At a time when Micro-finance Institutions (MFIs) are under the assault of Indian politicians Bangladesh has announced that it intends to cap the annual interest rate MFIs can charge at 27 percent - the UK-based Economist's Intelligence Unit report 'global microscope on Micro-finance business environment 2010' places Pakistan's regulatory framework on top among 54 developing countries and 5th overall in microfinance business environment surveyed to evaluate conditions globally.
The regulatory framework includes official legal recognition, interest rate restrictions, market distortions, capital requirements and regulatory capacity. In 2006, the pioneer of this form of finance and Nobel laureate Dr Muhammad Yunus, at a seminar, held in Ottawa, expressed similar views.
Micro-finance providers are required to incorporate with the Securities and Exchange Commission of Pakistan (SECP). As deposit-takers, they are supervised by the State Bank of Pakistan. The country, therefore, owes its highly enviable high ranking to its central bank's supervising capacity. Last year, SBP framed new rules in support of Micro-finance banks, allowing them to accept foreign currency loans from international investors. Islamic banking has also been allowed to MFIs wishing to have Sharia-compliant network. Now as many as 26 Pakistani Micro-finance network institutions plan to set up a nation-wide credit bureau by 2011.
Critics of micro-finance accuse the MFIs of charging very high lending rates. The cost of tapping into very low savings as well as delivery of small sums lent without collateral, MFI lending charges look exorbitant compared to normal bank lending rates. Compared to private money lenders, the MFI rates are still much lower, especially in rural areas where the local traditional money lender commonly knows as mahajun charges ten times higher.
Credit is not all that poor people need. Conducting normal business transactions and depositing small sums in saving accounts in the absence of a nearby bank branch is a rather difficult task. In order to cover the cost of mortar/brick branch banking - MFIs have teamed up with cellular companies. This is precisely the area where mobile banking can be useful. The regulatory framework for this kind of service is available in Pakistan. But it needs to be properly incentivised to become a priority for mobile service providers already involved in e-banking with commercial banks. Credit co-operatives in most countries are a key micro-finance provider. While the government-managed institutions of this kind have not been a success, the failure of private sector co-operative banks has earned a bad name for co-operatives unlike our eastern neighbour where such ventures have been a success story. Regulatory framework on this score in Pakistan appears to be lagging far behind.
According to data available, at the end of 2009, Pakistan had 2.35 million micro-savers and 1.8 million micro-borrowers with the National Rural Support Programme accounting for 56 percent share of savings. The focus of MFBs is to provide credit through group lending. Micro-insurance policy holders are now touching 3.5 million figures. As a note of caution, micro-finance lenders need to learn from the high incidence of NPLs in consumer lending under credit cards and auto-loans. Rising defaults in a tight monetary scenario forced borrowers to pay off one credit card debt by borrowing from the other in their possession. Multiple loans can be transacted in MFIs as well. If these loans are staggered then possibly the second loan is being taken to pay off the first. But, if the loans are taken simultaneously, then it implies that the borrower is doing so as his need is more than MFI's per person limit. Both need to be checked and verified. For this purpose credit information sharing between lenders becomes a necessity. A nation-wide credit information bureau needs to be created expeditiously and the industry needs to move from subsidised lending to become profitable and sustainable.
The SBP decision to allow big banks to enter leasing and Modaraba business has hampered creation of specialised lending institutions. We must incentivise commercial banks to provide credit lines to micro-finance banks. But at the same time micro-finance banks must refrain from quoting high returns on big deposits of public sector entities. While we cautiously favour fewer restrictions on micro lenders to help the poor, we generously advocate the need for striking a delicate through self-prudence.