SMEs have shown resilience, even as big corporations have faltered, Zubyr Soomro

Zubyr Soomro is presently Chairman and CEO at Hikmah Consulting. Besides serving as Chairman and President UBL, Chairman Pakistan Advisory Council and Chairman Karachi Stock Exchange, he has also had a long and illustrious career as a banker. Since retirement he has doubled efforts to promote corporate governance and the availability of micro finance in the country. The following transcript contains selected excerpts from his recent interview with BR Research.
My engagement with micro finance began when I took a leave of absence from Citibank and went to United Bank Limited. This move gave me a lot of exposure to the smaller cities and towns because Citibank was mostly concentrated in the major economic hubs. So, when I returned to Citibank we at Hikmah, got to thinking about how could we use our abilities as a major multinational institution to address local issues like the strengthening of local institutions, markets and society on the whole.
These endeavours were a natural extension of our business as Citibank had always stressed involved beyond simply strengthening our own bottom line. So starting in the year 2000 we started working very closely with the Citigroup Foundation which is a non-profit part of the Bank and supports social causes around the world. Leveraging this platform allowed us to contribute to society beyond monetary terms. So, if you consider micro finance; then besides providing funds for such a project, the Foundation also brought international expertise and knowledge from other projects to the equation.
But the mandate of the Foundation was such that it generally followed global themes, instead of doing different things in various countries. So, we started to draw on Pakistani expatriates to help us with projects that did not fall in the global theme but were important in the local context, for instance, the establishment of an oncology centre in Karachi, similar to Shaukat Khanum in Lahore. This project was undertaken with the Aga Khan Hospital and through collective efforts; we were able to collect more than Rs 12 million within 30-60 days, from current and former Citi bankers.
After this project we followed a similar model to help set up English medium school for girls and undertook other projects. After I left the Bank, my involvement with micro finance institutions focusing on providing financing to small and medium enterprises grew. Since the country was facing some testing times in the aftermath of 9/11, we decided to pursue individual donors instead of reaching out to big corporations.
The biggest motivator was that my experience at UBL had taught me that even in the most testing economic times when the corporate sector was struggling to maintain profitability; the SME sector had proved its resilience. When the bad loans of the corporate sector were up to 70 percent, the bad loans of SME sector were just around 10 percent. Drawn by this resilience, we started our SME finance business locally even though there were no global moves in that direction. As part of this we began wholesale lending to micro finance. We were the first ones that took a micro finance institution to the market, which is now Kashf Bank. That was a $22 million transaction in 2003-04, which was phenomenal for a micro finance institution in the country at that time. The consortium we made for this deal was designed to be able to remain functional in the future for similar projects.
BUILDING A CONDUCIVE FRAMEWORK
When Khushali Bank was being set up, Dr Esharat Hussain was Governor SBP and he approached Citibank and other multinationals to invest in this venture and help on the governance side, given their international expertise. So we put in about $1 million in Khushali Bank.
As my involvement with Pakistan Microfinance Network and with Pakistan Poverty Alleviation Fund deepened, we established awards for SME borrowers and to institutions that were playing enabling roles in terms of providing financing. We at Hikmah set up an advisory council which also had representatives from the central bank besides PMN and PPAF. These efforts have borne fruit and last year, The Economist magazine rated Pakistan's micro finance legal framework as the best in the world. If you look at our support infrastructure for micro finance, you will find that it is quite commendable. For instance, the legal regulations established by SBP are not just protective towards the MFIs; they are also very conducive to growth. Also note that about half of the PPAF's balance sheet has gone in to micro finance and it has been very focused on helping SMEs grow on one hand and to improve the structures and governance on the other hand.
In 2007, there were about 1.6-1.7 million borrowers in this segment. The government of the time came up with a five-year strategic plan to take this tally to 3 million borrowers by 2010 and to 5 million by 2013. Now consider these targets in comparison to regional peers. Bangladesh has about 25 million borrowers in this segment; India has more than 30 million borrowers. So you can see that our position is nothing to be proud of, especially when you consider that micro finance has proven to be very effective in terms of poverty alleviation. Unfortunately, soon after this plan was formulated, the 2008 crisis hit and borrowings actually fell further. This was not due to fewer borrowers but because many of the commercial banks that had been lending to MFIs, started to curtail their funding and as a result, funds available for lending dried up.
Consequently, Dr Shamshad Akhtar set up a task force which was to establish reasons for the stagnating growth of MFIs and to recommend steps to address these. I was asked to chair the task force which also included representatives from relevant sectors. Within 30 days we came up with a plan to address the liquidity issues, including steps to tap liquidity from international sources. Since most MFIs did not have the financial strength needed to convert into a bank, we also came up with recommendations that could allow them to raise some deposits, with insurance cover. Unfortunately none of the recommendations were taken up.
Then, when Shahid Kardar became Governor SBP, Hikmah raised the issue of Khushali Bank. At that time it had been jointly owned by fifteen different banks and their representatives made up its board of directors. Subsequently, UBL beat our bid and acquired Khushali Bank. The growth of this MFB shall now set the pace for the industry at large. This industry is really positioned for growth now. If you consider the period since January 2011, we have gone from having four entities with national micro finance bank licenses to eight such institutions. Then there has been this breakthrough in to the payments business.
IMPROVING DOCUMENTATION
The potential in mobile banking is huge and as it works out, it will create a win-win situation for all stakeholders including the government. As more and more people get on board with it, large proportions of monetary flows will become identifiable and that will in turn help improve the tax base among other benefits. A very small proportion of our population is paying taxes and supporting the entire economy. Unfortunately there is very little political will to change this situation in the short run. But as more and more people become a part of the documented economy, social pressure will build for the government to move towards expanding the tax base and brining those sectors into the documented economy.
A major reason due to which people shy away from proper documentation is the lack of governance. At the heart of it, better governance means having a system that deals with conflicts of interest in a fair, transparent and credible way. By improving governance in private and government institutions, the mistrust towards the authorities can be eliminated and that would not only encourage people to be more forthcoming, it will also build moral pressure on various segments to contribute their fair shares towards the expenses of the state.