The State Bank of Pakistan is formulating a five-year strategic framework for the development of microfinance sector in the country.
"This framework will serve as a roadmap for growth of the sector after its approval by the federal government," Deputy Governor of SBP Muhammad Kamran Shehzad said this while speaking at a seminar on "Programme for Increasing Sustainable Microfinance Assessing Capital Markets - Promoting Financial Inclusion" jointly organised by Pakistan Poverty Alleviation Fund (PPAF) and International Fund for Agriculture Development (IFAD) here on Tuesday.
He said the SBP has adopted a holistic approach towards financial inclusion with several targeted policy measures and carefully designed interventions supplemented by donor support for promoting a dynamic and sustainable microfinance sector. "These measures are not only focused on policy, legal and regulatory framework for the microfinance industry, but also, strengthening the necessary infrastructure and supporting mechanisms to promote diversity and sustainability in the microfinance business," he added.
He pointed out that the SBP has implemented a flexible prudential regulatory regime for Microfinance Banks (MFBs) which allows innovation and organic growth without abandoning prudential objectives. Industry-wide minimum regulatory standards on similar lines are under consideration. NGOs have been encouraged to restructure themselves into legally established companies, preferably licensed by central bank, so that they can operate under effective and transparent ownership with adequate capital base.
He said that innovative business models based on technological solutions are being facilitated by SBP for bringing in cost efficiency, better risk management as well as enhancing outreach to poor clients on a sustainable basis in partnership with non-financial institutions. Similarly, microfinance institutions are encouraged to have alliances with commercial financial institutions in order to meet funding needs of the sector.
The Deputy Governor SBP said smart subsidies through donor based programmes for providing infrastructure and capacity building support to the sector are being provided under the Financial Inclusion Program (FIP). Under the program, funds have been established which provide subsidies on matching grant basis. Institutional Strengthening Fund (ISF) is used to enhance capacity of MFBs and MFIs which are undergoing transformation to maximise potential for growth, achieve depth in outreach by improving human resource quality and enhancement of services and standards to potential clients.
He pointed out that a Financial Innovation Challenge Fund will soon be launched for encouraging product innovation to expand access to financial services towards the low income end of the market.
He said that both SBP and PPAF are addressing the funding constraints of the sector by encouraging institutions to look for funding resources which are diversified, private, owned and domestic. The SBP has issued guidelines to commercial banks for providing wholesale lending to the microfinance sector, he added.
He stressed that microfinance industry needs large-scale transformation to become dynamic participant within the overall banking system and to reach out to millions of un-served clients in the country. "This transformation would require energy, creativity, and commitment of all stakeholders. However, fundamental drive and dynamism must come from microfinance players themselves," he added.
He said the complacency, inefficiency, and exclusive reliance on traditional approaches will worsen the problem rather than solving it. The institutions need to develop internal technological resources, which provide effective information systems and robust service delivery channels. Every institution needs to have long-term business plan which generate revenues to meet all business costs and the approach for perpetual dependence on subsidies is neither sustainable at industry level nor acceptable among the ranks of policymakers.
He reiterated that policymakers are committed to providing enabling environment and appropriate support structures to microfinance players. However, he said, the sector needs to discontinue dependence on external catalyst and focus on improving its financial and operating performance by setting dynamic targets of borrowers, depositors, portfolio quality, and self-sufficiency. The success in achieving the targets will come only if microfinance players align their business plan, management talents, technology resources and governance structure to best standards, he added.
Ahmed Jamal, Chief Strategy Officer, PPAF said Pakistan microfinance sector has potential of 20-30 million borrowers and the sector has reached over 1.8 million indicating a huge upscale portfolio. This demand can be fulfilled by engaging formal commercial sector in microfinance, along with other avenues of financing.
He pointed out that PPAF has disbursed more than 3.4 million microfinance loans worth $550 million in 84 districts of the country. Out of the total 1.8 million borrowers in the country, PPAF holds approximately 50 percent share of the microfinance market. Almost half of all loans provided through PPAF support have been directed towards women and have predominantly focused on rural and semi-urban areas of the country. Over the year, PPAF has created a network of organisations, which have shown performance, growth and high portfolio qualities. However, their inability to attract additional funding for microfinance is holding back their expansion.
Given the supportive policy and regulatory environment with limited present coverage, there exists tremendous potential for microfinance. For continuous growth and sustainability of the microfinance sector, access and availability of funding from commercial banks and capital market is very important.
PPAF initiated $31 million Programme for Increasing Sustainable Microfinance with the support of IFAD in June 2008. The goals of this programme are poverty reduction, promotion of economic growth and to improve the livelihoods of rural households. This programme provides various options to the microfinance industry where funding is the main constraint for future growth. Increased funding will also help in expanding microfinance in the areas and to the borrowers whose demand is still unmet.
He said that PPAF is the lead institution for poverty-focused interventions in the country. Set up as a fully autonomous private sector institution, PPAF enjoys facilitation and support from the government of Pakistan, the World Bank and other international donors. Outreach of PPAF now extends throughout Pakistan and its micro-credit, community physical infrastructure, drought mitigation and education and health interventions have expanded all over the country. PPAF has received high performance rating.
Dr Rashid Bajwa CEO National Rural Support Programme said microfinance sector growth has declined during the last one and a half years due to economic slowdown. However there is a huge potential in this sector, he added. Qaim Ali Shah Country Presence Officer IFAD; Yasir Ashfaq General Manager Credit and Enterprise Development PPAF; Imran Ahad Head of Whole Sales Banking at Standard Chartered Bank and Roshaneh Zafar Managing Director Kashf Foundation also spoke on the occasion.
The speakers said there is a demonstrated need to create strong linkages between the non-formal and formal financial sectors to expend the outreach of microfinance and meet the objectives of Poverty Reduction Strategy of the government. The objective of the seminar was to bring microfinance players, banks and financial institutions closer and share experiences of their respective financial arrangements that have been materialised and other facilities that are under process.