State Bank of Pakistan is considering a proposal to launch business models for branch-less banking along with associated regulatory framework to promote Micro Finance (MF) Sector, while Grameen Foundation, USA will provide technical assistance in the areas of funding, technology, and training to Pakistani Microfinance Organisations.
According to State Bank of Pakistan Annual Performance Review 2007, as the Micro Finance (MF) sector continues to expand, the overall balance sheet footing of Micro Finance Banks (MFBs) recorded a 24 percent increase from Rs 8,458 million to Rs 10,514 million in CY 2005, but in 2006-07, the growth momentum was somewhat diluted as the largest MFB failed to pursue the previous growth pattern.
A critical factor to the bank's conservative strategy was not to start generation of internal funds through deposit-mobilisation in the wake of reduced ADB credit lines. As regards the quality of loan portfolio, it was encouraging to see that the portfolio quality remained satisfactory as NPLs to Assets Ratio declined from 4.4 percent to 1.8 percent. The major reasons for this decline were revised stringent criteria of loan classification and better management of loan quality.
According to report, the funding structure continues to be dominated by owners' equity and borrowings (largely from ADB). Some minor adjustments were observed in the funding structure for the last three years. The borrowings continued to be a major funding component at 48.9 percent followed by shareholders' equity at 36.1 percent.
The average capital to asset ratio stood at 36 percent, which indicates 'underleveraged' position of MFBs. However, deposit mobilisation remained weak as deposits to total funding ratio only marginally improved from 8.3 percent to 13.5 percent. During CY 2006, two district MFBs also registered a negative trend in deposit mobilisation. With the exception of two MFBs rest have not yet developed any strategies or put systems in place for mobilising deposits.
SBP report observed that the financial performance of the Micro Finance (MF) sector needs improvement. The key factors associated with negative returns were the modest growth of core-revenue generating portfolio (loans), continued inefficiencies and low yields.
The share of interest-based income to gross income has been increasing continuously. During CY 2006 its share increased to 72.7 percent as compared to 68.3 percent over the previous year. The interest from loan portfolio continued to contribute a higher share towards the interest income of MFBs. The average earning assets also recorded growth of 23 percent, which resulted in an improved share of net interest income to gross income.
During Year 2006, a dedicated Development Finance Group (DFG) was established within the banking cluster at SBP. This allowed SBP to focus on its advocacy role of promoting development finance in Pakistan. The DFG is inter alia responsible for fostering an enabling environment to facilitate intermediation of market based microfinance industry for developing institutional capacities. The DFG engaged with the existing development partners to further strengthen the relationships so as to maintain focus on ongoing activities planned under pre-agreed contracts. In addition, DFG also explored new avenues of mutual collaboration. In this perspective, DFG entered into dialogue with DFID for developing a partnership programme for promoting common development goals under the DFG umbrella.
In November 2006, GOP and ADB signed a programme on "Improving Access to Financial Services Programme (IAFSP)". The programme comprised two loans of $320 million for supporting the reforms programme aimed at improving access to credit and other financial services. These loans will be accompanied by the technical assistance grant of $2 million.
Furthermore, at the request of eight development agencies (through the informal donor group) and SBP CGAP conducted a Country-Level Effectiveness and Accountability Review (CLEAR) combined with a Policy Diagnostic Review of Pakistan in November and December 2006. The CGAP reviewers proposed seven priority recommendations, which included sustainability, innovation, entry of new players and approaches, promotion of commercial wholesale market, diversified use of funding instruments, creation of a joint TA facility, increased SBP focus on regulation & supervision and delineation of GOP role as a facilitator.
Commenting over the "Roundtable Discussion on Branch-less Banking", the report stated that the event jointly organised by CGAP, SBP, MOIT, and PMN; was held at SBP in April, 2007.
The objectives of the discussion was to clarify the current status of policies and regulations for Branch-less Banking, role of the Task Force on M-Banking established by SBP and MOIT, international experience on Business models of Branch-less Banking along with associated Regulatory framework and stimulating a discussion on the next steps towards branch-less banking in Pakistan. The pursuance of these objectives would promote development and implementation of policies and regulations on branch-less banking.
Round table discussion with World Women Banking on Negotiating Access to commercial loans/Capital Market is another important subject. The event organised by PMN and SBP, was held at SBP in May, 2007. The objective of the event was to prepare MFBs/MFIs to become 'investment ready' with a clear understanding of the core requirements necessary to pitch commercial investors as attractive investment potential of microfinance.
In addition, DFG is also engaged both directly and indirectly with various other internationally-recognised organisations like ASA, BRAC, IFAD, KfW, Unitus etc to stimulate their interest in our microfinance sector.
According to report, Pakistan's Microfinance landscape though evolved initially from a non-regulated paradigm (NGOs, Rural Support Programme etc) has seen increasing penetration of regulated institutions after the Year 2000-01 when the formal financial sector was opened to Microfinance Banks (MFBs).
This was the first major step towards integrating microfinance in the financial sector development strategy. The MFBs established under the Ordinance in the Year 2000-01, have been operating within the regulatory and supervisory framework of SBP. Recognising the challenge to serve a potential market comprising of 25-30 million clients, our microfinance policy framework allowed institutional diversity as both regulated (Deposit-taking) and non-regulated (Non-Deposit-taking) institutions were allowed to cater to financial services needs of the poor.
During the Year 2006, market share of the regulated MFBs rapidly increased. Similar growth was also observed in other areas including provision of an enabling policy environment; supportive infrastructure; institutional development through development of alternate delivery channels, human resources, use of technology and outreach enhancement in the form of number of microfinance banks.
The continuum of Pakistan MF banking industry in the last six years presents a sequence of ownership/sponsorship interests initiated first by the Government in the form of pioneer public-private partnership model MFB, followed by social investors' initiative of establishing MFBs and entry of commercial investors (both local and foreign) in the market. The commitment of GOP and SBP has helped in laying foundation of the sector which holds promise for broadening access to finance and expanding the associated business opportunities for commercial as well as social investors.
Currently, four nation-wide and two district-wide Micro Finance Banks (MFBs) including Khushhali Bank, First Micro Finance Bank, Tameer Micro Finance Bank, Pak Oman Microfinance Bank, Network Micro Finance Bank and Rozgar Micro Finance Bank are providing financial services.
During CY 2006, combined outreach of micro finance banks exhibited consistent growth where number of borrowers increased by 32 percent and the number of depositors 118 percent. However, this improvement was largely urban based as many of the new branches and service centre opened during CY 2006 were in big urban cities like Karachi, Lahore, Rawalpindi, and Peshawar.
The Pakistan Post Office (PPO) with an extensive branch network and experience in some banking functions like deposits and remittances has been encouraged to consider entry into microfinance service delivery. If PPO decides to initiate microfinance services, it will be a significant boost to outreach enhancement.
In addition, ongoing feasibility of branchless banking in Pakistan is a major development activity with the potential for breakthrough in up-scaling of microfinance operations.
Micro Finance Division (MFD) at SBP was staffed with personnel having prior experience in regulating the banking industry and exposure to operational & financial dynamics of microfinance institutions. Further, State Bank Partnership for Microfinance (SBPM)-capacity building and skills enhancement program was undertaken with the assistance of Swiss Agency for Development & Cooperation (SDC) which contributed towards capacity enhancement at SBP.
Under SBPM, separate On-site Examination and Offsite Surveillance Manuals were developed by International Consulting Consortium (Inc). These supervisory manuals focused on risk-based supervision principles and the training of SBP staff involved in supervision. This development activity was in line with the functional strategies of SBP inter alia requiring it to focus on financial sector deepening, proactive supervision and regulation of financial institutions. Both these manuals were finalised in May 2006 and are being used for supervision of MFBs.
Alongside these developments, policy formulation continued to be our focal area of concern at SBP. The Microfinance Consultative Group (MFCG) comprising of key stakeholders continued to act as an advisory body for SBP in MF related policy formulation. During the Year 2006, SBP developed the regulations for Loan Classification and provisioning in light of best international practices. Another important development was issuance of guidelines for commercial banks for venturing into microfinance business.
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