The State Bank of Pakistan, in a major move on 4th December, 2012, decided to allow micro-finance banks (MFBs) to avail financing under the Credit Guarantee Scheme (CGS) in order to help micro enterprises to boost their businesses. According to a SBP circular, "the SBP has extended the scope of the CGS by including micro-finance banks as eligible Participating Financial Institutions (PFIs) to enable micro enterprises to benefit from this scheme." It may be mentioned that the facility was earlier available only to commercial banks.
Under the scheme, the MFBs would be able to extend loans from Rs 150,000 to Rs 500,000 and additional loans, other than the guaranteed, could be advanced to a borrower under normal business operations. In order to enlarge the coverage of the scheme, MFBs which had already obtained prior approval of SBP for undertaking "micro enterprise" lending could also apply for allocation of credit exposure limits under the CGS. The SBP was so upbeat about the efficacy of its latest initiative that it stressed the point that "the MFBs would find great comfort in taking credit risks as they now enjoy risk coverage of 40 percent in their loans to micro enterprises."
It may be recalled that the government of Pakistan and the SBP have consistently shown a great deal of commitment over the last few years to promote micro-finance as a long-term strategy to broaden access to financial services to the low-income segments of population. The idea behind such a policy thrust was to improve the income generating capacities of the poor, promote employment in the country, reduce income inequalities and support the overall growth process. As the field of activity, ie, micro-finance relates basically to the SBP, it has made certain sincere efforts to promote the growth of this sector in the recent past. Micro-finance Credit Guarantee Scheme was previously launched by the SBP to mobilise more commercial funding for micro-finance providers through partial guarantees to commercial banks and Prudential Regulations No 10 and 11 were revised for MFBs to facilitate lending to micro-enterprise segment. However, it needs to be pointed out that despite certain obvious advantages, micro-finance sector has not made the desired progress. For instance, gross loan portfolio of the sector now stands at about Rs 30 billion, which is an insignificant amount compared to the aggregate loan portfolio of the financial institutions in the country. Apparently, the latest initiative by the SBP is meant to embolden the MFBs to venture into the field with greater vigour as the risk in loans given under the guarantee scheme to small enterprises will now be covered by the central bank up to 40 percent which means that in the case of default 40 percent loss would be borne by the SBP. However, looking at the history of micro-finance in the country, this measure of the State Bank may also not be able to generate the necessary enthusiasm and raise the level of micro-finance to the desired levels. The reasons for such a reckoning are obvious. We know that the SBP, like any other central bank, would not like to carry a greater risk but a higher risk of 60 percent still to be borne by the lending micro-finance institution would not motivate it sufficiently to venture into the field more courageously. Besides, the amount covered under the scheme is only up to Rs 500,000 which may not be adequate to start a business in the present high inflationary environment. Also, the scheme does not restrict banks to demand collaterals from borrowers which would continue to prevent collateral-deficient borrowers to utilise credit. However, more important than these financial incentives or constraints is the continued existence of certain irritants or handicaps in promoting micro-finance and SMEs in Pakistan. Most of small businesses in Pakistan are family-owned and self-financed because of the reason that petty officials of various government departments, taking advantage of outdated laws and often misinterpreting them, are in the habit of harassing their owners in order to extract bribes. They believe that once they get loans, the level of harassment, particularly by the tax staff, would increase significantly due to the automatic inclusion of their business entities in the formal sector. Also, they would be required to maintain proper records and account books, etc, which would be very time-consuming. In certain cases, clients may also shun the MFBs to avoid interest-based transactions on religious grounds. You can, of course, lead a horse to water but cannot make it drink. All of these factors suggest that hopes attached to the initiatives to promote micro-finance may not materialise fully unless and until the enabling environment is in place to ensure a better outcome.
Comments
Comments are closed.