should be a tiered structure and that too, with pilots.”

However, with more than 50 percent of the sector’s Gross Loan Portfolio being serviced by the MFBs, things seem to stay on the right path. “The projections say that in next three to four years, nearly three quarters of the microfinance baking industry (in terms of GLP) would be covered by the MFBs. However, MFIs may still hold the large number of clients.”

Unregulated MFIs

Application of technology, lowering of transaction costs and delivery costs, etc. can help tackle that. MFBs can deploy the agent model for loans disbursement and collection. Bringing e iciency can also lower delivery costs. Also, ideally competition should reduce spreads, push profits down thereby lowering interest rates.”

Waqas believes that it is hard to dislodge the middlemen, so a more prudent approach would be to bring this informal sector to the formal fold. “MFBs and MFIs only provide capital. Whereas aarhtis provide a social support system, a hassle-free access to capital, emergency funds support, to some extent advisory service, and even crop distribution system. It is essentially an old institution in Pakistan. It is impossible to imagine how rural markets can function without aarhtis – there are however issues of monopolistic market control and excessive margins,” he notes.

He specifies two ways to deal with this issue. One, some provincial governments, with the SBP’s help, have taken the initiative of ‘Commodity Receipts’ mechanism for major crops as wheat and rice. These receipts are negotiable instruments and they can lower the hold and market power of the aarhtis.

Two, for smaller crops, there is a need to actually capitalise on the strength of these middlemen. If CBs can come up with models to lend to the aarhtis – whose primary function is not lending, it is trade – they can use them as agents of the formal system, he explains.

Waqas concludes the session with his focus on the missing middle among the Pakistani enterprises. “Above microfinance, and lower than the corporate ‘M’ size, there is an ‘S’ area, the small businesses. This segment has a huge demand for capital, but there is no financial institution who is serving that demand. They are not being serviced by the MFBs nor are they entertained by the CBs. These businesses eventually resort to informal financing, by

realises the importance of such an entity. Such an entity is integrated with the commercial markets on its liability side, but is submerged in the microfinance market on its asset side,” he elaborates further.

Waqas proposes that to set the ball rolling for an MDF, donors can provide initial risk capital. “In our Pakistan Enterprise Fund, a project under design, we are seriously considering dedicating some of the funds to establish such an entity, which would be a stepped-up involvement from DFID, graduating from Credit Guarantee to a Debt Fund.”

Political risk is also high, as KIBOR is less than ten percent right now but effective interest rates are nearly four times as much. “It is good that PMN is working to bring ‘Microfinance Transparency’ (MFT) into Pakistan. MFT does a simple activity; it takes the repayment schedules of the standard products of the MFIs and MFBs, tabulates them, and

calculates the annual IRR (internal rate of return) of the micro loans.

Then they just make it public. Some of the institutions themselves are not aware of the interest rates they are charging, because it is in different forms, e.g. penalty, initial membership fee. MFT would help increase transparency and competition in the sector,” he argues.

Towards the end of the interview, Waqas ul Hasan questions why microfinance is not given its due share in national policy frameworks, economic agendas and development programmes.

“It figures here and there, but there is no focus by the political parties or even the Planning Commission or the Ministry of Finance on this sector. SBP has played a great role, because it has a mandate for policymaking as well. But this sector has to be a part of the national narrative of development and economic growth. Otherwise, the sector will not have a strong constituency required for realising the potential of microfinance for financial inclusion, job creation and asset formation,” he cautions.

He thinks that strong and wider ownership is also key for managing political risk, controlling distortions which state institutions may create by imposing sanctions or in some cases by introducing their own versions of microfinance. “In some cases, sector needs continued state support, for example, for a Disaster Protection Fund, which needs activation in cases of earthquakes, floods and droughts. All these external events debilitate the living and working conditions of the very communities microfinance providers are engaging with. The industry itself cannot cope with such disasters.”

Microfinance and national economic policies

tapping funding from families, friends, and other informal sources” he explains, adding that “with formal financial access, these enterprises can become the vehicles for job-creation.”

“We have a huge youth bulge to take care of in the near future, which demands creating no less than three million jobs per annum. This missing middle can provide jobs. In our new £85 million programme, Pakistan Enterprise Fund, we are looking at this area. Gates

Foundation and German KfW have shown interest in co financing, but there is only so much donors like us can do. The CBs need to come up with models to productively engage in this area and pay their role of financial intermediation” he concludes.

Interview by Hammad Haider

Microfinance Review | October 21, 2013 | 19

Microfinance in numbers MFB loan & borrowers growing

Active borrowers by peer group

Gross loan

MFB

Active borrowers Rs (mn) 25,000

1,000,000

20,000

875,000 750,000

10,000 5,000

Others

100% 80%

CY08

CY09

CY10

CY11

CY12

MFI

RSP

Others

MFB

MFI

40%

625,000

20%

500,000

0%

Active savers by peer group MFB

RSP

60%

15,000

0

MFI

CY08

CY09

CY10

CY11

CY12

2010

2011

2012

MFB - ADR & IDR

RSP

Others

Advances-to-Deposits Ratio Investments-to-Deposits Ratio

170%

200%

150% 130%

150%

110% 90%

100%

70% 50%

50%

30% 0% CY08

CY09

CY10

CY11

CY12

MFB - Borrowers increasing

10%

Advances Infection Ratio

No.(mn) 900

Rs(mn) 30

800

25

700

20

2.50%

600

15

2.00%

500

10

400

5

0.50%

0

0.00%

2008

2009

2009

MFB - Advances less infected

Borrowers Average Loan Size

300

2008

2010

20 | Microfinance Review | October 21, 2013

2011

2012

4.00%

24,000

3.50% 3.00%

19,000 14,000

1.50% 1.00%

9,000

2008

2009

2010

2011

2012

4,000

MFB - Asset mix Operating & others Investment

Gross loan portfolio by methodology

MFB - Funding mix

Cash & Equivalents Advances

Equity Borrowing

Other Liabilities Deposits

Individual

100%

95% 85%

100%

80%

80%

75% 65%

60%

60%

40%

40%

20%

20%

0%

0%

55% 45%

Group

35% 25% 15% 5%

2008

2009

2010

2011

2012

Active borrowers by gender

2008

2009

2010

2011

2012

CY08

Active borrowers by sector

Female Male

80% 60%

CY12

100%

CY11

80%

40%

20%

20%

CY08 CY08

CY09

CY10

CY11

0%

CY12

Policy holders by gender

20%

40%

60%

80%

0%

100%

CY08

Gross loan portfolio

Female Male

Others RSP

100%

CY12

60%

CY09

0%

CY11

Credit Life Health

CY10

40%

CY10

Policy holders by type

Agriculture Livestock Trade Services Manufacturing Housing Other

100%

CY09

CY09

CY10

CY11

CY12

Sum insured by peer group

MFI MFB

Others RSP

MFI MFB

CY12

CY08

80%

CY12

CY11

60%

CY10

40%

CY09

20% CY08 0% CY08

CY09

CY10

CY11

CY12

0%

10%

20%

30%

40%

50%

60%

Microfinance Review | October 21, 2013 | 21

Microfinance industry must have 10-20 million customers to become relevant Nadeem Hussain President, Tameer Bank

Nadeem Hussain is the president and chief executive officer of Tameer Microfinance Bank. Prior to this role, he spent 27 years with Citigroup, his last appointment being Country Manager for Citibank’s Iraq Operations within the Corporate Banking and Investment Division.

He has also served on the Board of Directors at the Institute of Business Administration; Chairman of the Bank Committee at Overseas Investors Chamber of Commerce and Industry as well as member of the Government of Pakistan Investment Advisory Board.

22 | Microfinance Review | October 21, 2013

You can call him Mr. Microfinance; Nadeem Hussain is the President of Tameer Bank, the country’s leading microfinance bank and a pioneer of branchless banking. Since its inception the bank has provided tens of billions of rupees in loans to thousands of small business owners, farmers and other individuals; helping them improve their financial standing. After tying up with Telenor Pakistan in 2008, the bank launched the country’s first branchless banking services and expanded its potential reach to trump that of even the largest conventional banks. And even as it continues to expand its banking services, Tameer is already exploring diversification into providing alternative energy solutions, micro insurance and low-cost housing.

But Hussain wasn’t always keeping cows as collateral for small loans. Before launching this bank, he had spent an illustrious career in conventional banking having served as country head for Citibank among other distinguished positions.

Recalling his initiation into the microfinance industry, he tells BR Research “When I started out, I knew very little about microfinance. In fact, coming from a career of conventional banking; there was a lot that had to be unlearnt in order to keep ourselves from assuming the realities of conventional banking to be universally applicable to microfinance.”

He quipped that one learns very quickly when one’s own capital is invested into the business. Besides serving as the president of the bank, Nadeem Hussain is also among its owners. The bank is a majority-owned subsidiary of Telenor, while other investors include the International Finance Corporation (IFC), private investors and the bank’s senior management.

Beyond brick-and-mortar Tameer Bank operates 128 branches, financial centers and community centers.

However its brick-and-mortar presence is

significantly enhanced by 30,000 EasyPaisa agent locations that also offer the basic banking services offered by the MFB. But the real basis for exponential expansion is the branchless banking services which Tameer pioneered in the country. The success of this channel is apparent from the fact that the conventional banks such as United Bank, MCB and Askari Bank, while Telenor’s competitors in the telco industry have all eagerly joined the bandwagon.

“To put things into perspective, consider that we have a network of well over 30,000 touch points where primary banking services are now available seven days, till 11PM. Compare this to the conventional banking industry which has a cumulative network of 12,700 branches and about 3,000 ATMs. Then we have a million mobile wallet accounts, through which a client can utilize basic banking services,” he says, highlighting the potential for banking the unbanked through branchless banking.

While stressing that there is still a huge unmet demand for microfinance in the country, Hussain argues that the biggest hurdle in the way of meeting this demand, is financing. Elaborating on the assertion he performs some back-of-theenvelope calculations.

At the moment there are fewer than three million borrowers in a market of close to 30 million people “Right now you have about 245 million customers and you’re talking about reaching around seven million customers.

Let’s assume that we need to reach another five million customers, with an average loan size of Rs20,000. That’s close to Rs70 billion. If you put in 15 percent capital, there’s still a requirement of more than Rs50 billion.” According to him, accessing this level of funding mandates much more strength within the industry along with strong governance and transparency frameworks.

MFBs: a part of the solution An assessment of advances within the microfinance industry by BR Research, pointed out that although the overall industry lends to male and female borrowers in comparable proportions, lending by the MFBs has so far been heavily skewed in favor of men. While acknowledging the apparent gender bias in lending by MFBs, He says that “at the moment there are fewer than three million borrowers in a market of close to 30 million people, so we are simply focused on lending to as many potential borrowers as we can.” He points out that Tameer Bank is working on products to

cater specifically to female borrowers but he concedes that the skew in lending by MFBs is unlikely to disappear anytime soon.

In his view, this is one of the reasons that microfinance institutions other than MFBs are a vital component of the microfinance industry going forward. He also states that the MFBs do not cater to the bottom of the pyramid, since part of the consideration when loans are issued is the borrower’s ability to repay. “The poorest of the poor must be assisted through direct interventions such as the Benazir Income Support Program.”

Responding to a question regarding possibilities of linking loans to skill development, he argues out that providing vocational training is not the expertise of financial institutions such as Tameer Bank. Giving the example of lending by Tameer Bank against cattle as collateral he explained that after assessing the health of the animals and other factors affecting repayment ability the loan is issued. “Now we know that the yield of milk from the cattle will directly affect the client’s repayment ability, so we have made links with relevant experts that help such borrowers improve their cattle’s yield. So the MFBs need to be tying up with institutions that can enhance that financial intervention.”

Markup rates Microfinance banks in the country are currently charging markup of about 28-32 percent on advances to their clientele, which is higher than rates charged by conventional banks. Explaining the reasons behind these rates, the bank president states “Obviously these rates are not arbitrarily fixed, so let’s consider the components that make up the markup rate. Firstly, the cost of funds is usually higher for microfinance banks because the smaller banks don’t have as much brand power and their ratings are not as strong as the Big5 banks.”

He also points out that the administration cost tends to be a relatively higher proportion for MFBs. Emphasizing the difference in the procedures adopted to issue loans he explains, “A commercial bank will look into some research reports from brokerage houses, audited financial statements and risk ratings to issue a loan worth Rs10-20 million. The MFB has to send an agent to the prospective borrower. That representative sits with the client, discusses his family and economic situation, and assesses the individual’s need and repayment ability before approving a loan of Rs10,000-20,000.”

The bank president predicted that these rates will decline as the MFBs acquire scale and gain access to cheaper sources of finance. That said he points out that some of the MFBs are currently incurring net losses, while the rest operate on much thinner margins as compared to conventional counterparts.

Average loan sizes must be enhanced in line with the rising needs of borrowers points out that there are only eight MFBs in the country, so unlike the commercial banking sector there are few chances that the apex regulator would encourage banks to merge. He highlights that “some of the smaller microfinance banks have been taken over by telcos and the capital injection from the acquiring parties may provide them with the resources needed to grow.”

The Grameen Bank of Bangladesh is lauded as a success story of microfinance.

Setting aside assertions that the borrower profile in Bangladesh is fundamentally different from Pakistan, the Tameer Bank president said that there are many lessons that can be learnt from the Grameen story.

“But what we should consider is that Grameen Bank has now been around for two decades; it secured donor assistance to the tune of a billion dollars and the capital reserve requirements mandated for it go into effect a year after a loan goes into default.” The bottom line, according to him, “is that the borrower profile is not the issue; the ability to reach scale and access commensurate financing are the real challenges that have to be met.”

More information; better decisions Citing the crisis encountered by microfinance industry in the Indian state of Andhra Pradesh, he contends that the basic irritant there had been the over-indebtedness of borrowers who were consequently unable to repay their loans. Though the problem has never been as severe for Pakistan’s nascent microfinance industry, over indebtedness is a fear for those borrowers that are accessing loans from multiple sources including MFIs, MFBs and informal sources. The establishment of a credit bureau for Pakistan’s microfinance industry has been lauded as a positive development in this realm.

“The credit bureau we have created now has 2.1 million microfinance customers in its database”, states the industry veteran.

He points out that this data has revealed a “40 percent hit rate of multiple lending”. In other words, four out of ten borrowers have taken loans from more than one MFI, MFB. The prevalence of such clients exists with those institutions that offer group lending services; since Tameer Bank does not offer this service, it is not particularly afflicted.

“The reason behind this phenomenon is that the average loan size has not increased in any mentionable terms even as inflation has raised the borrowing requirements of clients” he explains. Consequently he is of the opinion that average loan sizes must be enhanced in line with the rising needs of borrowers. “In the interim period, the credit bureau is a huge success because it will clean up the portfolios and protect the industry from default by customers due to over-indebtedness.”

Scale: the emergent challenge “The microfinance industry must have 10-20 million customers to become relevant” he stresses. He explains that given the worsening level of poverty in the country, the current client tally is not large enough to create a significant intervention.

Reducing the cost of funds and ensuring growth of the industry is the emergent challenge for microfinance banks and institutions, according to the industry pioneer. He points out that relying on branchless banking, gaining access to low-cost funding and raising customer awareness are all necessary ingredients for the growth recipe.

“Ultimately it is about being in touch with the customers and knowing about their changing needs; if the industry can do that, it will attain the scale and hence relevance that is needed to propel it to the next level in the country” he concludes.

Interview by Mobin Nasir

The future of MFBs in Pakistan Responding to a question regarding potential consolidation in the industry, he

Microfinance Review | October 21, 2013 | 23

Microinsurance:

straight from the heart

Faraz uddin Amjad | Joint Director at the SECP Microinsurance: straight from heart was the instant topic I could think of when I started writing this piece. Why did I choose to do so, will become evident by the time you finish reading this.

However, the title does not ever attempt to mean that our collective wisdom and experiences should not be applied for developing the sector; rather that these initiatives must be undertaken wholeheartedly and with the highest level of dedication and commitment.

When it comes to microinsurance, all stakeholders, especially the regulator, insurance industry and microfinance sector, appear to be committed and equally excited. The donor community has also been manifesting an unprecedented thrust on this theme. All that is required is an aligning of efforts and a unified vision.

24 | Microfinance Review | October 21, 2013

Solid foundations through policy framework The Securities and Exchange Commission of Pakistan (SECP) took the lead in initiating the development of regulatory framework for microinsurance in Pakistan. This journey transpired first in the form of the country diagnostic report which SECP conducted and published with assistance from the World Bank/ FIRST Initiative. That report revealed not only the potential of microinsurance required to be harnessed but also the need of putting together a sound regulatory framework for this very purpose.

With wholehearted and encouraging depiction, a private-sector led working group started the excursion of designing the regulatory framework for microinsurance in Pakistan and in the shortest possible time, they delivered the edifice of regulation based on solid foundations.

small but the numbers can grow exponentially by harnessing technology; be it branchless banking channels or cloud computing. Given that the potential market size spans beyond 31 million people the weighted average capital cost may not be too high compared to the projected returns.

Recent examples from Africa for delivering microinsurance to mass markets by using technology are mentionable here.

In 2010, Trustco Mobile in Zimbabwe introduced life insurance as a loyalty incentive in partnership with EcoLife and First Mutual Life Assurance, which is now serving over two million subscribers.

Similarly, in Ghana, a specialized microinsurance broker, MicroEnsure and a mobile phone company, Tigo, launched Tigo Family Care, a health microinsurance product in 2011, which is adding 4,500 new clients every day.

The regulatory framework which was formally released for public opinion and consultation in June has been divided into the following broad areas: (i) Contract and disclosure requirements (ii) Product features and submission requirements (iii) Intermediation specifications (iv) Requirements for authorized risk takers (v) Claims handling procedures (vi) Complaints and grievance handling mechanisms (vii) Code of conduct and consumer protection (viii) Prudential regulation (ix) Regulatory reporting and information sharing requirements.

The proposed regulations are quite specific on the definition of microinsurance, based on income levels of clients and maximum limits for the sum insured.

The proposed regulations are also cognizant of consumer protection by requiring clearly stated policies, specific compliance of codes of consumer protection and conduct of agents. All these factors have been factored into the upcoming regulatory framework.

What next?

So have we done enough to ensure that microinsurance will boom and benefit the common man? Not yet, but we are at the interim stage. The next step involves forging strong partnerships with industry stakeholders. The insurance companies have to make a business case and offer the right product at the right price.

Intermediaries and distributors have to tighten their belts and ensure outreach and market access.

Technology providers have a much bigger role to play as the ticket size is

Here, it is imperative to note that the development of effective payment systems is the key driver of growth.

Collecting microinsurance premiums can be a challenge, but emerging payment systems, such as Easypaisa are substantial drivers of growth.

Other channels could also be accessed such as established products and service providers. For example, Aon Affinity, a subsidiary of global insurance broking giant Aon whom most of the soccer-lovers know as the lead sponsor of Manchester United, reports covering more than 20 million, mostly low-income, people through mass-market schemes in six Latin American countries that access the existing client bases and use the payment systems of electricity, telephone and water utility companies.

This demonstrates the muscles of multinational brokers to replicate their success across jurisdictions. Others like Marsh and its sister-concern, Guy Carpenter, are involved in large government-sponsored schemes in India covering tens of millions of households.

Donors also need to channel resources into institutional infrastructure to support microinsurance in Pakistan on a sustainable basis, perhaps setting up a microinsurance research and development organization All these global success stories bring a common lesson to us. From the most advance mobile payment systems to expanded network of telecom and utility companies, from international broking and product design expertise to distribution management structures, all ingredients are available with us. And there is a huge opportunity for everyone, from insurers to intermediaries to technology providers to investors provided the initial teething challenges are managed wisely.

The regulatory framework in Pakistan is quite overarching. Hennie Bester, senior advisor at Centre for Financial Regulation and Inclusion (Cenfri), a South Africabased research and development institution for microfinance, notes that unlike other developing markets, Pakistan has a unique, open-architecture regulatory framework when it comes to insurance intermediation and that is highly favorable for the delivery of microinsurance.

Bester adds that it is exciting to see how Pakistan’s microfinance market is flourishing where mobile phone operators are becoming owners of microfinance banks for the delivery of financial products to mass markets. This is a promising sign for increasing penetration of microinsurance. What needs to be done is to pull all the pieces together and build synergy in initiatives which seems to be polarized, at least at this point in time.

Donors can play an important role here by by stimulating innovation and experimentation through apportionment of their development resources to support programs in health and livelihood initiatives, augmented by microinsurance.

Backing for product development and pilot projects is essentially important at this stage ‘to learn by doing’.

A complete resource starvation, or sometimes the limited availability, leaves the local insurers in an innuendo to choose which business activity to support more and this often renders microinsurance not among the pinnacle of priorities.

Donors also need to channel resources into institutional infrastructure to support microinsurance in Pakistan on a sustainable basis, perhaps setting up a microinsurance research and development organization, like PMN to serve as the focal point for R&D, pilot projects, information sharing, consumer education and awareness.

Interestingly, the macro level strategy developed by the SECP working group,

compassionately but clearly demarcates the roles which each actor has to play.

The driving factors highlighted by the group include: Regulatory framework that allows diversity of business and delivery models Support for sustainable business models Product diversification customized to consumer needs and life cycle events.

Focus on consumer protection and awareness Support for research, pilots, data collection, analysis Knowledge management to promote innovation Use of technology to encourage alternate distribution channels Program support from reinsurers Capacity building of stakeholders Unified strategic direction. initiatives like Adamjee-NRSP microinsurance program, BISP’s life and health microinsurance program, Jubilee-AKDN’s microinsurance program, and PPAF’s crop and livestock microinsurance programs should be assessed in terms of depth and impact. Successful replication of these projects or adaptation for further market penetration can lead to enormously diversified products, providers and delivery options.

Microinsurance is budding in Pakistan.

For it to blossom, all that is needed is that microinsurance should be done: Dil se!

The writer is a Joint Director at the Securities and Exchange Commission of Pakistan (SECP). The views expressed in this article are of the writer and do not necessarily represent the SECP’s position.

Literature review by Dr. Sana Nasim for confirming objective accuracies is thankfully acknowledged. The writer can be contacted at faraz.amjad@secp.gov.pk

Microfinance Review | October 21, 2013 | 25

We’re all speaking different languages Roshaneh Zafar

Managing Director | KASHF Foundation The founder and managing director of KASHF foundation, Roshaneh Zafar is considered a tour de force in the micro finance industry, having single-handedly laid the foundations of the first specialized MF program in the country that specifically targeted women. A graduate of the Wharton Business School at the University of Pennsylvania, Roshaneh also holds a Masters degree in International and Development Economics from Yale.

Starting the discussion with the long way KASHF foundation has come since its inception, Roshaneh reveals a tale that is both inspiring and heartening. Starting in 1996 with a start-up loan from her family, Roshaneh started her micro credit institution right from the backseat of an old car after a chance meeting with Professor Muhammad Yunus of Grameen Bank fame, led her to leave a position with the World Bank to pursue her calling.

The first replication of the Grameen banking model in the country, the last 17 years have seen KASHF branch out of that backseat to become one of the fastest growing micro credit lenders in the country, with total credit disbursed standing at $265 million as of Jan 2013.

Talking about how microfinance institutions in the country that have fared over the last decade, Roshaneh believes that the blue prints lay out by SBP and PPAF for the sector’s initial development have more than done their job to give things a kick-start.

But she warns that many challenges still lie ahead and that directed efforts are required if real financial inclusion for the masses is to be on the cards in the future.

“For one I strongly believe that the Microfinance Banking Ordinance went a tad too far in some regards” she says.

Explaining her observation, she adds that they should do away with some of the onerous and stringent regulations. “For instance the fact that the limit imposed by MFO on MFBs regarding the

26 | Microfinance Review | October 21, 2013

pre-determined income criteria and the loan size proves to be a catch-22,” she says.

“This leaves little leg-room for MFB’s to grow their portfolio because if they are to increase their loan sizes, they come to breach the income criteria. In this regard, talks with SECP are underway and KASHF have laid out their reservations to the regulatory body”, she continues.

“What we have proposed is that there should be a tiered system in place, she says adding that, “wherein market participants at different levels of the MFP food chain comply with a set of interim regulations that allow them some space to maneuver if they choose to diversify their client base.”

Responsive business models Roshaneh believes that for MFIs to tap into the market in real terms, there is a need for institutions to have a flexible mindset and a commitment to bring to the table the right mix of financial products that focus on asset creation.

“What we need is to scale, but scale in a manner which is in line with the purpose of micro finance as a tool providing financial empowerment to the masses,” she says. For that, she believes institutions need to turn an eye inward and see which processes need to be redressed and where changes need to be made. In this lieu, she feels that the nature of the micro lending business, embedding structural efficiencies lies at the crux of the matter.

“With the high volume small transaction nature of this business, it is imperative that responsive business models with strong oversight functions are superimposed upon strong local structures”, she argues. “Not only does this help ensure that the money is spent where it needed to be spent, but it ensures that we get the greatest possible bang for the buck,” she adds.

Roshaneh also states that the low levels of sustainability that reign in the sector is inherently the direct consequence of the smaller loan sizes and higher costs per unit lent; a set of factors that can be overcome with policies that align pricing with costs of operations.

Sustainable funding will remain a challenge Roshaneh agrees that as the sector grows, injecting liquidity would continue to be a major problem and that finding sustainable sources of long term funding for the sector should be one of the biggest priorities for the stakeholders involved.

She says that while endeavors such as the microcredit guarantee scheme have indeed helped bring in money from the commercial banks, they cannot be expected to singlehandedly provide the kind of impetus for

growth that the sector needs at the moment.

In this regard she believes that a diverse set of sources will need to be tapped. One such step can be the development of Microfinance Investment Vehicles (MIVs), which can also offer a viable long term solution to the liquidity problem.

“We can go about a number of ways creating a “fund of funds”, for instance one way could be that market participants could engage with third parties who put together a portfolio of the best performing micro lenders in the country, perform trend analyses, go out, sell that portfolio and bring in money,” she opines.

However, Roshaneh thinks that “at some point the sector will need to start moving forward from the credit-led model we have started out with and morph into a savings-based system, wherein “we are able to amass deposits and collect savings from low-income clients in an accessible and demand driven manner”.

She adds that although creating such a system banks heavily on the presence of sufficient regulatory frameworks, the job cannot be done by hinging incentives to the regulations.

When asked about her stance on the Directed Credit Policy, Roshaneh says that it was little more than arm twisting. “I

firmly believe in a level playing field and that it is indeed the prerogative of the commercial banks to lend to whomsoever they deem fit,” she contends. “If a pull is needed, it should come from within the market itself , she continues, adding that the “burden of proof lies with us, the MFIs, to prove that ours is indeed a bankable, credible sector with strong internal systems with the necessary wherewithal to bear the scrutiny of any heavy weight commercial lender.”

Policy disconnect Roshaneh maintained that a major policy disconnect exists with the decision–makers at the highest level, citing the example of income transfer programs the likes of BISP which have caused households to become focused on “instant gratification”; interventions that brought short-term benefits rather than any long term capacity enhancements.

From a microfinance perspective Roshaneh believes that this fuels public perception that poor clients “deserve” subsidized lending and has been a factor that could continues to mar the sector’s image and stunt growth. “These things have a much deeper effect because they can change mindsets and impact on everything

from recovery rates for MFI’s working in a particular region to the growth in portfolio”, she says adding that alleviating public concerns and improving the image of the sector is paramount to the sector’s well being in the future.

Work from within to strengthen “I believe that while we talk a lot about issues such as the sector’s growth statistics and innovations in delivery channels, little is said about the kinks that need to be worked out from within the sector itself, before we can go on to bridge the perception gaps that exist with the public at large and with the policy-makers,” she says.

“The sector needs to have one voice. We have to be convinced ourselves to be able to convince the rest of the stake holders, but unfortunately our case is similar to the Tower of Babel. We are all speaking different languages and that is one thing that needs to be redressed if we wish to see cohesive growth in the sector,” she concludes.

Interview by Javeria Ansar

.

Microfinance Review | October 21, 2013 | 27

Micro lending: women exclusion on the cards?

Sidra Farrukh Take a quick look at the numbers: Active women borrowers from microfinance providers in Pakistan represent a significant proportion of above 50 percent, meaning that women are getting majority of the microfinance loans and credit. Is it not a pleasant sight?

Now, a detailed look: First, with a potential of almost 30 million people, only 2.3 million are served by the microfinance institutions. Second, microfinance, generally perceived to be synonymous with women, has substantially lower women outreach in the country when compared with other South Asian countries with similar demographics.

National statistics come nowhere close to women outreach of over 90 percent among regional peers like Bangladesh, Nepal and India.

Evidence in support of this position can be found in the distribution of women across the microfinance sector. Even though the overall proportion of active women borrowers of microfinance has notched up in the last five years from 47 percent in 2008 to 58 percent in 2012, one cannot help but notice the clear schism when it comes to the microfinance providers.

Wake up and smell the coffee!

Women outreach is skewed towards microfinance institutions (MFIs) and rural support programs (RSPs) than in microfinance banks (MFBs); in 2012 where women representation in MFIs and RSPs ranged between 70 and 80 percent, that in MFBs was only 26 percent. And this trend has been unchanged for long.

Some reasons behind the clear divide are obvious. For instance, in Pakistani culture, patriarchy is one noticeable explanation behind this gender lending divide.

It is also reasonable to say that microfinance in the country is still largely taken to be a social service rather than financial service. The distribution of women borrowers among the various microfinance providers suggests the same.

Microloans and microcredit are of two types: where the microfinance banks have individual loan portfolios and a more general mandate in providing funds that generally entice male borrowers, the microfinance institutions and rural

Proportion of active women borrowers versus men MFBs

MFIs

RSPs

91%

85% 72%

42% 26%

19% 2008

2009

2010

2011

2012

Source: Pakistan Microfinance Network

support programs are more group based, focusing mostly on women empowerment and activism.

Also, the usual microfinance institutions like donor-sponsored NGOs have to keep their focus on women as per the guidelines of their international financiers.

Consequently, it makes sense when the MFIs and RSPs go after women. This way they are not only able to justify the lending to donors but also endorse their impact on society.

Similarly, women are also clear target for pro-poor policies of the microfinance institutions and NGOs as they suffer from weaker socio-economic conditions in poor countries.

When it comes to the operations, the MFBs are sustainable commercial entities that run after genuine borrowers. Private Sector Development Advisor at DFID, Waqas ul Hasan warned that chasing women for recovery or litigation procedures is generally considered a cultural taboo; hence, hinging on male clientele for cogent recovery and due diligence process seems a rational approach. Moreover, smaller loan sizes tend to be unsustainable for MFBs; it makes more sense for the MFIs to lend out to women as loan sizes are small.

The most astonishing aspect of women borrowers is what the World Bank states in one of its recent studies on women entrepreneurship and microfinance sector: women are often not the final beneficiaries of the microloans.

28 | Microfinance Review | October 21, 2013

The practice of passing on the loans is considered to be rife among women borrowers (between 50-70 percent) who just channel it to male relatives. According to the study, 50-70 percent of the loans made for women clients are used by their male counterparts.

In urban women lending, only 28 percent of the women borrowers actually use the loans themselves. Many times, when the men of the family cannot even borrow small amounts on their weak credit history, women are the perfect conduits to get access to finance.

And when women are the actual consumers, the stringent guarantor requirements and male permissions required, widens the gap between the Pakistani women and microfinance providers.

Other hurdles that restrict women from accessing bank loans include discrimination, non-availability of collateral, interpersonal communication, and nonexistent personalised products. Moreover, social and gender taboos, low literacy and awareness, limited access, mobility and weaker skill base also hold back development in the current policy environment.

deposits and give out loans, they are more self-sustaining in the long term.

And if MFBs are to take the centre stage, one question that arises is the likely impact on women borrowers already representing an undersized proportion.

Industry opinion suggests that (a) the transition is inevitable, and (b) the effect on total women borrowers could vary.

While most believe that there will be no change in what MFBs are pursuing, the perceptual intelligence suggests the opposite; if microfinance banks continue to provide services targeted towards men, women proportion could decline.

With MFBs being in the driving seat for microfinance in Pakistan, new linkages need to be created if women’s participation is to be brought at par with the rest of the world. These could be MFBs working with women chambers, microfinance institutions and rural programs. National Rural Support Program (NRSP) is already linking its rural development beneficiaries with MFBs including NRSP. Another relationship could be between the MFIs and State Bank’s Institutional Strengthening Fund (ISF), which would develop women specific business models and financial products that cater to women with various entrepreneurial needs.

Moreover, the key to successful microfinance lies in improving governance and fairness in the industry. Instead of window dressing the borrowers for international donations, the industry should adopt fair practices in recording the actual users of finance.

Although current policies do not seem to prohibit or discourage women outreach, the future calls for a more visible push rather than the current impartial stance. As more and more women enter the workforce, the task for policymakers accumulates beyond financial awareness.

What the future holds?

While the sustainability of microfinance institutions that are solely or partly dependent on donation or profit retention has come under scrutiny many times, MFBs are likely to be the future of microfinance in Pakistan. Since they take

The writer works as Research Analyst at Business Recorder. She can be reached at sidra.farrukh@br-mail.com

Microfinance sector should be driven by market demand; directed lending is a thing of the past Ghalib Nishtar | President, Khushhali Bank Ghalib Nishtar is the founding president of Khushhali Bank, Pakistan’s largest microfinance bank, which was founded in the 2000 by the Government of Pakistan. Nishtar was part of the process initiated by the Government of Pakistan to reform the financial sector under the Microfinance Sector Development Program in 2000. Before setting up Khushhali Bank, he had over 20 years of management experience commencing with Bank of America in ‘82 and concluding with the National Bank of Pakistan as SEVP. He holds a Masters degree in Information Technology from the Quaid-e-Azam University Islamabad and is the recipient of Sitara-i-Imtiaz.

30 | Microfinance Review | October 21, 2013

The pioneer is now the largest In a recent meeting with BR Research at the Khushhali Bank’s corporate office in Islamabad, Ghalib Nishtar started off with a brief overview of the bank’s activities.

“Khushhali Bank has sufficient experience of about 12 years in the microfinance sector. We have scale – with half a million clients, which is about 20 percent of the market, we are the market leader,” he says.

Nishtar points out that the bank maintains the largest and most diverse network across the country, due to which it has also accumulated valuable insights about the domestic market.

“We operate like any other bank does, but for a different segment of the market.

Our main focus is on micro loans, but we also target savings. We also provide money transfer and remittance services. We also have an inbound remittance arrangement with Western Union,” says Nishtar.

Access to financial services is a major requirement for the improvement of livelihoods in Pakistan, he remarks, while noting that the demand for microfinance, which is there in every household and micro-enterprise, has traditionally been served by the informal sector, through money lenders and aarhtis, whose terms of business are generally unfair.

He explained that demand is the major reason why the state moved into the sector and formed the Khushhali Bank, back in 2000. “It was about giving borrowers an alternative over aarhtis, by providing them access to financial services from specialized microfinance institutions duly regulated by the SBP.”

A huge market The potential market for microfinance clients is in the range of 25 to 30 million clients, the Khushhali Bank President informs; which means that the market participants are currently catering to only 10 percent of the potential demand.

“It’s a huge market with a largely unmet demand. Commercial proposition exists for the private sector to participate in the sector, which has already happened over the last decade. For instance, Khushhali Bank was the first microfinance bank (MFB) – now, there are ten specialized MFBs, all in the private sector.”

So, how can the market participants reach out to the 90 percent addressable yet unserved micro clients?

Citing international experience, Nishtar states that Pakistan has sufficient number of players in the market, who need to extend their footprints now. “In Bangladesh, where a different model is operative compared to Pakistan, three to four microfinance NGOs are adequately covering the market. The market coverage in Cambodia is dominated by just one institution. More than the number of MFIs on the ground, Pakistan now needs institutions that are strong and well-capitalized for sector growth.”

According to him Pakistan has adopted a very structured path towards developing microfinance under SBP’s strategic guidance since 2000, resulting in sector development and growth over the last decade.

He referred to MFBs having ownership from the private sector and international

To cater to the scale of this market, an institution has to be financially sustainable

investors as a testament to the sector’s strong credentials. However, he concedes that understanding this market requires time, and moving on, product development and efficiency gains would also require time to come through.

The President of Pakistan’s leading MFB is cognizant of the need for channels of financial access to be responsive to micro clients’ needs, in order to wean them away from the aarhtis to the formal financial sector. However, to decisively break the hold of middlemen, Nishtar feels that establishment of small local markets in agricultural belts can help.

“Such markets have to be linked with regional or national markets, which in turn are linked to the international markets. MFIs can help develop local markets, and then commercial banks can cater to the other markets whose funding needs are higher” he says.

But he laments that the cooperatives model adopted in the past has yielded few positive results; despite frequent, if not excessive government interventions. “Growers in the agriculture sector need support in terms of financial services, they need storage silos, advisory services, etcetra. Most challenging is the predicament of subsistence farmers,” he says.

Nishtar is confident that the sector is on a strong footing to expand its footprint, and foresees three things happening in next five years: growth in business volumes, innovation in products, and improvements in service delivery.

Recollecting the sector’s performance over the past decade he argues that major institutional developments have taken place due to which Pakistan is now ranked number one in the world in terms of regulatory framework for microfinance by the Economist Intelligence Unit. Pakistan is also ranked amongst the top three countries in the world for conducive business environment for the microfinance sector. He cites these conditions as major factors attracting big regional players to the domestic market.

“Moreover, telecom companies too have either acquired MFB licenses or started green field institutions. All these things have taken time, but it’s the time to take off now. We, ourselves, are a case in point. We went into the international market last year, and various prominent investors and institutions have invested in the Khushhali Bank. Today, a large part of the investment in the bank is from international sources, belonging to the US and Europe,” he states.

Challenges facing the sector Access to funding is among the myriad challenges ahead for the industry. “We realized in 2000 that donors alone can’t arrange that much funding; besides, they happen to have competing priorities.

Government also can’t commit resources all the time since they need to be responsive more to the social sectors,” explains Nishtar.

“That is why, for Pakistan, a sustainable business model was followed, which relied on raising deposits from the micro savers. To cater to the scale of this market, an institution has to be financially sustainable.

That is why we adopted the specialized banking model in 2000, so that we can take deposits,” he says.

Besides retail deposits, whose market is huge, Nishtar argues that financing needs of the MFBs can be bridged through borrowing from commercial banks. But for that, both institutional governance and balance sheet have to be strong. He mentions that following this approach, Khushhali Bank has been able to tap into domestic as well as international commercial markets to meet funding needs.

Another challenge has been the high operating costs, which have increased over the years due to heavy initial investment on infrastructure and market

development activities. Nishtar insists that as institutions mature and as their loan portfolios increase, these costs will eventually be rationalized.

Khushhali Bank’s loan portfolio remained conservative for many years, he says, but lately it has started to grow, and this growth would multiply in the future. He, however, cautioned that while service delivery costs will go down as loan portfolios expand, the delivery mechanisms need to be more efficient.

To mitigate the credit default risk, Nishtar refers to the sector stakeholders who are setting up a Credit Information Bureau that will be exclusive to microfinance clients. “The microfinance sector is partnering with the SBP, PPAF, and IFC on this project whose pilot has been done in Lahore, and soon this CIB will be rolled out nationally.”

He also underscores the need for improvement in management skills and human resource quality for improvement in credit assessment and risk underwriting. He hopes that using new lending methodologies for individuals, community-based lending and micro enterprise lending will also improve appetite for credit uptake.

“Our view on the branchless banking channel is different from that of the telcos. We as bankers see it as a channel for mobilisation of convenient and low-cost small savings. We are looking to develop savings product on this channel. Our strategic investor in this area is UBL (Omni), and our systems are being integrated. For sustainable growth, the economy needs domestic savings and investments,” he remarks.

There is nothing anyone can do to avert the external risks, though. “We can’t really control external factors, such as floods; that have hit our portfolio hard consecutively for the past three years” he concedes.

Seventy percent of Khushhali Bank’s portfolio is rural-based, so the 2010 deluge took a toll on its financial position. “But we rescheduled our clients’ loans, and the majority of them paid back. We did the handholding and didn’t write off those loans. Now the sector is looking to set up, with SBP assistance, a Risk Mitigation Fund that can help during the calamities,” explains Nishtar.

Directed credit policy for microfinance Nishtar strongly argues against “directed lending regime” for the sector, which he terms “a thing of the past”. He urged that going forward; it has to be market mechanisms that guide the sector.

“There is a baggage associated with directed credit. With directed credit, there are targets, on a quarterly basis, which results in imprudent lending to avoid penalties. So, the sector should be driven by business, demand, and commercial interests. If you need more finance, you can access other sources of funding,” he asserted.

Miles to go before I sleep Nishtar says that the microfinance sector in Pakistan has come a long way in the last ten years. He contends that “we have a head start in terms of our regulatory framework and business models compared to countries in the region which are now learning to do things the way we started doing back in 2000”.

While praising the self evident success of the sector so far, based on industry aggregates; Nishtar stresses that a lot more innovation and investment are needed. “In a few years’ time, Pakistan’s microfinance sector will be the most thriving anywhere in the world,” he concludes the disscussion on a hopeful note.

Interview by Hammad Haider

Microfinance Review | October 21, 2013 | 31

Developing seamless financial system in Pakistan Inshan Ali Nawaz Kanji | Director, Axes Advisory Finance is one of the key elements to drive not only economic growth but also improve quality of life. More specifically, enterprise credit allows an entrepreneur to leverage the equity in a profitable enterprise to raise revenue and profit.

On one end of the spectrum of enterprises, Pakistan’s financial system serves the private sector businesses, large local corporates and small and medium sized enterprises mainly through 38 commercial banks with loan outstanding of Rs2.66 trillion as of May 2013. Out of this amount, 12 percent was borrowed by SMEs. Approximately 19 percent of the loans of the SME portfolio are Rs3 million or smaller and less than 3 percent are on clean basis. Assuming that the smaller enterprises do not possess the tangible collateral required by commercial banks, the numbers imply that a tiny portion of the SME portfolio accounts for the smaller enterprises.

On the other end of the spectrum, the microfinance sector through 10 microfinance banks and microfinance institutions provided Rs43.4 million in credit to microfinance clients with an average size of disbursed loan of Rs25,027, according to an IFC report entitled “Scaling up SME Access to Finance in the Developing World”. This leaves an enormous number of small enterprises without access to credit from the formal financial system.

Over the years, the number of SMEs accessing credit from banks has been less than 200,000. As of Dec 2012 – it was 132,167 out of an estimated 3 million SMEs. A KfW survey estimates a funding gap of Rs277 billion for small enterprises. However, this situation is not specific to Pakistan or even the developing markets; even the EU and UK are realigning efforts to boost micro, small and medium sized enterprises.

Why focus on SMEs? SMEs contribute a third of global GDP and 45 percent of employment in developing markets. In EU SMEs account for 20.7 million firms, almost 98 percent of all enterprises, of which the lion’s share (92.2 percent) are firms with fewer than ten employees. For 2012 it is estimated that SMEs accounted for 67 per cent of total employment and 58 per cent of gross value added (GVA). Nine out of ten SMEs are with less than 10 employees.

In Pakistan SMEs contribute 30 percent of GDP and 70 percent of the labor force employed in manufacturing, trade and services in Pakistan. In other words, SMEs and micro-enterprises drive job creation in the country.

The small enterprise segment could perhaps be approached through different types of institutions. However, the higher end of small enterprises (formal enterprises) would be more suitable for the small and mid-tier commercial banks while the lower end of the segment could be targeted by up scaling microfinance banks.

Smaller enterprise finance: Microfinance banks with their institutional know-how of clean lending, presence in the closest market segment (micro), and their lending methodology that requires regular contact with the client are the most suitable type of financial institutions to service the lower end of the small enterprise segment.

Another major factor is Pakistan’s globally recognized and proportionate regulatory framework provided by the State Bank of Pakistan. This provides the microfinance banks regulatory space to lend to this segment with maximum loan size of Rs500,000 and the ability to access deposits from the public to finance their loan book.

However, venturing into lending Rs500,000 from an average loan size of Rs25,000 would require a multi-pronged approach: Capacity building of microfinance banks: MFBs will have to initiate cash flow based lending methodology for offering larger loans. This will allow the MFBs to determine the enterprise risk, its borrowing requirements, and its cash repayment capacity. The MFBs will perhaps have to undertake an assessment of their institutional capacity to identify gaps, and strengthen areas such as credit policy, product development, lending methodology, risk management, staff capacity, capital adequacy, liquidity and management information systems.

Apart from the credit side, the MFBs will need to offer cash management products tailored to the small enterprise segment. This will provide MFBs with sufficient information on the actual cash flows of the enterprise to evaluate the enterprise operating cycle, and assess the

32 | Microfinance Review | October 21, 2013

borrowers’ needs and repayment capacity.

However, one of the main challenges to offering a cash flow based loan product to this segment is information asymmetry.

Part of the reluctance of banks to lend to SMEs is the banks’ inability to evaluate risk because of the lack of reliable financial information.

Information obtained through visits by bank staff only gives a snapshot of the business on that particular day. For larger loans where risk is higher, MFBs may require more accurate information on cash flows and business seasonality. This would lead to better credit underwriting standards implemented by the MFBs, protecting depositors and shareholders.

Pakistan to train entrepreneurs in maintaining basic accounting information (e.g. trial balance) in the language of their convenience, along with collecting and converting it into monthly financial statements on the format as required by MFBs at an affordable and sustainable price.

This would help small businesses to access formal finance and also be better aware of their own financial standing. The BDSI would also assist in creation of clusters and associations essential for small enterprises to compete successfully in the local and international markets.

Innovative institution-based intervention would transform the small enterprise segment, initiating durable change in the

Cash flow based lending

Capacity building of entrepreneurs

Smaller enterprise finance

Cash management products

Proportionate regulatory framework

Capacity building of the small enterprises: To address the information asymmetry, and facilitate prudent credit underwriting standards, a Business Development Service Institution needs to be formed in

market, and creating permanent capacity for the entrepreneur to access formal finance. Though fraught with challenges, such an approach can help retain Pakistan’s leading position in microfinance.

Meeting the funding needs of microfinance industry Ali Basharat | Financial Analyst, PMN

MFPs require not only optimum utilization of existing sources of funds but also diversification of their sources of funds.

It is projected that over the next five years, the microfinance industry will grow to over 3.2 million borrowers, with GLP expected to rise to Rs94 billion.

The potential microfinance clientage in Pakistan is estimated to be 27 million, while the current market penetration rate stands around 9 percent, indicating a huge potential for further growth. According to a study conducted by Pakistan Microfinance Network (PMN), State Bank of Pakistan (SBP) and Pakistan Poverty Alleviation Fund (PPAF) in 2013, it is projected that over the next five years, the microfinance industry will grow to over 3.2 million borrowers, with GLP expected to rise to Rs94 billion.

Loan sizes are also likely to witness a gradual increase over time as microfinance providers (MFPs) upscale their businesses to tap micro-enterprises and lower segments of the Small and Medium Enterprises (SMEs).

These trends will push the funding needs of the sector to nearly Rs117 billion from the existing base of Rs34 billion.

The funding requirements shall be met by a blend of deposits and debt. Microfinance Banks (MFBs) are likely to take a deposit-led approach, whereas non-regulated Microfinance Institutions (MFIs) are likely to

take a debt-led approach to funding as they are prohibited from intermediating deposits.

Currently, the bulk of debt funding for the industry is either directly through the national apex, Pakistan Poverty Alleviation Fund (PPAF), or indirectly through the two guarantee funds set up to attract loans from commercial banks, one of which is housed at SBP and the other at PPAF. Moreover, MFBs have witnessed exponential growth in deposit mobilisations in the last few years with three out of ten MFBs now having a GLP-to-Deposit ratio of 1.

However, it is felt that the national apex and the guarantee funds alone will not be able to meet the increased future financing needs. In order to meet these enhanced funding requirements, MFPs require not only optimum utilisation of existing sources of funds but also diversification of their sources of funds. This requires multi-level and multi-directional efforts in which regulators, policymakers, apex and practitioners all have to contribute in the following ways:

A level playing field needs to be created in the microfinance industry by bringing non-bank MFPs under the regulatory framework.

Spin-off of the national apex into a specialised Microfinance Investment Vehicle (MIV) will allow it to diversify and enhance its sources of funding and meet the increasing need of liquidity of the industry.

The existing funding sources housed at SBP under the Financial Inclusion Program (FIP) need to be topped up.

There is a need for increased interaction between the microfinance industry and other financial institutions to present the industry as commercially viable and sustainable, and remove any misconceptions regarding microfinance in the country.

There is a need to improve disclosures and promote financial transparency.

The most crucial and important part of the efforts need to come from the practitioners themselves. MFPs need to explore new funding avenues by raising funds from money and capital markets and access global debt from Microfinance Investment Vehicles (MIVs). Importantly, the players need to build on relationships built with banks in availing finances under the guarantee funds and attract based on their profitability along with the strength of their balance sheets.

In order to effectively access these new sources of funds MFPs must improve their corporate governance standards and focus on the quality of their finance teams. Of critical importance is the adequate capitalization of the providers; MFBs at present are better placed as compared to non-bank MFIs in this regard. MFBs have attracted deep pocket investors from both local and international markets and this, coupled with SBP gradually increasing minimum capital requirements, ensures that MFBs are capitalised adequately.

Non-bank MFIs with their predominantly non-profit structure face a challenging situation in raising equity and will be dependent upon grants and retained earnings to ensure capital adequacy.

Proposed transformation of non-bank MFIs into regulated institutions under the SECP will better place such players to raise equity through commercial investors. For NGO-MFIs that will remain outside the ambit of the non-bank MFI framework, these will most likely remain small and niche players. An innovative option for these organisations can be linking with the larger players while working at the grass root level.

At a time when the sector is witnessing product diversification and establishment of industry infrastructure for risk management, such as the national roll out of the Microfinance Credit Information Bureau (MF-CIB), consumer protection monitoring and pricing transparency initiatives along with financial literacy initiatives, additional financing through a combination of sources is imperative for long-term growth and sustainability of the industry.

Also, MFPs need to impart investment readiness training in order to raise finances from commercial sources.

Microfinance Review | October 21, 2013 | 33

Microfinance industry will reach scale when there is a combination of adequate funding and strong institutions Syed Mohsin Ahmed | CEO, Pakistan Microfinance Network Syed Mohsin Ahmed has worked in the microfinance sector for the past eleven years. He has been associated with the PMN, which is the national association for retail players in Pakistan’s microfinance sector, since 2001 in various roles. A qualified Management Accountant, Mohsin has taken executive courses on leadership from the Harvard Business School, a Financial Risk Management course by the Citi Foundation and Women World Banking, and a diploma course on Microfinance at the Microfinance Training Program in Boulder, Colorado. He is currently also serving as the Chairman of the Board of Directors of South Asia Microfinance Network (SAMN). The following are excerpts from BR Research’s sit-down with the CEO PMN in Islamabad for this publication: Structures and frameworks The head of PMN started off the discussion by saying that the sector is blessed to have necessary structures and frameworks in place (except for a legal framework for non-banking microfinance institutions), besides consistent central bank policies. He says that PMN is in active discussion with all stakeholders for the establishment of a disaster management fund, and is in the process of creating a dedicated credit information bureau for the sector, in collaboration with the market participants and with the support of SBP and PPAF. Recognising that over 90 percent of the microfinance sector remains untapped, Syed Mohsin

Ahmed outlines both long-term and short-term approaches to achieve significant scale. “For the long-term growth, right things are being put in right places. Market participants are coming up with a menu of financial services, to provide, in addition to credit, products of savings, insurance, remittance, etcetra.”

“In the short term, it is about the availability of financial resources so that we can kick start growth – that is where strong institutions matter. It’s a huge market, and many new players can join in. Last year, the industry, as a whole, showed profitability for the first time,” he said.

Ahmed adds that “this year, the industry profits might be close to a billion rupees. That will create a demonstration effect for potential

34 | Microfinance Review | October 21, 2013

investors who know that Pakistan is already globally recognised for its microfinance sector.”

The challenges The CEO of PMN insists that external challenges confronting the microfinance sector are at least as potent as the internal sectoral challenges. He categorises among external factors issues such as natural disasters, security situation, macroeconomic imbalances and insurgencies; for all these issues affect the microfinance sector’s outreach.

He mentions Balochistan and KPK where the sector used to have a fair presence prior to 2007-08, but later, it had to shrink owing to the deteriorating law and order conditions there.

He said that some microfinance providers (MFPs) had to close down their branches due to kidnapping incidents in remote areas.

The macroeconomic factors have also had their toll. “We did a research some time back on macroeconomic factors, and interestingly, we found out that inflation had a very marginal impact on our clients in rural areas” according to Ahmed.

He explains that in certain areas, it had a positive impact on livelihoods due to commodity price increases. However the PMN head adds that the energy crisis has taken a major toll on livelihoods of borrowers; especially in urban areas. “Micro clients doing production work have been really affected, and even those operating in service sectors, like parlors, barbers, sewing and embroidery have been impacted,” he explains.

Mohsin Ahmed also draws attention to non-banking MFIs that operate outside of regulatory umbrella. “Intermediation by the non-banking MFIs leads to certain risks, likes of which were seen recently in Andhra Pradesh, India, where farmer suicides were being linked with MFIs’ strict loan monitoring. That led to local

ownership structures, and good quality management teams. The scale will be reached with a combination of both funding availability and institutional strengthening,” according to him.

He also stresses the need for developing the requisite human resource. Pointing out that there are about 12,000 people working in the sector, he says that this pool must double in size within the next few years.

cycle stage, their operating costs were at the same level,” he points out.

The PMN CEO stated that this is a life cycle curve question, and SBP, PPAF and PMN are monitoring this. “Institutions recognise the need to bring down these costs, and appreciate the role of economies and technologies. That is where branchless banking becomes really important as a delivery channel,” he says.

Potential for deposit mobilisation

Microfinance CIB

To a query about the importance of deposittaking by MFBs to ease their funding requirements, Mohsin Ahmed responds that it takes a long time, on an average 10-15 years, for the institutions to have a deposit base that consists of institutional depositors, high net worth individuals and micro savers.

“Micro savers are large in number but their deposit value is very small. I don’t expect value contribution from micro savings to be more than 30 percent of total deposits, because institutional deposits and other private sector savings will remain high value,” he explains.

To make deposits viable, there has to be a mix of

One of the landmark projects PMN is working on is the Microfinance Credit Information Bureau, which will help the MFPs in their clients’ credit assessment and credit risk mitigation. “We started with the CIB pilot in Lahore, which was converted last year into a national programme with support from PPAF, DFID, IFC and SBP” according to him.

The bureau packs in capacity building features because its members are subsidised on pricing, MIS and HR training. The project is slated to take three years to complete and so far out of 2.4 million client records, 70 percent have been updated. “By June this year, we

Management of social performance means that the institution is measuring and actively managing achievement of its goals and objectives, much like it would measure and manage its financial performance level politicians and interest groups rising against the microfinance sector as a whole” he points out.

“Interestingly, global experience in microfinance shows that political risk is not on pricing per se, but on the consumer protection side.

Clients naturally take up an issue with politicians when they realise that they are not able to repay a loan and the institutions are sticking to their zero tolerance policy for defaults,” he explains.

To counter such scenario in Pakistan, he stresses the need for entire sector to be regulated, and expresses confidence that the broad-based steering committee that is headed by the Chairman SECP will come up with a framework that can achieve that goal.

Within the sector, one of the big challenges is the sources of finance for the MFPs. “The sector has to grow fast because potential market is between 25-40 million borrowers.

Right now, the balance sheet of the sector is Rs60 billion. Our projections tell us that by 2016, we might reach 3.3 million active borrowers, and this balance sheet may reach close to Rs140 billion” according to him.

The PMN chief executive claims that such an increase would bring another Rs80 billion into the system. “We believe that loan sizes are only going to increase in the future because new MFBs are coming in and they will go up market, moving from household lending to enterprise lending,” he argues.

Even though credit enhancement support is there from the likes of PPAF and DFID (through the SBP), the funding requirements are astronomical.

“That is where we need to look inwards, which means institutional changes are required.

There is need for strong corporate governance,

sources. But micro savings must also continue to rise, for which product development has to come in focus, to channel informal savings to the formal fold. “For that, micro client’s cash flows and their coping mechanisms would have to be understood,” says Ahmed.

Commercial banks’ interest As for commercial banks’ involvement in the microfinance sector, Ahmed contends that the ice has been broken. He highlights the fact that through guarantee mechanisms with SBP and PPAF, various commercial banks have been lending to the sector, either on a stand-alone basis or through consortium, which reflects a good repayment history of the sector.

“PMN together with SBP and PPAF is trying to reach out to the commercial banks and sell the prospects of microfinance to them. We are trying to create a platform where these banks can come, understand the sector, and inquire about the misgivings they may have about the sector. We are already seeing encouraging developments.

For instance, both SBP MCGF and PPAF PRISM (credit guarantee) facilities have been almost fully utilised with no call on these guarantees over the last 3-4 years,” he elaborates.

Bringing down the operating costs The operating costs of the sector are between 18-20 percent; high in Ahmed’s opinion. “We have not achieved economies of scale in Pakistan yet. When Bangladeshi and Indian microfinance sectors were at our current life

expect all the MFPs to be registered with the bureau, and have 99 percent of client’s credit information. Our focus, then, will be that the MFPs start using this facility. We have also engaged with Nadra, so that the entire database gets cleansed,” says Ahmed.

He calls PMN a facilitator, “a marriage bureau”, of sorts. “During these three years, we are going to ensure that we build the capacity of the institutions to report to this bureau, update database, build up their MIS, comply with the CIB’s requirements, and get interlinked” says the PMN chief executive.

He adds that it will be the responsibility of the MFPs to give the data on a monthly basis to the third-party (Data Check). He expresses confidence that in time, the central bank will declare it mandatory for all banks to report to the bureau.

Corporate governance and consumer protection The CEO PMN concludes the interview by stressing the need for strong institutions through focus on corporate governance, and hiring of high quality senior managers. He argues that almost as important is consumer protection, because “ours is a deliberate mission to impact social change”. He underscores the need for ensuring that this sector follows responsible finance practices, particularly in three core areas: social performance, client protection and increasing financial capacity.

Interview by Hammad Haider

Microfinance Review | October 21, 2013 | 35

Microfinance sector: in search of financial sustainability Sobia Mesiya Microfinance banks and not-for-profit microfinance institutions, the two key players of the microfinance sector across the globe, aim at reaching out to the poor – a stratum that makes up over 40 percent of the world’s population. The difference, however, lies in their approach. The business model of microfinance banks (MFBs) largely revolves around mobilising savings and deposits. On the flipside, microfinance institutions (MFIs) are mostly donor-based – eyeing charities, subsidized credit and grants.

Keeping in view their source of funds, MFBs tend to be more vigilant in their exposures as they are accountable to their depositors and also to the regulators.

Hence, they tend to lend cautiously in an effort to mitigate risk of their depositors.

MFIs on the other hand have a sole objective of social welfare and therefore rarely have a motivation of profitability enrichment. The CEO of a renowned MFI operating in Pakistan, told BR Research that unlike MFBs that seek operational efficiency to lower their costs, MFIs have no such pressures as they meet their

operational cost from donations – quite a contingent business model.

Considering the burgeoning population, especially of poor in Pakistan, the gap between supply and demand of funds in the microfinance sector is widening.

Moreover, with the increasing number of MFIs, intense competition prevails as to who will grab the potential funds, donations, grants, etc.

Similarly for MFBs, the growing network of branchless and mobile banking which offers basic banking services to those living in far flung of the country, the deposit base of MFBs is highly endangered. Against this backdrop, gloomy prospects cloud over the financial sustainability of the country’s microfinance sector which might lead to severe credit rationing in the times to come.

Current feasts feeding the sector The current funding recipe of microfinance sector comprises a blend of commercial debt, subsidised debt, deposits (in case of MFBs), and debt

acquired under guarantee facilities besides aids and donations.

While each MFI or MFB has its own set of financiers, Pakistan Poverty Alleviation Fund (PPAF), KfW Development Bank and SBP, in association with deep-pocketed foreign donors, have emerged as the primary providers of funding to the sector.

The schemes initiated by SBP include Microfinance Credit Guarantee Facility (MCGF) and the Institutional Strengthening Fund (ISF).

Under MCGF, SBP extends credit guarantees to commercial banks to enable them to provide loans to the microfinance sector. SBP provides partial guarantee to cover principal amount in default or First Loss Default Guarantee to cover first loss. The ISF, on the other hand, is a grant-based fund initiated by SBP in association with the Department for International Development (DfID). This funds aim at improving operational efficiency of the microfinance sector.

PPAF, the apex microfinance financier, has also initiated a number of schemes based on plain vanilla financing

lines, credit guarantee facilities and equity funds. Furthermore, it has also been channelising grants to the sector for institutional strengthening and capacity building.

Besides, Kfw Development Bank has also established the National Debt Fund for the microfinance industry. Kfw also has two other schemes in pipeline which endeavor to provide debt and equity financing to the government of Pakistan for the microfinance industry development.

Behind the glossy curtains Although, the aforementioned schemes seem flattering, an in-depth analysis reveals a grave reality. MFBs remain the major beneficiaries of the guarantee schemes initiated by SBP leaving MFIs in the lurch. On the grants front too, MFBs grab the major share owing to the transparency and scale of their operations and the vigilance of their exposure. The Kfw equity fund is only targeting NRSP thus far.

Funds available to the microfinance sector of Pakistan Fund name

Fund volume Rs (mn)

Source of funds

Tenor

PPAF-III

2,970

World Bank

2009-13

PPAF-III

495

World Bank

2009-13

PRISM equity fund

807

IFAD

2008-13

2,059

IFAD

2008-13

PRISM institutional strengthening fund

83

IFAD

2008-13

PRISM knowledge management and policy support

160

IFAD

2008-13

SBP Microfinance Credit Guarantee Facility

1,440

DFID

2008-13

SBP Institutional Strengthening Fund

1,440

DFID

2008-13

160

KfW Entwicklungsbank

2011-16

PRISM credit enhancement facility

KfW Equity Fund

* In addition to PPAF III and PRISM, PKR 53.2 billion has been disbursed from PPAF-reflows since inception.

Source: Pakistan Microfinance Network

36 | Microfinance Review | October 21, 2013

Talking about the funds initiated by PPAF, which are directed towards its partner organisations which also include MFIs, however, a majority of funds are directed towards the larger and efficient ones.

This might be because of the extensive outreach and high profit margins which in turn enhance their repayment capacity. Thus, for most of the MFIs based on the model of social welfare, the writing is on the wall.

That said, MFBs cannot be expected to be financially sustainable. Experts forewarn that the funds currently available might exhaust anytime soon and that the sector must prepare itself for an imminent credit crunch. With such threats looming large, the question of self-sustainability still remains unacknowledged for the microfinance sector of Pakistan.

What is next?

As the microfinance sector moves ahead the wavering tunnel, similar industries in other countries tend to offer some useful insights. Venturing the capital and money markets, perhaps, appears to be the most viable alternative these days.

The IPO conducted by Banco Compartamos, the largest microfinance bank of Latin America which was founded

as an NGO in 1990, serves as a milestone in the history of the global microfinance industry. Given the handsome profitability of the sector, the IPO received an overwhelming response resulting in an oversubscription by 13 times.

Other countries also jumped the similar tide. For instance, in 2010, SKS, India’s largest microfinance institution, also filed a prospectus to sell shares on the India stock exchange in an IPO. Pakistani industry, slowly and steadily, is also joining the marathon. SBP, of late, has been encouraging the microfinance sector to mobilize funds through non-bank/capital market sources.

Kashf Foundation and Tameer Microfinance Bank took the lead by floating their respective TFCs and commercial papers to meet funding requirements.

Local experts suggest that if other players in the industry may take a similar path, they can gently expand opportunities for the poor to access financial services.

Taking into account the high profitability of the sector, it seems that this transformation would reap sound results. Hedge funds, venture capital firms, and other big investors swarm the business. However, there is a reservation to this approach too.

Tapping capital and money markets might

not be a choice for the smaller MFIs as investors are sensitive to reputation and brand recognition of the company while making investments, says an expert. This leaves small and less renowned companies at a competitive disadvantage in attracting investors, especially the retail investors, despite their performance.

Hence, for smaller MFIs, the journey towards self sustainability is longer. They first need to enhance their market penetration and operational efficiency besides selling their brand so as to entice prospective investors. Pakistan Microfinance Network is playing a laudable role in motivating MFIs to stop relying on donations and aid and enhance their efficiency in order to avail commercial funding avenues available. Besides, they are making greater strides in familiarising MFIs to commercial banks in order to facilitate the flow of commercial funds to the microfinance sector.

However, on a grim note, this might lead the sector having its legs in two boats – social welfare and profitability.

To win investors in capital markets, where thousands of companies are contesting for funds, the sector might cash in on extreme poverty. Instead of reinvesting its profits to enhance the services to the poor, the sector will tend to direct those profits to investors to satiate their appetite. Only time will tell whether the quest for financial sustainability renders the sector more efficient in serving the desolate or pulls it away from its core duty. Needless to say, the regulators (SBP and SECP) along with other players (PMN, PPAF, KSE) are bound to play important roles in ensuring that the sector doesn’t lose its true essence.

Double bottom line Excessively exploiting commercial funding avenues such as capital markets is sure to produce a marginal impact on increasing the number of active microfinance borrowers besides blessing the sector with financial sustainability.

The writer is a Research Analyst at Business Recorder.

She can be reached at: sobia.mesiya@gmail.com

Microfinance Review | October 21, 2013 | 37

Staying focused on responsible practices in the march towards financial inclusion Zahra Khalid | Social Analyst, PMN Financial inclusion has been around as a policy buzzword for a few years. Its goal is to provide access to quality financial services to those who have historically been unserved or underserved clients. All stakeholders in the financial inclusion landscape are committed to and actively working towards development of new solutions for financial inclusion and spreading best practices. Financial service providers want to operate profitably so that clients can be provided access to these quality financial services, and these can be sustained over time while being offered to more clients.

This is being done through more and more innovative techniques and use of technology, which is helping institutions achieve scale and efficiency at an impressive rate, that is forcing policymakers and other stakeholders to take note and devise policies or strategies that offer both ease and oversight to financial inclusion developments. Suddenly, financial inclusion seems achievable within our lifetimes.

In this race of trying to balance quality and scale, financial institutions must pay particular attention to their responsibilities to clients, especially because of the nature of their clientele – most of whom are semi-literate at best and socially vulnerable.

For the past few years there has been a global movement towards building responsible practices in financial services provision, especially at the lower end of the market through a series of efforts and interventions. The first of these takes the form of consumer protection regulation and supervision by central banks. Regulation ensures that rules are set for all financial service providers at the retail level, across the board, and that these rules are followed up by inspections in an ongoing process. Usually, such regulations include

stipulations of offering services transparently and fairly, taking care not to over indebt clients and to offer complaint resolution mechanisms.

In Pakistan, the Consumer Protection Department at the State Bank of Pakistan ensures that aspects of client protection are incorporated in legislation and efforts are being made to refine these further to make them more holistic.

The second strategy in entrenching responsible practices comes from the industry’s own efforts – such as self-regulating through common platforms and individual institution‘s own initiatives. This is already happening at the level of the national Microfinance Association of Pakistan and the Pakistan Microfi-

an important component as such interventions help customers protect themselves from harm, choose wisely amongst options and behave responsibly.

So what exactly does responsible finance entail for a single retail financial services provider striving for its bottom line?

The answer depends on the vision and mission of the financial services provider.

For institutions that do not necessarily have a development agenda or are commercially oriented, there is a need to focus on client protection in order to exhibit responsible practices. Client protection in financial inclusion has a mandate of ‘do no harm’ to clients and includes areas such as preventing over-indebtedness, appropriateness of

reduction, and empowerment of women; responsible finance encompasses an additional dimension: that of social performance management. Management of social performance means that the institution is measuring and actively managing achievement of its goals and objectives, much like it would measure and manage its financial performance.

When financial institutions have a social mission, their stakeholders, including the general public, expect that these institutions will work towards attainment of this mission.

This can only be possible through realisation of this mission into specific goals, development of metrics to measure and record performance against these

In this race of trying to balance quality and scale, financial institutions must pay particular attention to their responsibilities to clients nance Network, through adoption of a voluntary industry code around client protection and related client protection implementation initiatives. In addition, interventions at the client level that increase clients’ financial capabilities is also an important area demanding focus and resources.

There is a need for such initiatives at not only the individual institution level (some institutions have in place quite ambitious financial capability initiatives) but also at a more public level through mass advocacy and education that is incorporated into community outreach programs by the Government. There have been some efforts made towards this by key industry players such the State Bank of Pakistan, however, much more remains to be done, at a much larger scale. This is

38 | Microfinance Review | October 21, 2013

products and services extended to clients, responsible and transparent pricing and procedures, fair and respectful treatment of clients, ensuring privacy of client information and offering mechanisms for complaint redress to clients.

Expansion of client protection regulations by the State Bank of Pakistan to include all these areas can help institutions maintain minimum standards of client protection practice, especially if institutions are fully commercially oriented. Here, other industry watchdogs, such as the Pakistan Poverty Alleviation Fund and donors and investors can also play their part in sending a signal that responsible practices are important.

For financial services providers that have a development mission, such as outreach to underserved people, poverty

goals, and assessing their performance against these metrics – as a continuous process of management, where relevant adjustments and changes are made to strategies as the environment evolves.

While many steps towards ensuring responsible practices in financial inclusion are in place or being taken, as exhibited in this article, the onus of responsibility, in the end, still lies with each individual financial services providers. Together, they must ensure the health of this industry by ensuring institutionalisation of these practices.

We are not here for facebook likes...

BRResearch http://www.brecorder.com/br_research.html | research@br-mail.com |

Intelligence you can bank on BRResearch |

@BRResearch09