Yaseen Anwar: Microfinance developments in Pakistan
Inaugural address by Mr Yaseen Anwar, Governor of the State Bank of Pakistan, at the
5th Pakistan Microfinance Country Forum, Karachi, 2 December 2011.
* * *
Distinguished Speakers, Guests, Ladies and Gentlemen!
I am delighted to be invited to the 5th Pakistan Microfinance Country Forum.
Microfinance in Pakistan has made good progress but must make major breakthroughs to
reach millions of underserved people who require a wide variety of financial services.
Pakistan has one of the lowest financial penetration levels in the World with 56% of the adult
population totally excluded, and another 32% informally served. However, despite
considerable support from the Government, donors and the State Bank of Pakistan, the
microfinance sector has only been able to tap a small fraction of the potential market, with
current active borrowers standing at roughly 2 million.
Now, I would like to share SBP's vision on the development of microfinance and financial
inclusion in Pakistan and some of the initiatives taken by SBP. The history of microfinance is
not very old in Pakistan. In fact, efforts to mainstream Microfinance into the formal financial
system started in 2000 & 2001 when the Government promulgated the Microfinance
Ordinance. The passage of the law the allowed private sector to establish Microfinance
Banks that are licensed and regulated by State Bank of Pakistan. Since then, we have
witnessed the establishment of new MFBs, transformations of large MFIs, diversification of
funding sources, development of inclusive financial services, emergence of alternative
delivery channels, and piloting of "Microfinance - Credit Information Bureau" (MCIB). These
developments are indeed a sign of growth and maturity and a direct outcome of the enabling
regulatory framework and market development initiatives for microfinance. The success of
microfinance in Pakistan is widely acknowledged by the international community. Our
microfinance regulatory framework has been ranked globally at the top in 2010 and 2011 by
the independent "the Economic Intelligence Unit" of UK's "The Economist" Magazine.
In developing regulations for microfinance, the State Bank has pursued a bottom-up
approach along with use of strong analytical and problem solving skills and industry
consultation. Since the inception of microfinance banking in Pakistan, our goal has been to
determine the proportionality of a regulation before it is put in place. Hence, the regulatory
approach has remained gradual and in line with the evolution of the sector. The evolution or
trajectory of microfinance has so far remained positive despite the fact that many challenges
arose along the way which I will cover later. Presently, nine MFBs are operating in Pakistan.
All these MFBs are privately owned and reflect diversity of ownership and approaches to
microfinance banking. Considering that the market has potential and the regulatory
framework is supportive, the ownership in MFBs has flowed both from local and international
investors including banks, development agencies, investment funds, mobile network
operators, and large domestic MFIs.
One of the success stories in microfinance sector is the unique opportunity in Pakistan to
utilize alternative delivery channels due to the presence of a sound and pro-growth
regulatory framework, dense population, and high demand for financial services. The
motivation for developing alternative channels for service delivery is twofold: firstly, there is
enormous scope for expanding outreach, especially to hard-to-reach rural areas. The
emerging models relying on "banking agents" will greatly extend the distribution of financial
services to the poor and marginalized segments. Secondly, alternative delivery channels
promise significant cost reduction to institutions. The traditional microfinance business is
based on personal, one-on-one relationships. Thus, personnel expenses often account for a
significant portion of microfinance operating expenses. The use of banking agents will help to
reduce the operating costs of the sector.
The recent development in mobile phone banking is highly encouraging. The expansion in
the retail network of microfinance has arisen overwhelmingly from agents and mobile phone
channels. Within a span of just two years, there are now almost 18,000 branchless banking
outlets surpassing the 10,000 conventional bank branches. The combined daily transaction
volume of the two prominent branchless banking models "Easypaisa" and "Omni" now
averages over 175,000, with an average size of Rs. 3,700. As per an independent World
Bank - CGAP study, the small size of the transaction indicates enhanced access to finance
by the poor and the marginalized unbanked people, an important milestone for financial
inclusion. The early successes of mobile banking in Pakistan are attributable to the
collaborative efforts of a wide range of stakeholders, including the Government, regulatory
authorities, development agencies, NADRA, telecom operators, financial institutions, and
technology firms. SBP continues to work with all stakeholders, in order to support this
nascent industry that is expected to be a key driver in expanding financial services to all of
Pakistan. The sheer diversity of the stakeholders, many of which had not worked in
businesses together, underlines the need for continued close coordination to foster a
marketdriven mobile banking eco-system.
I must acknowledge the important role our partner donors continue to play in facilitating this
sector to develop a sound footing. I would like to especially thank the UKAid and Asian
Development Bank for funding support for microfinance development. Under the programs
sponsored by these donors, a number of market interventions are managed by SBP. Some
of these initiatives are as follows:
The Institutional Strengthening Fund (ISF) a UK £10million grant facility launched in
December 2008, is intended to strengthen institutional & human resource capacity of MFB/Is
to enhance scale and sustainability of microfinance services. The ISF has thus far approved
Rs. 522 million for 11 microfinance providers including top and middle tier MFBs and MFIs.
Under the arrangements, the ISF will support 15 projects for investment in HR, IT, product
development, Risk management systems, business plans and branchless banking
development. Also, under ISF, the Pakistan Microfinance Network (PMN) was provided
funding support to conduct research and develop the industry's infrastructure such as the
testing of pilot microfinance Credit Information Bureau (CIB) in Lahore. Going forward, ISF
will consider how to further support important systemic areas such as upgrading CIB to the
national level.
The Microfinance Credit Guarantee Facility (MCGF) a £10 million guarantee facility, was
launched by SBP in December 2008, to mobilize wholesale commercial funding for
microfinance providers through partial guarantees to commercial banks. The facility hasthus
far mobilized commercial funding of Rs. 3,225/- million for four microfinance providers for
onward lending to around 200,000 new micro borrowers. Going forward, the facility will aim
to raise commercial debt from non bank sources, diversifying sources of commercial capital
for microfinance providers. The facility will be instrumental in mainstreaming microfinance
providers and resolve some of its funding constraints on a permanent basis.
Similarly, the Financial Innovation Challenge Fund (FICF), a £10million innovation grant
facility, was launched by SBP in May 2011, to provide grants to foster innovation and test
new markets, lower cost of delivery, enable systems and procedures to be more efficient and
provide new ways of meeting the larger demand for financial services. The first FICF
challenge round was held on Financially Inclusive Government to Persons (G2P) Payments.
Banks, public sector institutions, Microfinance institutions, government agencies, pension
funds, and academic institutions were invited to apply for the promotion of financial inclusive
G2P payments through bank accounts at branchless banking outlets and also provide other
financial services to the G2P payments beneficiaries. A number of applications have been
received from these institutions which are now being evaluated for the first round of G2P
payments Challenge.
Financial literacy has assumed greater importance in recent years and is now considered an
important systemic area for promoting financial inclusion and ultimately financial stability.
Both developed and developing countries, therefore, are focusing on programs for financial
literacy/education.
SBP has started a pilot Financial Literacy Program (FLP) with the private sector as an
implementing partner. The Program is the first ever initiative to promote financial literacy
among the general public at the national level. The dissemination will be made through TV
channels, regional Radio, print media and mobile network operators. In addition, field training
and street theatres will also be used to target beneficiaries. The program will impart
knowledge about basic financial concepts such as budgeting, savings, investments, debt
management, financial products and branchless banking. The pilot phase will target about
50,000 beneficiaries with emphasis on low income strata. After completion of the pilot, an
impact assessment of the pilot will be conducted and based on the results and
recommendation the program will be scaled to the national level.
Although these early successes in microfinance industry are laudable, they have yet to
create a major dent in the widespread financial exclusion. Currently, microcredit is reaching
only 2 million borrowers whereas the size of the target market is estimated to be 25 to
30 million. While this high level of financial exclusion is somewhat disappointing, it does
highlight the frontier of opportunities and bodes well for development of the microfinance
industry to become a major participant within the overall financial sector while serving the
millions of underserved and unbanked people. I, therefore, urge all stakeholders to step up
their efforts in their area.
As we know, Pakistan has unfortunately faced an increased occurrence of natural calamities.
In 2010 and 2011, floods and rains destroyed lives, properties, and businesses, particularly
of those living in rural and peri-urban areas. The poor have also been adversely affected by
volatility in food prices and fuel costs. Increased power outage has been another major
concern. Furthermore, the current global financial turmoil may in the long run adversely affect
the flow in funding from the global financial markets. This state of affairs poses a number of
challenges for the microfinance sector. I will highlight some of these and try to offer general
solutions.
The first and foremost challenge is organizational development. Every institution must
determine and pursue this goal by having in place appropriate governance structures,
management teams, business policies & plans, risk management practices, product
development & innovation and use of appropriate technologies. Quality Human Resource is
a prerequisite for achieving this goal.
The second challenge is funding avenues for microfinance service providers. It is a proven
fact that in order to have a financially sustainable model, MFBs should assign more
emphasis on savings mobilization and develop strategies and the infrastructure to mobilize
deposits.
Thirdly, MFBs need to improve the quality of growth through promoting inclusive financial
services with up-scaling credit operations. Lending operations must extend to different
economic and geographic segments. SBP will issue regulatory guidelines to MFBs for
upscaling of loans, and develop a reporting structure to assess the geographic distribution of
microfinance growth. Donor funding can support product development, capacity building, and
market surveys.
Fourthly, institutions must assign equal importance to consumer protection and awareness.
SBP will also review and strengthen its regulatory and supervisory processes to ensure
protection of microfinance clients' rights.
In the new Microfinance Strategic framework 2011-15, SBP has laid out a detailed strategy
to promote sustainable growth of the sector. The strategy's effectiveness and success hinges
on growth dynamism fundamentally coming from microfinance operators themselves. The
role of SBP is to develop the banking infrastructure, encourage the use of successful global
practices, and provide the regulatory and supervisory mechanism to enable MFBs to develop
viable business models.
To sum up, I would like to reaffirm the need for microfinance development for fostering a
propoor and sustainable development in Pakistan. Microfinance has come of age, and the
sector needs to discontinue dependence on external catalysts and focus on improving its
financial and operating performance by setting targets for borrowers, savers, portfolio quality,
and self-sufficiency. Considerable work still needs to be undertaken to ensure that all
microfinance banks and institutions are acting responsibly. It is also important for the industry
to continue to innovate, create new partnerships with the growing branchless banking
networks, and to evolve and provide financial access to the unbanked.
Let me once again thank the organizers for holding important event and I wish the
Conference all success.