Ishrat Husain: Strategy for development of Microfinance in Pakistan
Remarks delivered by Dr Ishrat Husain, Governor of the State Bank of Pakistan, as Chief Guest at the
launching ceremony of the Financial Sector strengthening program of the Swiss Agency for
Development and Cooperation, Islamabad, 26 February 2003.
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I would like to commend the Swiss Government and the Swiss Agency for Development and
Cooperation (SDC) for launching the Financial Sector Strengthening Program (FSSP). I believe that
the lack of adequate human and institutional capacity, shortage of local expertise and weak
coordination among the various stakeholders are indeed the factors inhibiting the growth of
microfinance sector in Pakistan. The initiative taken by SDC to overcome these constraints is therefore
both timely and appropriate. But I do expect that once the FSSP has successfully demonstrated the
business model for capacity building it will be adapted and internalized by our own network without
any further recourse to external donors. The transfer of technology and its adaptation to our own
circumstances is the most effective way to utilize external resources.
At the outset let me place microfinance in the overall context of the efforts the State Bank is making to
expand the outreach of financial services and help the goal of poverty alleviation in the country. The
SBP is, in addition to microfinance, encouraging the provision of credit to small and medium
entrepreneurs through a newly set up SME Bank, to small farmers through a newly restructured Zarai
Taraqqati Bank Ltd and Cooperative Banks, to women entrepreneurs, individuals and small firms
through the First Women's Bank. These institutions will work as the protype in developing the
methodology and expertise in these areas and then this protype will be replicated through the
mainstream financial institutions in the country. This is the only durable basis through which the poor
can benefit from financial sector of the country.
Pakistan has adopted a sectoral approach to microfinance in Pakistan and assimilated learnings from
the experience of other developing countries which have been active in this area for decades.
Microfinance is still in its infancy and has a long way to go. Some momentum has been built up during
the last three years as bulk of the disbursements has taken place since June, 1999. Although there
has been a big spurt in these three years the numbers of the beneficiaries and the volume of credit
disbursed is still quite low in relation to the needs and demand of the intended target group. We have
therefore decided to adopt a holistic, "let thousand flowers bloom", and inclusive strategy for promotion
and spread of microfinance in Pakistan. This strategy consists of the following six elements.
First, there is a strong political commitment towards supporting microfinance as an integral tool of
poverty alleviation program. President of Pakistan has taken keen personal interest in the nurturing
and growth of this sector and has directed the Ministry of Finance to monitor and track the
microfinance sector on a regular basis. The Government has invited the World Bank, ADB and other
bilateral donors to actively assist us in this sector. Consequently the enabling environment for
development and growth of MF is highly conducive. The constraints, snags and problems faced during
the implementation of the program are removed in consultation and full involvement of the
stakeholders.
Second, the program involves multiple actors and institutions - community organizations, NGOs, public
sector, private sector, Rural Support programs - in the delivery of microfinance. The extent of poverty
prevailing in Pakistan requires 'all hands - on the deck' approach rather than and exclusive monopoly
of the Government or the public sector as has been the case in the past. Khushali Bank is owned by
several leading financial institutions - private, public and foreign - rather than by the Government of
Pakistan. This has allowed it to function in a professional manner.
Third, the complementarities between microfinance and other elements of poverty alleviation such as
Investment, Infrastructure, Social services and Capacity building are clearly recognized and built in the
program. Income generation by the poor cannot take place only through availability of credit if there is
no infrastructure, or markets for selling their produce. Similarly without building the knowledge base
and enlarging capacity of the poor there won't be any scope for sustainable microfinance.
Fourth, the government is experimenting with a variety of institutional models for delivery mechanisms
and outreach to the poor. For example, we have a wholesale organization such as PPAF which is
successfully disbursing a $ 100 million line of credit provided by the World Bank. We have Khushali
Bank which is a retail bank and has already reached out to 100,000 customers and is targeted at
700,000 by 2007. Then there is First Mcirofinance Bank established in the private sector which is
expanding its branch network throughout the country. We have integrated program vehicles such as
the NRSP, PRSP etc. which combine Microcredit with other services. There are several single product
Microfinance NGOs such as Kashif Foundation in Lahore. Two commercial banks are also providing
lines of credit for microfinance. Leasing companies have also begun to take some interest and two of
them are already engaged in the sector. In addition there are several self standing donor supported
projects delivering microfinance. We don't know as to which particular delivery mechanism will be
effective and that is why there is a need to experiment with plurality and diversity.
Fifth, an innovative feature of the Microfinance Sector Development is that as the poor segments of
the population are much more prone and vulnerable to shocks they need to be protected. Thus a bad
harvest or drought or strikes in the cities or violence completely wipe out the earning capacity of the
poor and disable them from repaying their credit obligations on time. As labor is their only asset and
the returns on labor are disrupted for no fault of theirs a risk mitigation mechanism had to be created
to insulate the poor borrowers from these unforeseen hazards. A Risk Mitigation and Deposit
Protection Fund has been created to provide protection to the MFIs borrowers and depositors. They
can seek recourse to this fund under adverse circumstances beyond their control.
Sixth, the regulatory regime adopted by the SBP for Microfinance sector is that of a facilitator, guide
and problem solver. We do not prescribe for MFIs the same onerous regulations which prevail for
other financial institutions. We have a light regulatory oversight and are learning together with the
practitioners and adopting ourselves to the changing circumstances. We have a Consultative Group
drawn from the representatives of stakeholders who guide us in the development of our regulations
and prudential norms.
To conclude, the strategy for microfinance development will undergo continuous review and
modification to make it responsive to the needs of the poor. The government, State Bank, NGOs and
all other MF practitioners have to work together to make this strategy work and accelerate the speed
with which we can reach out to the potential beneficiaries. On the part of the SBP I can assure you our
full commitment and support to this strategy. We look forward to working together with you in these
endeavors.