Yaseen Anwar: Developments of the microfinance sector in Pakistan
Keynote address by Mr Yaseen Anwar, Governor of the State Bank of Pakistan, at the
national roll-out of microfinance-exclusive Credit Information Bureau (MF-CIB), Karachi,
20 June 2012.
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Distinguished Guests,
Ladies and Gentlemen,
I am extremely delighted to be part of this historic event of the launch of the national roll-out
of microfinance dedicated CIB, and I congratulate all the stakeholders, Pakistan Microfinance
Network, Pakistan Poverty Alleviation Fund, DFID, DataCheck, Microfinance Banks and
MFIs, and my colleagues at SBP on this great achievement which will modernize and
strengthen the "industry infrastructure" of microfinance in Pakistan.
SBP has been actively supporting microfinance in Pakistan through policy, regulatory and
program-based interventions to make major breakthroughs in reaching out to millions of
underserved people who require a wide variety of financial services. The efforts to
mainstream Microfinance into the formal financial system started in 2000-2001 when the
Government promulgated the Microfinance Institutions Ordinance. 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 largest transformed MFIs. With the collective wisdom and efforts of
all key stakeholders, the microfinance sector has spawned its own innovation, and 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 "Economic Intelligence Unit" of UK's "The Economist" Magazine. And
Pakistan is the fastest developing market for branchless banking.
SBP has played a sterling role in the development of the microfinance sector as an
alternative to conventional banking to serve the lower end of the market. However, there is a
global shift from microfinance to inclusive finance, that is, from supporting microfinance
initiatives in isolation to building an inclusive financial sector. Inclusive finance recognizes
that a continuum of financial services providers work within their comparative advantages to
serve the poor and low-income people, as well as micro and small enterprises. Financial
inclusion is a core component of SBP's financial sector development strategy. It envisages
transforming the financial market into an equitable system with efficient market-based
financial services to the otherwise excluded poor and marginalized population including
women and young people.
SBP's financial inclusion agenda is supported by a multi-pronged strategy. First, the
regulatory framework to enable commercial microfinance in Pakistan is well-developed. The
most recent regulatory innovation includes the introduction of the bank-led model for
branchless banking. Second, SBP's commitment is reflected by the in-house Development
Finance Group, dedicated to increasing access to financial services. The Development
Finance Group consists of departments that focus on key areas of financial inclusion
including microfinance, agricultural credit, SMEs finance, and housing finance. Third, SBP
has partnered with DFID to launch a GBP 50 million "Financial Inclusion Program" (FIP) to
tackle financial exclusion among poor and marginalized groups head-on through a variety of
supply-side funds and facilities. FIP focuses on market-based, sustainable financial
services for low income people and small enterprises and to move away from a donor
dependent model. In addition, FIP aims to enhance delivery of financial services through
technology based branchless banking solutions, financial innovation, and remittances.
Fourth, in line with the evidence (Access to Finance (A2F) Survey of 2008) that lack of
financial literacy is a major constraint in advancing financial inclusion, SBP launched the
first-ever Nationwide Financial Literacy Program (NLFP) in January 2012 to tackle this issue.
The program focuses on different themes such as savings, budgeting, debt management,
investment, consumer protection and branchless banking to impart awareness and
understanding of basic financial concepts to the low-income and unbanked population.
Lastly, a number of initiatives have been taken to promote access to finance in the SMEs,
agriculture, housing and microfinance sectors that largely focus on creating an enabling
environment by addressing regulatory barriers, market failures and industry bottlenecks, and
ensuring consumer protection.
Despite having in place internationally acclaimed regulations, innovative delivery channels,
credit enhancement mechanisms and industry-wide initiatives for institutional and capacity
development, and consumer protection, the growth in microfinance has remained stagnant at
around 2 million borrowers in Pakistan in recent years, indicating that our success in
achieving financial inclusion leaves much to be desired. This partly explains why Pakistan
has one of the lowest financial penetration levels in the world with 56% adult population
totally excluded, and another 32% informally served. Therefore, it is imperative that we all
endeavor to bring these segments into the formal banking channels to achieve our collective
vision of "access for all".
The stagnancy in microfinance growth is attributable to various factors; most notably among
them is the risk of multiple borrowings by clients. In a period of high growth during 2007-08,
the staff of some MFIs followed unhealthy practices of clients vying and poaching that
caused negative repercussions on loan portfolios of such MFIs. As the competition
increased, the MFBs and MFIs became increasingly sensitive to the fact that without an
information sharing mechanism, aggressive credit growth would lead to worsening of
repayment performance, thereby creating systemic risk for the sector. The lack of a complete
information sharing mechanism was due to the fact that only MFBs (regulated by the State
Bank) had access to SBP's e-CIB; and non-regulated MFIs were neither posting nor
retrieving credit history of their borrowers through SBP or a private CIB. Clearly, the lack of
an exclusive credit bureau was contributing to the "imperfection" of the credit market. At the
same time, the experiences of borrowers' revolts and government interventions in
neighboring countries, such as Andhra Pardesh in India, were also forcing the lenders to
pursue a risk-averse approach in Pakistan.
Taking a proactive approach in Pakistan and recognizing the potential risks in absence of a
sound risk management framework nor a credit information sharing mechanism, policy
makers and other key stakeholders explored different options to develop a long-term solution
of credit information sharing. Finally, in May 2010, PMN and DataCheck in collaboration with
SBP and PPAF, launched a pilot of MF-exclusive CIB at Lahore. The idea was to test and
develop the reporting structures, MIS, and data storage/processing capabilities of lenders in
the pilot and then prepare for a national roll-out at the appropriate time. Here, I would like to
congratulate the leadership and team of DataCheck/PMN for their commitment and
hard-work in making the pilot a successful project, and paving the way for the development
of a dedicated national CIB for microfinance.
Currently, four CIBs are operational in Pakistan, three private and one public, all with varying
stages of development. The largest and oldest is e-CIB, which is housed in the State Bank of
Pakistan and requires all regulated financial institutions to report data on all loans and debt
instruments, both disbursements and repayments. According to an IFC's paper on credit
bureaus released in 2007 "Private credit bureaus are found in approximately 60 countries
and in nearly every developed country. Public credit bureaus, usually set up by central banks
and found mostly in developing countries, exist in approximately 70 countries." It is a matter
of great satisfaction that Pakistan has credit bureaus both in the public and private sector.
Having a private sector credit bureau exclusively for microfinance in particular is a source of
both encouragement and pride for all of us. Let me assure you that SBP is fully supportive of
private sector credit bureaus. However, presently private bureaus are non regulated entities.
SBP believes that a policy framework for credit bureaus is essential for their smooth and
long-term growth. In fact, the Government and SBP are already working on the development
of a legal framework that will strengthen private CIBs by establishing criteria for licensing,
issuing regulations, and creating an oversight mechanism. All this will result into
stakeholders' satisfaction, and, most importantly, it will boost public confidence.
A nation-wide MF-CIB will be a major step with positive impact for both lenders and
borrowers. As the CIB expands its operations across the country, the quality and efficiency of
the loan appraisal process will improve significantly. The CIB will help microfinance banks
and institutions in developing robust risk management system and practices, thus reducing
the risk of multiple borrowing and loan defaults. On the clients' side, the CIB will open access
to credit for millions of potential poor borrowers. Availability of the CIB will also reduce the
credit risk cost of the lender, thus also lowering the loan price for the borrowers. At present,
the successful borrowers of microfinance institutions also face difficulty in accessing larger
loans from MFBs or commercial banks due to non-availability of their long history of loans
and timely repayments with a microfinance institution. The MF-CIB will facilitate the
"graduation" of such livelihood-based workers into small entrepreneurs.
Although there are numerous benefits of a fully functional credit bureau to all stakeholders,
successfully operating a national CIB will not be without challenges. Ensuring timely and
accurate reporting by all members will be crucial for maintaining the impartiality and integrity
of the CIB. I believe PPAF will make it mandatory for its partner MFIs to report accurate and
timely data on their clients. At the policy level, it will be a priority to ensure that consumer
rights remain protected. They should not become victims of inaccurate reporting of their data,
and/or breach of data confidentiality by the CIB. As customers, it is their right to have an
accessible redressal mechanism. I am sure the leadership of MF-CIB will take into account
all these concerns, and build the CIB on strong fundamentals.
I will now highlight few recent developments in the microfinance sector that, we hope, can
turn the existing stagnant curve into a steeper growth curve. First and foremost, many of our
MFBs have undergone recapitalization and restructuring in the last two years. Resultantly,
strong and strategic investors have now entered and are entering in the microfinance sector.
Secondly, adoption of new technologies and alternative delivery channels such as mobile
phone and agent-based banking have radically transformed the distribution channels and
retail capacity of the sector. Finally, SBP continues to invest in various large-scale initiatives
in areas of funding, financial literacy, capacity building, institutional strengthening and
innovation. In the interest of time, I will not go into the details of these initiatives. However, I
will emphasize that all these initiatives, including MF-CIB, have now set a platform for MFBs
and MFIs to attain high growth momentum. SBP encourages that credit growth should be
fairly distributed across all economic, social, and geographic segments of the target market.
The MFBs and MFIs should develop innovative credit methodologies and appropriate risk
management policies to maintain growth and quality of loan portfolios. In particular, SBP
encourages financing micro enterprises that so far have been neglected by both the
microfinance sector and commercial banks. In this regard, SBP has already issued
necessary regulations to allow MFBs to extend loans of up to Rs. 500,000/- to
microenterprises.
Now I wish to address the CEOs/Presidents of MFBs and MFIs specifically? In my view, the
ball is now in your court. What has so far been achieved in the arena of microfinance in
Pakistan may best be described as an "enabling environment for attaining scale and
sustainability". However, achieving scale and sustainability is a huge task. I would urge you
to improve corporate governance, management structures, and institutional and
HR development in your respective organizations. Your organizations should also have in
place adequate systems and policies for ensuring the protection of consumer rights. SBP is
already in the process of revising regulations to ensure that MFBs follow best standards in
these critical areas. We count on your wisdom and commitment to reach out to millions of
financially excluded people. On our part, SBP will continue to support your efforts to advance
financial inclusion.
In conclusion, I would like to congratulate PMN, DataCheck and all key stakeholders on the
national roll-out of MF-CIB, and we look forward to its success and expected outcomes of
this mega initiative. I believe after global recognition of Pakistan's MF regulations, it is now
the turn of our MF-CIB to earn appreciation worldwide.
Thank you!