Response to PMN postion paper on Pakistan MF sector
The Pakistan Microfinance Network (PMN) in its position paper on the Country’s Microfinance Sector, written and distributed for the forthcoming Microcredit Summit (November 11-13 2002) in New York has discussed the policy environment and the government’s initiatives to develop the sector and increase overall outreach of MF services in the medium term. The observations made and conclusions drawn in the paper on these issues could mislead the readers in their assessment, and understanding of the current state of affairs for Microfinance in Pakistan, if not clarified. The following response has therefore, been prepared to further explain some of the issues touched in the paper:
Policy and Regulatory Environment
For the past two years the Government has been showing strong resolve and commitment to promote and facilitate sustainable growth of the MF sector. As a first step toward achieving this goal, it has enacted a legal framework, which encourages private sector entry into banking with the poor. While First Microfinance Bank sponsored by Aga Khan Development Network commenced operations few month ago, the Khushhali Bank created in August 2000 has reached to about 75,000 clients in 30 Districts throughout the country. The formal Microfinance Banks can provide a full range of MF services viz. savings, credits and payment transfers etc. and are expected to be pivotal in achieving manifold increase in the outreach levels in the medium and long term.
The legal and policy framework, developed in consultation with MF stakeholders, does not cover the operations of NGOs/RSPs and is applicable only to regulated microfinance banks/institutions engaged/to be engaged in deposit mobilization from the public to finance their operations. The present policy environment therefore, encourages two major types of institutions to provide Microfinance services to the poor, the NGOs/RSPs which have been extending microcredit and allied services for more than two decades with cumulative outreach of less than 200,000 clients, and the formal Microfinance Banks established/to be established under MFIs legal framework enacted in 2001. It is important to highlight that NGOs/RSPs are prohibited from mobilizing deposits for on-lending as they continue to remain unregulated. However, they also remain free to operate as they choose, determining their own client segment, pricing, funding sources and loan sizes.
Substantial resources at subsidized rates have been made available for NGOs for their capacity building and scaling up of operations through institutions like PPAF. Several NGOs also receive international donor and grant funds. Further the MFIs framework encourages strong NGOs engaged in microcredit and related services, to plan for possible conversion into formal Microfinance Banks and contribute up to 50% of the minimum capital requirements in the form of their existing portfolio of microcredit and other assets. In addition a grant of up to 2.5% of paid-up capital of the proposed MFI/MFB has also been made available for institutional strengthening of the MFIs.
The PMN though welcomed the enactment of the framework and appreciated it as a whole, has however, been lobbying for substantially lower capital requirements. The demand however, is not based on a realistic assessment of capacity of the existing players, mostly NGOs, to undertake banking functions and manage public resources. The PPAF after about three years of hard work could contract only 30 NGOs as Partner Organizations (POs) for extending microcredit facilities to the poor. Most of these POs are small NGOs operating in small geographical areas with limited capacity to mange even the small microcredit programs on a sustainable basis. So even if the capital requirements are lowered, as desired by PMN, the operational, financial and managerial capacity of most of the existing players is too limited for conversion into formal Microfinance Banks. The framework therefore, envisages financially strong microfinance banks, though lesser in number, but having adequate capital base to withstand the shocks of the higher risk MF business, and sufficient cushion for the depositors. The relatively stronger NGOs could either continue to provide the services they have been engaged in for decades or plan for conversion into formal MFB. The small and relatively weak NGOs could gradually build their capacities and systems etc. for ultimate conversion into formal MFB. The present policy environment with the GOP showing strong resolve and commitment and the Central Bank formulating and implementing supportive policies and a responsive regulatory framework, can be considered as most conducive for the development of a healthy private sector MF industry. The NGOs need to come forward to play their role in developing the sector. The legal and regulatory framework so far developed has been recognized by both domestic and international MF experts and practitioners as highly responsive and fair and the SBP will continue to work with the MF sector and with experts from around the world, to improve and evolve the policy framework when warranted to support growth.
Maximum Loan Size for MFIs
The regulatory framework requires MFIs to remain focused on their core area of operations and their primary target market, the maximum loan size, the MFIs could extend has therefore, been fixed at Rs.100,000/- as otherwise the MFIs might drift from their primary market and objective of serving the poor. The limit enforced after taking consent of the stakeholders including PMN, is already quite liberal as against the average loan size of existing NGO MFIs and formal Microfinance banks. The regulations are not static and would be reviewed on continuous basis and necessary changes etc. would be made as and when such a need arises.
Establishment, Ownership & Interest Rate Structure of Khushhali Bank
The Government facilitated the establishment of Khushhali Bank in August 2000 as a public private venture in the MF sector to substantially increase outreach of MF services in the medium term and also to create an institution, which could be a role model for the private sector and could encourage its entry into banking with the poor. Though initially the majority shareholding was with public sector banks, the KB Board is not permitted to have Government nominees and is comprised of senior bankers and microfinance specialist, including two women representing the NGO sector. After privatization of United Bank Ltd. the private sector now has majority shareholding in KB.
The KB Board of Directors/ Management takes autonomous decisions regarding pricing and interest rate structures. Decisions are based on its overall cost structure. The delivery of MF services on the basis of full cost recovery including the cost of funds is the primary and fundamental basis of all our MF policies and framework. None of our policies encourages delivery of MF services at subsidized rates, as prior experience of such policies has been dismal. The Prudential Regulations for MFIs/MFBs require MFIs including Khushhali bank to price their products and services in a way, which ensure their operating and financial self-sustainability. Further under the Prudential Regulations for MFIs enacted recently, the loans in arrears for 30 days or more are classified as Non-Performing Loans (NPLs)/Portfolio At Risk (PAR) and KB according to this criteria had PAR of 0.9% as of 30th September 2002.
Microfinance Sector Development Funds & Credit Line Made Available to KB
The MSDP Special Funds have been created to accelerate growth of MF sector. The Funds resources have been earmarked for Khushhali bank for the first three years (almost two years have already passed) and would be available to other licensed MFIs from January 2004. These funds could be made available for other licensed MFIs even before the three years if such a need arises. It may be noted that KB utilizes a very small portion of these funds and it has been financing almost 100% of its social mobilization cost through its own resources i.e. by debit to its profit & loss account. The credit line of US$ 68 million presently available to KB may also be opened for other licensed Microfinance banks. Khushhali Bank draws down on this credit line from the SBP at the average weighted deposit rate which is currently 4% and by now has drawn Rs.210 million (US$3.5 million)
Conclusion
The Government of Pakistan and the Central Bank are fully committed for growth and development of the Microfinance Sector on sound and sustainable basis. The policy makers’ vision for the sector is to develop a conducive policy environment in which MFIs could establish, flourish, grow and provide a full range of financial services to the poor. A considerable development has already been made in this direction and further steps are being taken to make the policy environment more conducive for the sector. As of the issuance of the new Prudential Regulations in October 2002, all licensed MFIs including Khushhali Bank are now under the same regulatory framework and a level playing field is being ensured for all the players.
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