The current situation of the financial sector in the country is that its penetration is too low when compared with the regional countries. The number of people per bank branch in Pakistan is 20,450. In other regional countries, this ratio is: India 15864, Indonesia 11,845, Malaysia 10,208, Philippines 12,773, Singapore 10,954, Sri Lanka 14,551 and Thailand 13,929.
The sectoral distribution of advances also speaks of "exclusiveness" of very important segment of the rural Pakistan, ie, micro-finance borrowers. As of end 2006, over 50 percent of the outstanding advances were held by the corporate sector [Rs 1269.564 billion out of total outstanding advances of Rs 2411.496 billion] while the micro-finance loans stood at Rs 10.473, billion constituting merely 0.44 percent of the total outstanding advances.
State Bank of Pakistan (SBP) Governor spoke of the strategy to build up "inclusive" banking sector in the country in her speech delivered at the 'DfID & HM Treasury Financial Inclusion conference' held in London on 19th June, 2007 which was published in Business Recorder on the 6th/7th August, 2007 and the SBP monthly news bulletin for September, 2007.
According to the Governor, second generation reforms for financial services industry is placing high priority on developing and implementing the effective strategy for financial 'inclusion' with a view to supporting government's target for halving the poverty head count by 2015. The Governor reiterated the claim that poverty has reduced by 10 percent to 24 percent during 2000-2007 and that per capita income has doubled to $925.
Various programmes are under way in the rural sector for poverty alleviation; prominent among them is Pakistan Poverty Alleviation Fund (PPAF) which is sponsored by Government of Pakistan and funded by the World Bank and other lenders. The NRSP (National Rural Support Programme) is financed by PPAF. The NRSP, with more than half a million poor households organised into a network of about 29,000 community organisations (COs), manages one of the largest micro-finance portfolios with 282,481 active loans. The total resources available to PPAF amount to Rs 49.56 billion.
In addition to that, 5 or 6 micro-finance banks are also busy in providing small loans to the poor households. The current portfolio of micro loans provided by the Micro-Finance banks (MFBs) and Micro-Finance Institutions (MFIs) through 239 branches, as put in the SBP governor's above speech, is Rs 5.6 billion only. The figure of Rs 10.743 billion given in the earlier paragraph may include micro loans provided by commercial banks under "agricultural credit" scheme.
National Bank of Pakistan (NBP) is providing small loans to unemployed and the poor to finance purchase of auto-rickshaws, setting up of utility stores under franchise of the Utility Stores Corporation and setting up of public call offices, etc, at the interest rate of 6 percent p.a. while the government shares the remaining 6 percent p.a. The internal and external verification of borrowers, references and guarantees are handled by ICIL - a representative firm of Dun and bradstreet of UK.
The scheme anticipates to disburse Rs 105 billion over 5 years. The scheme has currently delivered Rs 2 billion only. SBP strategy for financial "inclusion", inter-alia, includes: (a) provision of liquidity to the Micro-finance providers by the commercial banks, (b) conversion of Micro-finance Institutions into full-fleged Micro-finance banks, (c) enhancement of capacities of PPAF to offer credit enhancement to leverage resources for micro-finance industry and supporting other industry-wide initiatives, (d) revision of SBP's branch licensing policy requiring the banks (with 100 branches or more) to open at least 20 percent of branches outside big cities in Tehsil headquarters where no branch of any bank exists (e) establishment by commercial banks in inner regions sub-branches/booths/ service centres, to be managed by skeleton staff, which can act as extended arm of the near branch for performing limited banking functions, where it is costly to maintain full-fledged branch, (f) launching of mobile banking in collaboration with Asian Development Bank (ADB), (g) exploration of possibility as to how 12,343 field office network of Post Offices (PO) can be used to provide financial services by encouraging alliances between MFBs/ MFIs and PO.
PO is now working with a few MFBs/MFIs to develop a viable arrangement for PO to sublet premises to MF providers or to partner them to launch wide range of financial services, (h) introduction of new product of Basis Banking Accounts (BBAs) by the banks for small depositors.
One may have to wait for quite a long time to see the results of the "inclusion" strategy devised by the SBP as an ingredient of second generation reforms in the financial sector. Although the micro-finance sector is in operation for over half a decade, the results achieved as depicted above are hardly satisfactory. The PPAF is stated to possess resources of over Rs 49.56 billion but the use is very poor.
The nation may be paying interest to the lenders if the amount has already been got disbursed and if not at least there would an outgo of foreign exchange on account of "commitment charges" on the undrawn funds. While the new resources may be mobilised as there is a vast potential of lending in the micro-finance sector, more urgent need is to devise means to expeditiously utilise the resources already available with the PPAF.
Our authorities continue to repeat [as has been done in SBP Governor's speech under review] that the poverty head count has reduced from 34.46 percent in FY-01 to 23.9 percent in FY-05- a reduction of about 10 percent. A few months back, World Bank has asserted that poverty reduction may be 5 percent or so and not 10 percent.
The Economic Survey for FY-06 tells us that the conclusion was based on the survey of only 14,706 households [5808 households in urban areas and 8898 in rural areas]. How can the survey of such a small number of households can be representative of the population of over 155 million? According to the globally accepted formula, a person earning $1 a day (Rs 1800 per month) lives in abject poverty.
The threshold adopted by our Planning Division is merely Rs 878.64 per capita per month. If authorities further reduce this threshold, the poverty will further decline. As a corollary to the reduction in poverty, the income inequalities between various sections of the society should also come down. In our case, reverse is the picture; the share of bottom 10 percent of the population in the national cake has declined from 4.4 percent in 2001 to 4.1 percent in 2005 while the share of the top 10 percent has increased from 24.2 percent to 25.6 percent during this period.
As for doubling per capita GDP to $925 during 2000-2007, various factors may have to be taken into consideration; firstly the rebasing of the national accounts in 2000-01 and the inflation since the per capita income is based on the nominal value of the GDP. The compound impact of the officially accepted inflation during 2001-02 to 2006-07 works out to 31.6 percent while 20 percent may be attributed to the rebasing of national accounts. Thus in real terms, the per capita GDP has hardly increased.
During second generation reforms, SBP authorities are thinking of building up "inclusive" financial sector while during the first generation reform period [when Dr Ishrat Husain has occupied the seat of SBP Governor] just opposite policies were followed by adopting several means, inter-alia, including: (a) bringing the deposit rate to almost zero percent for the small depositors [large banks are still paying interest @ 0.1 percent p.a. on the deposits of upto Rs 10,000 but the SBP is not prepared to remedy the situation], (b) imposition of minimum balance requirement by the banks and imposition of monthly penalty if the balance fell below the minimum, the minimum balance and monthly penalty differed from bank to bank [recently SBP has recently ordered that the amount of penalty shall not be more than Rs 50 per month], (c) indiscriminate closure of branches in urban as well as rural areas.
These measures, duly authorised by the SBP, encouraged the banks to show the small clients the doors of the bank which reduced the number of small depositors [amounts upto Rs 10,000] from 16,237,497(31-12-1998) to 6,881,300 (30-06-2006). THE DETAILS OF THE BRANCHES CLOSED BY THE FIVE LARGE BANKS SINCE 1996 ARE GIVEN IN THE TABLE APPENDED: BRANCHES AS END OF:
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Banks 1996 2006 Closed
(2-3)
1 2 3 4
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National Bank of Pakistan 1555 1250 305
Habib Bank Ltd 1992 1477 515
United Bank Ltd 1701 1059 642
MCB Bank Ltd 1332 994 338
Allied Bank Ltd 929 742 187
Total 7509 5522 1987
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