Shamshad Akhtar: Launch of microfinance initiatives
Speech by Dr Shamshad Akhtar, Governor of the State Bank of Pakistan, at the Launch of
Microfinance Initiatives, Karachi, 19 December 2008.
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1. Approximately 30 million Pakistanis are living in poverty. Despite consensus that
microfinance is an effective tool to alleviate poverty, there is a wide gap between demand
and supply of financial services for the poor and marginalized segments of population. The
current outreach of microfinance services, 1.8 million customers, while a significant
improvement over last few years, is a mere 5% of the potential microfinance market. Where
there are challenges there are also numerous opportunities for growth of microfinance
businesses. SBP and the Government of Pakistan are committed to increasing outreach and
facilitating the development of the microfinance sector. To kick start real action, SBP with
industry developed a Microfinance Strategy which was adopted in 2007. This strategy has
set growth targets of increasing the numbers of microfinance borrowers to 3 million by the
end of 2010 and 10 million by 2015.
2. The microfinance outreach increased by 47% at the end of December 2007 and by 13%
as of September of 2008 as the concept of commercialization or for-profit microfinance
business started to permeate. NGOs and MFIs have been seeking additional sources of
funding in an effort to expand their operations and distribution of services. The enabling
regulatory environment promoted by the SBP has helped MFIs to create innovative
partnerships with commercial banks or transform themselves into a regulated entity which
allows them to accept deposits and utilize mainstream sources of capital. Pakistan has
proven to be leader in the Asian region in commercialized microfinance and is the first
country to introduce a comprehensive legal, regulatory, and supervisory framework for formal
microfinance in Asia.
SBP initiatives for the promotion of microfinance
3. To realize the growth targets of microfinance, SBP has identified three concurrent steps
the industry needs to undergo in order to fulfill set goals:
1) Sustainable cost-covering operating/business model;
2) Mobilize private domestic capital; and
3) Build human resource systems.
4. In order to develop these critical areas of the microfinance industry, SBP has undertaken
several steps, which include, but not limited to:
(i) State Bank launched the Financial Inclusion Program, aimed at eliminating market
failures. FIP is a £50 million program funded by the UK Department for International
Development (DFID) with several initiatives aimed at improving access to financial
services for poor and marginalized groups and for small enterprises in Pakistan.
(ii) State Bank has issued Branchless Banking Regulations, which is the regulatory
framework to promote banking in remote areas using technology.
(iii) SBP encouraged microfinance institutions to transform into regulated entities.
(iv) SBP encouraged partnerships between the post office (PO) network and MF
providers. Post Offices already manage over 4 million savings accounts, mainly
small accounts below Rs 10,000, through more than 12,000 branches. There is
scope for the Post Office and MF providers to join forces with the latter acting as
intermediaries for funds raised by POs, especially as MF providers are constrained
by limited funding.
(v) SBP is encouraging new international players including BRAC and ASA who have
already started microfinance operations in Pakistan.
(vi) SBP has set up a special Micro finance focal group with an independent head and
qualified staff to support these and other financial inclusion initiatives.
4. Many of these initiatives are recent and have yet to demonstrate effect vis-à-vis improved
outlook for microfinance. However, the effectiveness of some of these initiatives may be
improved in light of inferences drawn from microfinance industry trends. Broadly, the current
outlook for microfinance remains optimistic, but we must examine emerging trends with
caution.
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First, the industry is still young and continues to be largely dependent on donor
assistance to grow, which though necessary at infancy stage is an unsustainable
approach to long-term development. It is, however, critical that MFBs move toward
deposit mobilization to increase funds for on-lending to achieve of the National
Strategy of reaching 10 million clients by 2015.
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Second, cost-efficiency is especially important in the current environment of the
global financial crisis where rising cost of borrowing will eventually impact cost of
lending for MFIs and MFBs as they move towards commercial funding. Hopefully,
the introduction of international players may encourage local organizations to
develop cost efficient structures and improve the quality of available human
resource.
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Third, resource deficiency exists for microfinance not only in the form of funding.
Human resource capacity must also be strengthened to provide quality microfinance
services. Capacity building will take time as human resource development will
primarily have to come from organic means given the unique nature of the
microfinance industry.
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Lastly, there are concerns over gender and regional participation will have to be
critically examined and addressed in order to make microfinance's ability to fight
poverty more meaningful.
New initiatives
5. Today the biggest challenge faced by microfinance is scaling up. Although microfinance
operations can become successful in achieving sustainability, however, initially these cannot
grow on solely deposit mobilization or retained earnings, nor can it raise capital in financial
markets. In order for microfinance to play a bigger role in improving livelihood opportunities
for the poor and alleviate poverty, it must be scaledup significantly and must become
sustainable to be able to generate profits and mobilize deposits and capital from alternative
sources. This would require a number of things including institutional strengthening and
specific interventions to resolve market failures. The commercialization for greater outreach
and sustainability require greater institutional building blocks which in turn require new
partnerships.
6. I am pleased to announce that SBP today is launching three facilities for the support of
microfinance sector to promote financial inclusion.
1) The Microfinance Credit Guarantee Facility
2) The Institutional Strengthening Fund; and
3) The Improving Access to Finance Services Fund
7. These measures are expected to ease liquidity constraints of microfinance providers in
view of the tighter liquidity conditions and sudden spike in inflation which has severely
affected the poor and marginalized segments of the society.
The Microfinance Credit Guarantee Facility
8. This is expected to increase the flow of credit to microfinance sector. The facility aims to
incentivize banks/DFIs to channelize funds to MFBs/MFIs for on lending to low income
segment of the population. The facility will provide credit guarantees of up to 40 percent of
the funding provided by Banks/DFIs and aims to develop market and graduate poor
borrowers to mainstream financial service providers. The facility will be established at SBP
with UK Government Financial Inclusion Program grant funds equivalent of up to GBP 10
million to be used as the guarantee fund. The State Bank has issued necessary guidelines
for operationalizing the facility which were finalized after due consultation with stakeholders.
9. Commercial banks are allowed options to undertake microfinance business directly and in
partnership with MFIs by providing wholesale funds to them for on-lending through four
different modes i.e. a) MF counters in existing branches, b) standalone MF Branches, c)
establishment of independent subsidiary MFB, and d) linkage with NGO-MFI. The MCG
facility is expected to help raise local currency funds for eligible MFIs/MFBs. The loans
portfolio under the guarantee scheme will be administered by banks. The facility will also
help build links between micro borrowers and formal financial institutions. The familiarization
of the bank with the client should eventually lead to the "graduation" of the borrower. The
facility shall provide partial Guarantee to minimize the perceived risk premium by covering
part of the losses incurred on funds made available to MFBs/MFIs with the advantage of
leveraging the guarantee fund a number of times while keeping the incentive for banks/DFIs
to collect the loan. The lending of MCG facility will help these institutions to play their role in
the growth of micro credit more effectively.
The Institutional Strengthening Fund
10. This Fund is designed to build capacity of the microfinance sector. The fund is expected
to enhance potential for growth and create depth in outreach by improving human resource
quality, service delivery and increasing service availability to potential microfinance clients.
The fund is established at the State Bank under the UK Government's Financial Inclusion
Program that involved funds equivalent to Pound Sterling 10 million for institutional
strengthening. The fund will provide grants for capacity building to generate on-lending
resources through commercial sources, equity investments or deposit mobilization strategy
through improvement in management, governance, internal controls and functions. The fund
will also provide grants for employing cost reduction mechanisms for increasing outreach in
rural and remote areas through product innovation, development or use of technology. In
addition, the fund will provide grants for business development services to MFI clients or
improving quality of services; and developing capacity for transformation of MFIs into
licensed microfinance banks.
11. SBP has developed detailed guidelines, selection criteria and application format for ISF.
The fund will primarily focus on institutions that are already regulated, or are in the process of
seeking a license or have solid plans for restructuring in the near future. SBP regulatory
oversight will ensure transparency and good governance practices, which will ultimately lead
to greater investment in the microfinance industry. Moreover, ISF is capped at US$1 million
per year per grantee and subject to at least 25% matching grant from the grantee. Grants
may be made on an annual basis and institutions that qualify for funding in a year may also
qualify for funding in another year subject to good performance and submission of another
successful proposal through the approved application procedure.
Improving access to financial services
12. This component is designed to enhance capacity of the microfinance sector and promote
financial literacy. The fund has been established at the State Bank with help of an
endowment of USD 20 million under the ADB-supported "Improving Access to Financial
Services Program - IAFSP". The fund will provide benefits for and have positive impacts on
rural and urban communities, in particular the poor & the women.
13. These benefits are quantitative and qualitative in nature and include (i) capacity building
and training of financial services providers to promote expansion into rural areas; product
and service innovation, including savings, remittances and Islamic financial services;
adoption and integration of new technologies and applications for improving access to
financial services; (ii) capacity building and training of Government and regulatory authorities
to support development of an inclusive financial sector and implementation of measures
under the Program; and (iii) literacy programs (financial and basic) conducted by or on behalf
of financial services providers for clients and potential clients to improve access to financial
services and the utilization of finance.
14. To initiate provision of grants SBP has developed detailed guidelines, selection criteria
and application format for the IAFSF. The fund will initially focus on regulated institutions to
ensure transparency and good governance practices to attract investment in the
microfinance industry. Grants shall be provided to projects that meet the criteria for improving
basic & financial literacy of current and potential microfinance consumers besides promoting
utilization of cost effective means for financial service delivery and expanding outreach to
rural and remote areas.
15. In conclusion, I would like to highlight that all the SBP initiatives have strong support of
the industry simply because of the partnership we have with the Pakistan Micro Finance
industry and network. Ultimate success of these initiatives lies with both the banking and
microfinance industry and we count on their continued dedication for promotion of
microfinance industry.