Pakistan Micro Finance Review 2013

In colloboration with MONDAY, OCTOBER 21, 2013 | www.brecorder.
com/mfr2013
From Editors Desk
BR RESEARCH
THE TEAM
Ali Khizar Aslam
Head of Research
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 Pakistans 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 profitabilityfor the first timeonly 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 regulatorState Bank of Pakistanmust 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.
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 Oficer
Murtaza Khaliq
Creative Head
10 | Micro inance Review | October 21, 2013
Contents
Microfinance Credit Guarantee Facility (MCGF) mobilising commercial capital for microfinance providers
State Bank of Pakistan
Unity of purpose between SBP, PPAF and PMN behind the success of microfinance industry
Rashid Bajwa Chairperson Pakistan Microfinance Network and CEO NRSP
Microinsurance: straight from the heart

Faraz uddin Amjad Joint Director at the SECP
Meeting the funding needs of microfinance industry

Ali Basharat Financial Analyst | PMN
Greatest champions of communities emerge from the communities themselves

Qazi Azmat Isa CEO, Pakistan Poverty Alleviation Fund
PPAF and the microfinance sector in Pakistan

Yasir Ashfaq, Group Head, Financial Services Group, PPAF Saqib Siddiqui, General Manager, Sector Development Unit, PPAF Ali Qureshi, Manager, Sector Development Unit, PPAF
Were all speaking different languages

Roshaneh Zafar Managing Director KASHF Foundation
Microfinance industry will reach scale when there is a combination of adequate funding and strong institutions
Syed Mohsin Ahmed CEO | Pakistan Microfinance Network
Technology is the game changer

Mohammed Asif Arif SECP Commissioner - Insurance
Specialised entity needed to bridge funding requirements of microfinance providers

Waqas ul Hasan Private Sector Advisor | Department for International Development, UK
Micro lending: women exclusion on the cards?

Sidra Farrukh
Microfinance sector: in search of financial sustainability

Sobia Mesiya
MOBILISING GRASSROOTS SAVINGS

Hammad Haider
Microfinance in numbers
Microfinance sector should be driven by market demand; directed lending is a thing of the past
Ghalib Nishtar President | Khushhali Bank
Staying focused on responsible practices in the march towards financial inclusion

Zahra Khalid Social Analyst | PMN
Savings mobilization by MFBs: experiences, challenges and the way forward

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

Nadeem Hussain President | Tameer Bank
Developing seamless financial system in Pakistan

Inshan Ali Nawaz Kanji Director | Axes Advisory
Micro inance Credit Guarantee Facility (MCGF) mobilising commercial capital for micro inance providers
The micro inance outreach in Pakistan is currently around 2.4 million which is less than 10 percent of the estimated market potential of 25 30 million micro inance clients. One of the key challenges in this regard is the lack of access to commercial funding for micro inance provider. Availability of commercial funding is not irst 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 micro inance market initiatives with funding assistance of GBP 50 million from the UKs Depart-
Number of deals by funding institutions

BAL BOP SCB Soneri Bank TFC (non bank) UBL MCB Bank JS Bank NBP KASB FBL ABL Silk Bank AKBL PO Invt. Co. Syndicated*
Funds mobilised Rs(mn)

Tameer MFB Kashf Foundation NRSP Foundation Khushhali MFB NRSP MFB
*HBL, NBP, ABL, MCB, UBL, AKBL, NIB, FBL

wholesale funds to micro inance banks and institutions for on-lending to poor and marginalized groups. The facility offers two risk sharing options with 25% irst loss or 40% pari passu coverage to such funding. Recently, the scope of the facility has been enhanced to allow micro inance providers to mobilize non-bank inancing 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 micro inance 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 inancial 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 inancial institutions such as commercial banks and non-bank funders. The MCGF has guaranteed 27 transactions inanced by 16 commercial funders from both banks and non-banking sectors to facilitate wholesale funding relationships with micro inance providers. Prior to the launch of the MCGF, micro inance 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 micro inance providers. Most of funders are now engaged in multiple deals with micro i-
only necessary for expansion in micro inance outreach to millions of unserved clients but also needed by micro inance providers to achieve greater scale and sustainability in their operations. Globally, credit enhancement/risk sharing facilities are developed to enable micro inance access to wholesale commercial funding. Risk-sharing facilities enable well-managed micro inance providers, with limited or no equity, to secure their
ment for International Development. SBP introduced a GBP 15 million risk-sharing facility for micro inance providers under the name of Micro inance Credit Guarantee Facility (MCGF). The MCGF is a market-based credit enhancement facility to enable long-term local currency commercial inance for micro inance providers. The objective of the facility is to incentivize commercial banks through risk sharing mechanism to provide
nance providers, clearly re lecting their growing comfort with micro inance 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 micro inance providers in accordance with their credit policies and due diligence criteria. This has served twin objectives; irst, it discouraged moral hazard and second, it helped commercial banks to develop their own sense of the risk involved in funding micro inance. The results re lects 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 micro inance banks and institutions to secure wholesale loans from local commercial banks. Five of the leading micro inance providers have been regularly able to access commercial credit market, positioning them for greater scale and sustainable operations. Tameer Micro inance 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 lexibility to structure transactions based
Funding mobilised (LHS) & number of deals

Rs (mn)
MCGF was to facilitate long-term local currency funding from commercial credit markets. The MCGF allows funding deals of up to ive 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
to their high perceived risk. Although, the MCGF has a market-based cap on the interest rates charged on the credit lines facilitated, the micro inance providers have recently negotiated competitive rates than the MCGF market cap in some instances. This clearly indicates
3000 2500 2000 1500 1000 500 0
Funding deals by micro inance providers

Tameer MFB
NRSP MFB
Kashf Foundation
1 Year
2 Years 3 Years 4 Years 5 Years

increased con idence of the micro inance providers and comfort of the commercial funders in inancing the micro inance sector establishing good benchmarks for healthy institutions. Finally, the MCGF has allowed the micro inance providers to offer small ticket sizes for retail investors through issuance of Term Finance Certi icates (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.
Khushhali MFB
NRSP Foundation
longer term view of the micro inance sector. On the other hand, this has also facilitated the micro inance 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 micro inance providers to experience multiple loan cycles establishing their credibility in credit markets and viability of their micro inance clients.
yet. This also re lects 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 micro inance providers and micro inance fundamentals. Third, MCGF through its risk sharing
on their risk perception. Both options have been used frequently by funding institutions and have contributed signi icant funding for micro inance 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% irst loss
18 deals
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 micro inance sector. On the other hand, this has also facilitated the micro inance 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.
Sixth, historically, commercial funding for micro inance providers in Pakistan and other developing countries has been provided at very high interest rates due
Conclusion
First, MCGF has demonstrated that funding micro inance through wholesale channels in emerging markets is becoming viable and increasingly present. Second, while lenders must develop standardized procedures for originating, underwriting and servicing micro inance loans and create performance histories to enable wholesale funding, developing the wholesale funding channel may stimulate competition from large inancial 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 inance to retail deposits for institutions with a mandate to collect deposits.
40% pari passu
For comments and suggestions please write to noor.ahmed@sbp.org.pk
Micro inance 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 PPAFs institutional memory tell about the role of micro inance in improving lives and livelihoods of the marginalized communities and individuals?
Qazi Azmat Isa: Access to inancial 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 micro inance market, PPAF has transformed the micro inance 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 inancial services results in an increase in income as well as a general improvement of the poor. Three research studies undertaken by Gallup Pakistan on PPAFs micro inance 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 micro inance can play in building sustainable income streams not only for individuals but entire communities. As a result, inancial services remain core to PPAFs 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 inancial 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 micro inance 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 micro inance plays a crucial role in fostering, developing and providing the skills and assets to support rural entrepreneurship. Over 60 percent of micro inance 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 PPAFs 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 communitys 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 re lected through PPAFs 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 Womens Livestock Cooperative Farming Program, dairy value chains and agri-value chains.
BR RESEARCH
What are some of the major challenges faced by the micro inance sector? What kind of policy responses can help address those challenges?
QAI: Despite the tremendous growth in the micro inance 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 inancial 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 micro inance sector is to link them up with local and international inancial 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 inancial 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.
BR RESEARCH
On what fronts does the PPAF engage with the MFPs? QAI: PPAFs core focus remains on inancial inclusion, and ensuring that the poor and marginalised have access to inclusive, transparent and sustainable inancial products and services. At the policy level, PPAFs role in catalysing innovations in micro inance and bringing forth the new era of micro inance plus, is driven by its membership of SBPs Micro inance 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 SBPs Steering Committee for Financial Literacy. As the sector developer and primary source of debt funding for micro inance 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 irms on the Quality Control Review (QCR) list of ICAP and visits by PPAFs 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 micro inance 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 inancial 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 quali ied individuals on the BoD. As the sector develops, PPAF is striving to ensure that the focus remains on providing value-added, niche, customized inancial services, such as branchless banking, micro-insurance, renewable energy, among others. Innovation remains central to micro inance, and keeping this in view, we have piloted the irst-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 SECPs Micro-Insurance Working Group for formulation of Micro-Insurance Regulations in Pakistan, which many feel will be akin to the growth of micro inance market in Pakistan.
PPAFS EXTENSIVE . GRASSROOTS NETWORK

BR RESEARCH
How can more space be created for MFPs when middlemen and aarhtis exercise considerable in luence 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 in luence various stages of production, leading from higher input costs fertiliser, seed, and technical inputs to lower market prices at the inal 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 pro its 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 irst 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 micro inance borrowers. In order to dismantle traditional dependence on aarhtis, micro inance 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 low-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
BRR: 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 micro inance 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 signi icant role in changing the way micro inance borrowers think about loan repayments and deposits, and promises to o er an array of holistic and diversi ied inancial products and services to the individuals in their communities. Realising the natural synergies that exist in branchless banking and micro inance 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 ive 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.
Interview by Hammad Haider
Technology is the game changer

Mohammed Asif Arif | SECP Commissioner - Insurance
When it comes to the role of microinsurance in micro inance industry, the message is simple, according to Mohammed Asif Arif: Micro inance 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 regulators Karachi ofice. Elaborating on his assertion, Arif highlighted that microinsurance reduces the vulnerability of micro inance, 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 micro inance cannot really move forward. This is because if micro inance 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 micro inance 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. Its 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 countrys 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 con ined to ive or six large cities. 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.
The game changer: TECHNOLOGY

What other options exist for boosting outreach microinsurance? we ask. Asif Arifs response is once again rapid and concise; Technology is the game changer. Micro inance 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.
First things irst: 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 irst 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 ield 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 ive 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 lung branches as distribution outlets for insurance as well as micro insurance.
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 micro inance. In the last lood, 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 years 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 con idence that such innovative schemes coupled with the harnessing of technology and knowledge sharing are all set to propel the micro inance and microinsurance sectors of Pakistan on a journey of rapid success and growth.
The challenges: ILLITERACY AND LACK OF AWARENESS

However, since a micro inance 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
Interview by Sohaib Jamali
Hammad Haider
MOBILISING GRASSROOTS SAVINGS

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 industrys deposits. PMNs 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 micro inance 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 industrys 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 industrys deposit base in value. To Programmes and micro inance-NGOs. As per SBP statutes these organisations cannot play the role of inancial 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 micro inance-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. 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 Micro inance Banks Easypaisa has shown the way by recently launching its savings product, Khushaal Munafa. The product offers Easypaisa mobile account customers a pro it of up to 9 percent on saving Rs2,000 or more. Pro it 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 products small lot size (around 0.001 Tola) is expected to generate interest from micro savers. As it appears, it will be bene icial 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 inancial 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 pro it rates. Industry players can also market their savings products by setting up kiosks at retail outlets. Progress in expanding the industrys footprint to currently underserved territories in Baluchistan, parts of Khyber Pakhtunkhwa and interior Sindh will automatically lead to an increase in the industrys deposit base.
Availability of funding seems to be the greatest challenge facing Pakistans micro inance 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 Micro inance Network, State Bank and Pakistan Poverty Alleviation Fund highlights the need for over Rs80 billion in new funding which is more than twice the industrys current balance sheet to cater to the borrowing needs of some 3.2 million borrowers over the next ive years. Despite these pressing liquidity pressures, there is consensus among policymakers and practitioners that funding sources for this industry must be diversi ied in nature for sustainable growth. Talking about sustainability brings to fore the industrys 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 micro inance industry is essentially about reaching out
Deposit mobilisation in micro inance 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 banks stated goal of inancial inclusion, which requires service providers to offer a complete suite of inancial 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. Its 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 irst need to study what factors weigh in a females 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 Micro inance Banks (MFBs) seem particularly focused on the deposit-led funding approach. That is why they hold 93 percent of the industrys total deposit base by servicing just forty percent of the industrys depositors. Rest of the deposit base is with the non-banking Micro inance Institutions (MFIs), which include Rural Support The rapid growth of branchless banking (BB) in Pakistan is expected to help the micro inance 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 sectors 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 inancial services segment, the risk-averse telcos
The writer is a Research Analyst at Business Recorder. He can be reached at: hammadshah24@gmail.com
Savings mobilization by MFBs:

experiences, challenges and the way forward
The promulgation of Micro inance Institutions Ordinance in 2001 allowed establishment of a new tier of institutions i.e. Micro inance Banks (MFBs) in Pakistan as an alternative to conventional banking to cater to the holistic inancial services needs of the poor and marginalized segments of society. This approach led to mainstreaming micro inance into overall inancial system with the following inherent advantages:
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 signi icant 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, micro inance banking started to make a fundamental shift in their structural & operational orientation in the last four to ive years. This new market evolution, characterized by eficiency 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 eficiencies and thus making the business case for micro inance 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 ive 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 inancial services.
Providing a wide range of inancial services, and not just micro-credit as offered historically by the non-governmental organizations, micro inance 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, micro inance 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, the paper re lects on the positive evolutions so far, and raises expectations that micro inance 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) con irmed that 59% of the unbanked population saves money at home, demonstrating both will and capacity to save. Interestingly, 23% of the
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 ire-proof vaults, deploying security guards, and obtaining appropriate cash insurance. These considerations sometime make it dificult 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 Pakistans 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 bene it 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. 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 inancial intermediaries, building inancial 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 micro inance 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.
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:
Conclusion
Within overall inancial 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 Micro inance Review | October 21, 2013 | 13
Unity of purpose between SBP, PPAF and PMN behind the success of micro inance industry
Rashid Bajwa, Chairperson Pakistan Micro inance Network and CEO NRSP
Dr. Rashid Bajwa is the Chairperson of Pakistans national-level association Pakistan Micro inance Network. He is also Chief Executive Oficer of the largest Micro inance Institution (MFI) in Pakistan, the National Rural Support Programme. BR Research recently sat down with Dr. Bajwa in Islamabad for a discussion on micro inance 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 micro inance 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 micro inance 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 sectors liquidity needs. Micro inance 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 sectors statistics in real terms, growth has been muted on two counts. Firstly, the average loan size has not increased as compared to in lation 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 micro inance providers (MFPs) are inite 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 inancing 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.
Dr. Bajwa compares the current state of the micro inance 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 micro inance 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 micro inance 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 inds 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 in lationary impacts. When we started micro inance 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 in lation 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 micro inance, 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) doesnt help in business planning and expanding loan portfolios. For sectoral expansion both horizontally and vertically, there has to be certainty and con idence that liquidity will be available for at least three to ive 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.
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

Cognizant of the need for a disaster protection fund for the micro inance 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 micro inance clients can be minimized.
Today PMN is a recognised body both domestically and internationally and provides key services to its members as well as policymakers
Knowledge management
He appreciats 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 Micro inance 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 micro inance and for the transformation of institutions like NRSP. SECPs role is crucial in providing a regulatory cover to MFIs, PPAFs 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.
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 micro inance can be achieved. Towards that end, he refers to the positive contributions of the SECP; supported by the SBP,
Micro inance: 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
PPAF and the micro inance sector in Pakistan

Micro inance can be de ined as provision of loans, savings, insurance, remittance or other inancial services to the poor. Various research studies undertaken globally have reinforced the direct link between access to inance 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 inancial 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 micro inance 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 inance, 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 micro inance market through a network of more than 100 Partner Organizations (POs) across the country. communities that foster inancial inclusion through the provision of credit. Due to investments in the sector made by PPAF and other stakeholders, the micro inance 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 Micro inance 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 inanciers and investors for the sector. PPAFs primary mandate is to alleviate poverty. Throughout the past decade, it has adopted a holistic and sustainable approach to micro inance. PPAFs 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 inancial 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 Micro inance Business Environment 2012 report by the Economist Intelligence Unit (EIU) ranks Pakistan as one of the top countries for overall micro inance business environment1. In fact, Pakistan is one of the few countries in the world that has a separate legal and regulatory framework for micro inance banks, and key stakeholders have been successful in ensuring a progressive environment for the sector. Not only did PPAF create the market for micro inance, it also played the role of lender of the last resort, and stood by partners impacted by the torrential rains in Sindh in 2011, loods of 2010 and earthquake in 2005. In this journey PPAF has immensely bene itted from the experience of The World Bank and IFAD.
1 Global Microscope on the Micro inance Business Environment 2012. Economist Intelligence Unit, 2012.
Nurturing Growth
One of the key areas of focus for PPAF remains that of wholesale inancial intermediation. With over USD 800 million and 5.2 million loans served, PPAF has remained the primary source of funding in the micro inance market. The effect of PPAFs inancial 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 micro inance were disbursed to women and 53% of all micro inance investments since inception went to women. PPAFs holistic approach to micro inance has ensured that not only has it provided funding to the diverse micro inance institutions that include 50 Partner Organizations, comprising Micro Finance Banks (MFBs), Micro inance 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 micro inance 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 inancial management, oversight and transparency. Transparency and accountability have remained a central theme in all of PPAFs Micro inance Operations, and as a result, the same focus has been ensured in PPAFs 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 inancial 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
inancial 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 modi ied its approach, and ensured that it continues to work on innovative, new inancial products and services and delivery mechanisms that can make a difference in the lives of the marginalized. This has led to development of new micro inance products that are customized, tailor made, niche based, inclusive and in line with the needs of communities. Under the Micro inance Innovation and Outreach Programme, 25 innovative products and delivery mechanisms including value chains, village banking, branchless banking, business revival loans in lood affected areas were introduced. One of the products introduced under the program, Womens Cooperative Livestock Farming, received international acclaim by winning IFADs 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 irst 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.
Genesis of the Apex

The micro inance 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). PPAFs entry at the early stages was geared towards sector development and attempting to develop institutions and
Pilots in branchless banking with 5 partners were carried out, in collaboration with UBLs Omni and Tameer-Telenors Easy Paisa initiatives to collect loan repayments on behalf of the micro inance 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- ledge banking services. This model is expected to revolutionize micro-savings, and provide access to diverse inancial services to millions of micro inance borrower. Renewable Energy: PPAF has launched pilots on Solar and Biogas Energy projects inanced through micro inance 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 inance lies in our ability to complement a inancial market orientation, one that focuses on inancial institutions, the products they deliver, and the constraints and distortions they confrontwith a product market orientationone that
focuses on rural enterprises, the value chains they participate in, the opportunities and constraints they face, and the most critical inancial services they demand. PPAF has already developed many value chains in enterprises, agriculture and dairy sectors, which have resulted in improved productivity, eficiency 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 certi ies MFPs who meet a set of indicators that demonstrate signi icant 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, inancial, 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 PPAFs micro inance 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 inance in deprived areas remains a formidable challenge. In order to ensure that incentives for MFPs remain in line with PPAFs 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 eficiencies in micro inance 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 inancial services to the poor than at any point in the past while improving outreach to neglected segments. The apex continues to work towards promoting eficiencies that would ultimately result in lowering costs incurred by micro inance 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 micro inance sector. By using PPAFs in luence and credibility,
the sector can derive greater bene it from stakeholders who hold the key to the environment in which MFPs operate and the subsequent inancial 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 micro inance sector in Pakistan. In addition, the PPAF continues to represent the micro inance sector at international platforms through partnerships, linkages and advocacy, championing the call for provision of inclusive and holistic inancial 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
Specialised entity needed to bridge funding requirements of micro inance providers

Waqas ul Hasan Private Sector Advisor | Department for International Development, UK Waqas ul Hasan is managing the inancial 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 inancial 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:
Global evidence for the effect of micro inance on the poor is mixed. Therefore, DFID would be exercising the policy of caution for doing blanket micro inance programmes for the poor, Waqas Ul Hasan started off, while noting that providing micro inance to the poor who do not have sustainable cash lows, or means of living, and who do not have assets for survival may not be bene icial for them. It makes sense to have micro inance for the transitory poor. For the very poor, or chronic poor, cash transfers and handouts would be more bene icial. In Pakistan, the industry has started applying this caution already. Micro inance 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 lows and are not using it merely for consumption purposes. For the chronic poor, micro inance may actually increase their poverty severity however, for the transitory poor, who borrow to inance their microenterprises, studies show that their rates of returns vary from 79 percent to 226 percent, he noted. Waqas expresses satisfaction with the progress micro inance sector has made in Pakistan thus far. Markets pass through different phases. Six to seven years back, the micro inance sector was unregulated, subsidy-based, and donordependent. In the last ive years, the sector has graduated to a marketbased and a largely central-bankregulated sector. The share of micro inance banks (MFBs) by Gross Loan Portfolio had risen from 31.5 percent in 2008 to 55 percent by 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, micro inance 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 inance their portfolio. It is a duly regulated MFB that gives con idence to the commercial lenders to put their money into them, he maintains.
Evidence on micro inance
The funding challenge
While noting that the micro inance 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, DFIDs FIP introduced two main instruments. One was a Micro inance 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 ive percent irst loss and forty percent pari passu.
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 inancing of the micro inance sector, he says. Waqas commends the SBP for doing a great job in terms of developing this market and giving market the con idence. 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
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 ind manageable, he says. But success of this guarantee would be, when it wont be used. When the bankers are comfortable lending to the micro inance 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.
Micro inance Debt Fund
Waqas feels that there still is a need for a inancial institution that can act as a bridge between inancial markets and the MFBs. He strongly supports the creation of a Micro inance 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 micro inance sector, and eventually becomes a standardsetter for the sector. Commercial banks cannot be expected to bridge all the inancing needs of the micro i-
nance sector, because their size is relatively very small to capture the formers 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 micro inance 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 micro inance sector, but is operating at a commercial level. It could be a stepped-up version of PPAF, which
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 micro inance 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.
He argues against putting a directed credit policy regime in place for micro inance, and favors market forces to determine the inancial 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 ind 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 inancial institutions are acting as real inancial intermediaries for the economy or merely collecting deposits from general public for states de icit inancing.
Directed credit policy
MFIs face a tougher job accessing inancial 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 micro inance is integrated with market and reputation risk can be mitigated. SECP has done some work with PMNs 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 sectors 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 micro inance baking industry (in terms of GLP) would be covered by the MFBs. However, MFIs may still hold the large number of clients.
Unregulated MFIs
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.
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 pro its down thereby lowering interest rates.
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 Micro inance 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.
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 speci ies two ways to deal with this issue. One, some provincial governments, with the SBPs 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.
Role of the middlemen
Towards the end of the interview, Waqas ul Hasan questions why micro inance is not given its due share in national policy frameworks, economic agendas and development programmes. It igures 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 micro inance for inancial 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 micro inance. In some cases, sector needs continued state support, for example, for a Disaster Protection Fund, which needs activation in cases of earthquakes, loods and droughts. All these external events debilitate the living and working conditions of the very communities micro inance providers are engaging with. The industry itself cannot cope with such disasters.
Micro inance and national economic policies
The missing middle
Waqas concludes the session with his focus on the missing middle among the Pakistani enterprises. Above micro inance, 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 inancial 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 inancing, by
tapping funding from families, friends, and other informal sources he explains, adding that with formal inancial 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 inancing, 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 inancial intermediation he concludes.
Microfinance in numbers
MFB loan & borrowers growing
Gross loan Active borrowers Rs (mn) 25,000 20,000 15,000 750,000 10,000 5,000 0 625,000 500,000 1,000,000 875,000
Active borrowers by peer group

MFB MFI RSP Others
100% 80% 60% 40% 20% 0%
CY08
CY09
CY10
CY11
CY12
CY08
CY09
CY10
CY11
CY12
Active savers by peer group

MFB
200% 150% 100% 50% 0% CY08 CY09 CY10 CY11 CY12
MFB - ADR & IDR

Others
170% 150% 130% 110% 90% 70% 50% 30% 10% 2008 2009 2010 2011 2012
Advances-to-Deposits Ratio Investments-to-Deposits Ratio
MFI
RSP
Others
MFB
MFI
RSP
MFB - Borrowers increasing

Borrowers Average Loan Size
No.(mn) 900 800 700 600 500 400 300 2008 2009 2010 2011 2012 Rs(mn) 30 25 20 15 10 5 0
MFB - Advances less infected

Advances Infection Ratio
4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% 2008 2009 2010 2011 2012
24,000 19,000 14,000 9,000 4,000
MFB - Asset mix

Operating & others Investment Cash & Equivalents Advances
MFB - Funding mix

Equity Borrowing Other Liabilities Deposits
Gross loan portfolio by methodology

Individual
100% 80% 60% 40% 20% 0%
95% 85% 75% 65% 55% 45% 35% 25% 15% 5% 2008 2009 2010 2011 2012
100% 80% 60% 40% 20% 0%
Group
2008
2009
2010
2011
2012
CY08
CY09
CY10
CY11
CY12
Active borrowers by gender

Female Male 100% 80% 60% 40% 20%
Active borrowers by sector

Agriculture Livestock Trade Services Manufacturing Housing Other CY12 CY11 CY10 CY09 CY08
Policy holders by type

Credit Life Health 100% 80% 60% 40% 20% 0% CY08 CY09 CY10 CY11 CY12
0% CY08 CY09 CY10 CY11 CY12
0%
20%
40%
60%
80%
100%
Policy holders by gender

Female Male 100% 80% 60% 40% 20%
Gross loan portfolio

Others RSP CY12 MFI MFB
Sum insured by peer group

Others RSP MFI MFB
CY08
CY11 CY10 CY09 CY08
CY12
0% CY08
CY09
CY10
CY11
CY12
0%
10%
20%
30%
40%
50%
60%
Micro inance industry must have 10 20 million customers to become relevant

Nadeem Hussain President, Tameer Bank
Nadeem Hussain is the president and chief executive oficer of Tameer Micro inance Bank. Prior to this role, he spent 27 years with Citigroup, his last appointment being Country Manager for Citibanks 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.
You can call him Mr. Micro inance; Nadeem Hussain is the President of Tameer Bank, the countrys leading micro inance 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 inancial standing. After tying up with Telenor Pakistan in 2008, the bank launched the countrys irst 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 diversi ication into providing alternative energy solutions, micro insurance and low-cost housing. But Hussain wasnt 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 micro inance industry, he tells BR Research When I started out, I knew very little about micro inance. 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 micro inance. He quipped that one learns very quickly when ones 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 banks senior management.
Beyond brick-and-mortar
Tameer Bank operates 128 branches, inancial centers and community centers. However its brick-and-mortar presence is
signi icantly 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 Telenors 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 micro inance in the country, Hussain argues that the biggest hurdle in the way of meeting this demand, is inancing. Elaborating on the assertion he performs some back-of-theenvelope calculations.
cater speci ically 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 micro inance institutions other than MFBs are a vital component of the micro inance 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 borrowers 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 inancial 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 clients repayment ability, so we have made links with relevant experts that help such borrowers improve their cattles yield. So the MFBs need to be tying up with institutions that can enhance that inancial intervention.
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 micro inance 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 micro inance. Setting aside assertions that the borrower pro ile 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 pro ile is not the issue; the ability to reach scale and access commensurate inancing are the real challenges that have to be met. 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 aflicted. The reason behind this phenomenon is that the average loan size has not increased in any mentionable terms even as in lation 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.
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 youre talking about reaching around seven million customers. Lets assume that we need to reach another ive million customers, with an average loan size of Rs20,000. Thats close to Rs70 billion. If you put in 15 percent capital, theres 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.
Markup rates
Micro inance 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 ixed, so lets consider the components that make up the markup rate. Firstly, the cost of funds is usually higher for micro inance banks because the smaller banks dont 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 inancial 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 individuals 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 inance. 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.
Scale: the emergent challenge

The micro inance 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 signi icant intervention. Reducing the cost of funds and ensuring growth of the industry is the emergent challenge for micro inance 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.
More information; better decisions

Citing the crisis encountered by micro inance 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 Pakistans nascent micro inance 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 Pakistans micro inance industry has been lauded as a positive development in this realm. The credit bureau we have created now has 2.1 million micro inance customers in its database, states the industry veteran.
Interview by Mobin Nasir
MFBs: a part of the solution

An assessment of advances within the micro inance 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
The future of MFBs in Pakistan

Responding to a question regarding potential consolidation in the industry, he
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 inish 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 micro inance 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 uni ied vision.
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 irst 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 edi ice 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.
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 micro inance, 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 Pakistans micro inance market is lourishing where mobile phone operators are becoming owners of micro inance banks for the delivery of inancial 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 diversi ication 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 Uni ied strategic direction. initiatives like Adamjee-NRSP microinsurance program, BISPs life and health microinsurance program, Jubilee-AKDNs microinsurance program, and PPAFs crop and livestock microinsurance programs should be assessed in terms of depth and impact. Successful replication of these projects or adaptation for futher market penetration can lead to enormously diversi ied 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 SECPs position. Literature review by Dr. Sana Nasim for con irming objective accuracies is thankfully acknowledged. The writer can be contacted at faraz.amjad@secp.gov.pk
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 speci ications (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 speci ic on the de inition 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, speci ic 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 bene it 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 Afinity, 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.
Were 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 inance industry, having single-handedly laid the foundations of the irst specialized MF program in the country that speci ically 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 irst 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 micro inance 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 sectors 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 inancial inclusion for the masses is to be on the cards in the future. For one I strongly believe that the Micro inance 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 pre-determined income criteria and the loan size proves to be a catch-22, she says. This leaves little leg-room for MFBs 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 lexible mindset and a commitment to bring to the table the right mix of inancial 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 inance as a tool providing inancial 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 eficiencies 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 inding 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 Micro inance 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 suficient 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
irmly believe in a level playing ield and that it is indeed the prerogative of the commercial banks to lend to whomsoever they deem it, 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.
from recovery rates for MFIs 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 sectors well being in the future.
Work from within to strengthen

I believe that while we talk a lot about issues such as the sectors 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.
Policy disconnect
Roshaneh maintained that a major policy disconnect exists with the decisionmakers at the highest level, citing the example of income transfer programs the likes of BISP which have caused households to become focused on instant grati ication; interventions that brought short-term bene its rather than any long term capacity enhancements. From a micro inance 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 sectors image and stunt growth. These things have a much deeper effect because they can change mindsets and impact on everything
Interview by Javeria Ansar
Micro lending: women exclusion on the cards?

Sidra Farrukh
Take a quick look at the numbers: Active women borrowers from micro inance providers in Pakistan represent a signi icant proportion of above 50 percent, meaning that women are getting majority of the micro inance 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 micro inance institutions. Second, micro inance, 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 micro inance sector. Even though the overall proportion of active women borrowers of micro inance has notched up in the last ive years from 47 percent in 2008 to 58 percent in 2012, one cannot help but notice the clear schism when it comes to the micro inance providers.
Proportion of active women borrowers versus men

MFBs 91% MFIs RSPs 85% 72% 42% 19% 2008 2009 2010 2011 26%
2012
Source: Pakistan Microfinance Network
Wake up and smell the coffee!

Women outreach is skewed towards micro inance institutions (MFIs) and rural support programs (RSPs) than in micro inance 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 micro inance in the country is still largely taken to be a social service rather than inancial service. The distribution of women borrowers among the various micro inance providers suggests the same. Microloans and microcredit are of two types: where the micro inance banks have individual loan portfolios and a more general mandate in providing funds that generally entice male borrowers, the micro inance institutions and rural
support programs are more group based, focusing mostly on women empowerment and activism. Also, the usual micro inance institutions like donor-sponsored NGOs have to keep their focus on women as per the guidelines of their international inanciers. 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 micro inance 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 micro inance sector: women are often not the inal bene iciaries of the microloans.
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 inance. And when women are the actual consumers, the stringent guarantor requirements and male permissions required, widens the gap between the Pakistani women and micro inance 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 micro inance banks continue to provide services targeted towards men, women proportion could decline. With MFBs being in the driving seat for micro inance in Pakistan, new linkages need to be created if womens participation is to be brought at par with the rest of the world. These could be MFBs working with women chambers, micro inance institutions and rural programs. National Rural Support Program (NRSP) is already linking its rural development bene iciaries with MFBs including NRSP. Another relationship could be between the MFIs and State Banks Institutional Strengthening Fund (ISF), which would develop women speci ic business models and inancial products that cater to women with various entrepreneurial needs. Moreover, the key to successful micro inance 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 inance. 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 inancial awareness.
What the future holds?

While the sustainability of micro inance institutions that are solely or partly dependent on donation or pro it retention has come under scrutiny many times, MFBs are likely to be the future of micro inance in Pakistan. Since they take
The writer works as Research Analyst at Business Recorder. She can be reached at sidra.farrukh@br-mail.com
Micro inance 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, Pakistans largest micro inance 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 inancial sector under the Micro inance 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.
The pioneer is now the largest

In a recent meeting with BR Research at the Khushhali Banks corporate ofice in Islamabad, Ghalib Nishtar started off with a brief overview of the banks activities. Khushhali Bank has suficient experience of about 12 years in the micro inance 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 inancial services is a major requirement for the improvement of livelihoods in Pakistan, he remarks, while noting that the demand for micro inance, 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 inancial services from specialized micro inance institutions duly regulated by the SBP.
A huge market
The potential market for micro inance 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. Its 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 irst micro inance 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 suficient 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 micro inance 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 micro inance under SBPs 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 inancially sustainable
investors as a testament to the sectors strong credentials. However, he concedes that understanding this market requires time, and moving on, product development and eficiency gains would also require time to come through. The President of Pakistans leading MFB is cognizant of the need for channels of inancial access to be responsive to micro clients needs, in order to wean them away from the aarhtis to the formal inancial 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 inancial services, they need storage silos, advisory services, etcetra. Most challenging is the predicament of subsistence farmers, he says. Nishtar is con ident that the sector is on a strong footing to expand its footprint, and foresees three things happening in next ive years: growth in business volumes, innovation in products, and improvements in service delivery. Recollecting the sectors 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 micro inance by the Economist Intelligence Unit. Pakistan is also ranked amongst the top three countries in the world for conducive business environment for the micro inance 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 ield institutions. All these things have taken time, but its 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.
development activities. Nishtar insists that as institutions mature and as their loan portfolios increase, these costs will eventually be rationalized. Khushhali Banks 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 eficient. 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 micro inance clients. The micro inance 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 cant really control external factors, such as loods; that have hit our portfolio hard consecutively for the past three years he concedes. Seventy percent of Khushhali Banks portfolio is rural-based, so the 2010 deluge took a toll on its inancial position. But we rescheduled our clients loans, and the majority of them paid back. We did the handholding and didnt 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 micro inance

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 inance, you can access other sources of funding, he asserted.
Challenges facing the sector

Access to funding is among the myriad challenges ahead for the industry. We realized in 2000 that donors alone cant arrange that much funding; besides, they happen to have competing priorities. Government also cant 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 inancially 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 inancing 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
Miles to go before I sleep

Nishtar says that the micro inance 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, Pakistans micro inance sector will be the most thriving anywhere in the world, he concludes the disscussion on a hopeful note.
Developing seamless inancial 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 speci ically, enterprise credit allows an entrepreneur to leverage the equity in a pro itable enterprise to raise revenue and pro it. On one end of the spectrum of enterprises, Pakistans inancial 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 micro inance sector through 10 micro inance banks and micro inance institutions provided Rs43.4 million in credit to micro inance 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 inancial 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 speci ic 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 irms, almost 98 percent of all enterprises, of which the lions share (92.2 percent) are irms 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 micro inance banks. Smaller enterprise inance: Microinance 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 inancial institutions to service the lower end of the small enterprise segment. Another major factor is Pakistans globally recognized and proportionate regulatory framework provided by the State Bank of Pakistan. This provides the micro inance 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 inance 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 micro inance banks: MFBs will have to initiate cash low 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 suficient information on the actual cash lows of the enterprise to evaluate the enterprise operating cycle, and assess the borrowers needs and repayment capacity. However, one of the main challenges to offering a cash low 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 inancial 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 lows 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 inancial statements on the format as required by MFBs at an affordable and sustainable price. This would help small businesses to access formal inance and also be better aware of their own inancial 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 low based lending
Capacity building of entrepreneurs
Smaller enterprise inance
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 inance. Though fraught with challenges, such an approach can help retain Pakistans leading position in micro inance.
Meeting the funding needs of micro inance industry

Ali Basharat | Financial Analyst, PMN
MFPs require not only optimum utilization of existing sources of funds but also diversi ication of their sources of funds. It is projected that over the next ive years, the micro inance industry will grow to over 3.2 million borrowers, with GLP expected to rise to Rs94 billion.
The potential micro inance 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 Micro inance Network (PMN), State Bank of Pakistan (SBP) and Pakistan Poverty Alleviation Fund (PPAF) in 2013, it is projected that over the next ive years, the micro inance 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 micro inance 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. Micro inance Banks (MFBs) are likely to take a deposit-led approach, whereas non-regulated Micro inance 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 inancing needs. In order to meet these enhanced funding requirements, MFPs require not only optimum utilisation of existing sources of funds but also diversi ication 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 ield needs to be created in the micro inance industry by bringing non-bank MFPs under the regulatory framework. Spin-off of the national apex into a specialised Micro inance 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 micro inance industry and other inancial institutions to present the industry as commercially viable and sustainable, and remove any misconceptions regarding micro inance in the country. There is a need to improve disclosures and promote inancial transparency. Also, MFPs need to impart investment readiness training in order to raise inances from commercial sources.
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 Micro inance Investment Vehicles (MIVs). Importantly, the players need to build on relationships built with banks in availing inances under the guarantee funds and attract based on their pro itability 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 inance 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-pro it 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 diversi ication and establishment of industry infrastructure for risk management, such as the national roll out of the Micro inance Credit Information Bureau (MF CIB), consumer protection monitoring and pricing transparency initiatives along with inancial literacy initiatives, additional inancing through a combination of sources is imperative for long-term growth and sustainability of the industry.
Micro inance industry will reach scale when there is a combination of adequate funding and strong institutions
Syed Mohsin Ahmed | CEO, Pakistan Micro inance Network Syed Mohsin Ahmed has worked in the micro inance sector for the past eleven years. He has been associated with the PMN, which is the national association for retail players in Pakistans micro inance sector, since 2001 in various roles. A quali ied 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 Micro inance at the Micro inance Training Program in Boulder, Colorado. He is currently also serving as the Chairman of the Board of Directors of South Asia Micro inance Network (SAMN). The following are excerpts from BR Researchs 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 micro inance 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 micro inance sector remains untapped, Syed Mohsin Ahmed outlines both long-term and short-term approaches to achieve signi icant scale. For the long-term growth, right things are being put in right places. Market participants are coming up with a menu of inancial services, to provide, in addition to credit, products of savings, insurance, remittance, etcetra. In the short term, it is about the availability of inancial resources so that we can kick start growth that is where strong institutions matter. Its a huge market, and many new players can join in. Last year, the industry, as a whole, showed pro itability for the irst time, he said. Ahmed adds that this year, the industry pro its might be close to a billion rupees. That will create a demonstration effect for potential investors who know that Pakistan is already globally recognised for its micro inance sector.
The challenges
The CEO of PMN insists that external challenges confronting the micro inance 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 micro inance sectors 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 micro inance 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 in lation 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

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 dont 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
Micro inance CIB

One of the landmark projects PMN is working on is the Micro inance 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 inancial performance
level politicians and interest groups rising against the micro inance sector as a whole he points out. Interestingly, global experience in micro inance 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 con idence 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 inance 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 clients cash lows and their coping mechanisms would have to be understood, says Ahmed. expect all the MFPs to be registered with the bureau, and have 99 percent of clients 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 CIBs 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 con idence that in time, the central bank will declare it mandatory for all banks to report to the bureau.
Commercial banks interest

As for commercial banks involvement in the micro inance 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 re lects 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 micro inance 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.
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 inance practices, particularly in three core areas: social performance, client protection and increasing inancial capacity.
Bringing down the operating costs

The operating costs of the sector are between 18 20 percent; high in Ahmeds opinion. We have not achieved economies of scale in Pakistan yet. When Bangladeshi and Indian micro inance sectors were at our current life
Micro inance sector: in search of inancial sustainability

Sobia Mesiya
Micro inance banks and not-for-pro it micro inance institutions, the two key players of the micro inance sector across the globe, aim at reaching out to the poor a stratum that makes up over 40 percent of the worlds population. The difference, however, lies in their approach. The business model of micro inance banks (MFBs) largely revolves around mobilising savings and deposits. On the lipside, micro inance 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 pro itability enrichment. The CEO of a renowned MFI operating in Pakistan, told BR Research that unlike MFBs that seek operational eficiency 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 micro inance 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 lung of the country, the deposit base of MFBs is highly endangered. Against this backdrop, gloomy prospects cloud over the inancial sustainability of the countrys micro inance sector which might lead to severe credit rationing in the times to come. acquired under guarantee facilities besides aids and donations. While each MFI or MFB has its own set of inanciers, 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 Micro inance 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 micro inance sector. SBP provides partial guarantee to cover principal amount in default or First Loss Default Guarantee to cover irst 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 eficiency of the micro inance sector. PPAF, the apex micro inance inancier, has also initiated a number of schemes based on plain vanilla inancing 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 micro inance industry. Kfw also has two other schemes in pipeline which endeavor to provide debt and equity inancing to the government of Pakistan for the micro inance industry development.
Behind the glossy curtains

Although, the aforementioned schemes seem lattering, an in-depth analysis reveals a grave reality. MFBs remain the major bene iciaries 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.
Current feasts feeding the sector

The current funding recipe of micro inance sector comprises a blend of commercial debt, subsidised debt, deposits (in case of MFBs), and debt
Funds available to the microfinance sector of Pakistan

Fund name
PPAF-III PPAF-III PRISM equity fund PRISM credit enhancement facility PRISM institutional strengthening fund PRISM knowledge management and policy support SBP Microfinance Credit Guarantee Facility SBP Institutional Strengthening Fund KfW Equity Fund
Fund volume Rs (mn)

2,970 495 807 2,059 83 160 1,440 1,440 160
Source of funds
World Bank World Bank IFAD IFAD IFAD IFAD DFID DFID KfW Entwicklungsbank
Tenor
2009-13 2009-13 2008-13 2008-13 2008-13 2008-13 2008-13 2008-13 2011-16
* In addition to PPAF III and PRISM, PKR 53.2 billion has been disbursed from PPAF-reflows since inception.
Source: Pakistan Microfinance Network
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 eficient ones. This might be because of the extensive outreach and high pro it 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 inancially 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 micro inance sector of Pakistan.
What is next?
As the micro inance 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 micro inance bank of Latin America which was founded
as an NGO in 1990, serves as a milestone in the history of the global micro inance industry. Given the handsome pro itability 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, Indias largest micro inance institution, also iled 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 micro inance sector to mobilize funds through non-bank/capital market sources. Kashf Foundation and Tameer Micro inance Bank took the lead by loating 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 inancial services. Taking into account the high pro itability of the sector, it seems that this transformation would reap sound results. Hedge funds, venture capital irms, 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 irst need to enhance their market penetration and operational eficiency besides selling their brand so as to entice prospective investors. Pakistan Micro inance Network is playing a laudable role in motivating MFIs to stop relying on donations and aid and enhance their eficiency 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 low of commercial funds to the micro inance sector.
However, on a grim note, this might lead the sector having its legs in two boats social welfare and pro itability. 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 pro its to enhance the services to the poor, the sector will tend to direct those pro its to investors to satiate their appetite. Only time will tell whether the quest for inancial sustainability renders the sector more eficient 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 doesnt 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 micro inance borrowers besides blessing the sector with inancial sustainability.
The writer is a Research Analyst at Business Recorder. She can be reached at: sobia.mesiya@gmail.com
Staying focused on responsible practices in the march towards inancial 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 inancial services to those who have historically been unserved or underserved clients. All stakeholders in the inancial inclusion landscape are committed to and actively working towards development of new solutions for inancial inclusion and spreading best practices. Financial service providers want to operate pro itably so that clients can be provided access to these quality inancial 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 eficiency 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 inancial inclusion developments. Suddenly, inancial inclusion seems achievable within our lifetimes. In this race of trying to balance quality and scale, inancial 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 inancial services provision, especially at the lower end of the market through a series of efforts and interventions. The irst of these takes the form of consumer protection regulation and supervision by central banks. Regulation ensures that rules are set for all inancial 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 re ine these further to make them more holistic. The second strategy in entrenching responsible practices comes from the industrys own efforts such as self-regulating through common platforms and individual institutions own initiatives. This is already happening at the level of the national Micro inance Association of Pakistan and the Pakistan Micro ian important component as such interventions help customers protect themselves from harm, choose wisely amongst options and behave responsibly. So what exactly does responsible inance entail for a single retail inancial services provider striving for its bottom line? The answer depends on the vision and mission of the inancial 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 inancial 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 inance 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 inancial performance. When inancial 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 speci ic goals, development of metrics to measure and record performance against these
In this race of trying to balance quality and scale, inancial 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 inancial 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 inancial 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 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 inancial 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 inancial inclusion are in place or being taken, as exhibited in this article, the onus of responsibility, in the end, still lies with each individual inancial services providers. Together, they must ensure the health of this industry by ensuring institutionalisation of these practices.
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In colloboration with MONDAY, OCTOBER 21, 2013 | www.brecorder.

From Editors Desk

Huge micro success

Zuhair Abbasi Mobin Nasir

Senior Research Analyst Asst. Editor Research

Zuhair Abbasi Sijal Fawad

Sobia Muhammad Saleem

10 | Micro inance Review | October 21, 2013

Microinsurance: straight from the heart

Meeting the funding needs of microfinance industry

Greatest champions of communities emerge from the communities themselves

PPAF and the microfinance sector in Pakistan

Were all speaking different languages

Technology is the game changer

Specialised entity needed to bridge funding requirements of microfinance providers

Micro lending: women exclusion on the cards?

Microfinance sector: in search of financial sustainability

MOBILISING GRASSROOTS SAVINGS

Staying focused on responsible practices in the march towards financial inclusion

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

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

Developing seamless financial system in Pakistan

Number of deals by funding institutions

Funds mobilised Rs(mn)

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

6 | Micro inance Review | October 21, 2013

Funding mobilised (LHS) & number of deals

3000 2500 2000 1500 1000 500 0

Funding deals by micro inance providers

2 Years 3 Years 4 Years 5 Years

Funding mobilised & deals by risk sharing options

4000 3000 2000 1000 0

40% pari passu

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

Micro inance Review | October 21, 2013 | 7

Greatest champions of communities emerge from the communities themselves

8 | Micro inance Review | October 21, 2013

PPAFS EXTENSIVE . GRASSROOTS NETWORK

Districts through 114 partner organizations in Pakistan.

Interview by Hammad Haider

Micro inance Review | October 21, 2013 | 9

Technology is the game changer

The game changer: TECHNOLOGY

First things irst: OUTREACH

Innovations on the cards: LOCALISED SOLUTIONS

The challenges: ILLITERACY AND LACK OF AWARENESS

Interview by Sohaib Jamali

10 | Micro inance Review | October 21, 2013

MOBILISING GRASSROOTS SAVINGS

Micro inance Review | October 21, 2013 | 11

Savings mobilization by MFBs:

12 | Micro inance Review | October 21, 2013

14 | Micro inance Review | October 21, 2013

A directed credit policy

Disaster protection fund

Bringing MFIs into the regulatory fold

Micro inance: a case study on institutional collaboration

Interview by Hammad Haider

Micro inance Review | October 21, 2013 | 15

PPAF and the micro inance sector in Pakistan

Meeting Demands of the Communities

Genesis of the Apex

16 | Micro inance Review | October 21, 2013