micro finance institutions overview
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Microfinance in
Pakistan
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Role of Commercial Banks in Micro FinanceSector
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Micro Finance
Micro finance is the provision offinancial services including Credit,Savings, Insurance etc, to those
sectors of economy, which are notserviced by traditional formalfinancial institutions viz. commercialbanks and non-banking financialinstitutions.
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Microfinance caters to the financial
services needs of the poor andmicro enterprises and is normallycollateral-free short term facility
whereas the commercial banksgenerally deal with corporateclients, SMEs and individuals with
larger income levels and extendfinancing facilities primarily basedon collaterals and borrowers
ca acit to re a .
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Microfinance Providers
Broadly there are two types ofinstitutions in Pakistan providingmicro credit/microfinance services
to the poor households/microenterprises the Non Government-Micro finance Institutions (NGO-
MFIs) /Rural Support Programs(RSPs) extending micro credit tothe poor through sources other thanpublic savings and
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While the Microfinance Banks areeligible to mobilize public savings tofinance their operations, the
Government has established awholesale window, the PakistanPoverty Alleviation Fund (PPAF),
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to provide wholesale funds/creditlines and grants to NGOs for onlending to the poor and capacity
and infrastructure building.
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Law Implications
The formal microfinance banks arerequired to take license from StateBank of Pakistan under MFIsOrdinance 2001 to operate asmicrofinance bank and are under
the regulatory ambit of the StateBank,
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whereas the NGO-MFIs/RSPs are
registered with RegistrarNGOs/Provincial CooperativeDepartments and are not under the
regulatoryambit of State Bank.
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Suppliers of Microfinance
Category 1: Informal Sources
Category 2: Semiformal Sources
Category 3: Formal Sources
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Informal SourcesInformal Reciprocal Arrangements
Account for 83% of credit supply,Commercial creditors that liaison
with marketing intermediaries, Landbased credit arrangements extendedby landlords to farmers, Socially
based arrangements of friends andfamily
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Semiformal Sources
Pakistan Poverty Alleviation Fund(PPAF)
NGOsMulti- sectorial NGOsoffers
composite services:
education
Health
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Infrastructure and community
developmentOffers Micro credit as a minorprogram
Few NGOs with microfinance as acore activity
Government sponsored programs
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NGOs in Microfinance
A number of NGOs are working inPakistan, a few NGOs are doingtheir job with the contribution of
international financial institutions.
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Formal
Commercial banks and licensedMFIs, by State Bank of Pakistan,
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Role of Commercial
Banks in
Microfinance Sector
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Microfinance in its broadest terms
can be defined as provision of arange of financial services such asdeposits, loans, payment services,
money transfers and insurance topoor and low income households,and their micro enterprises.
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While a commercial bank is a
financial institution that offers abroad range of deposit accounts,including checking, savings, and
time deposits, and extends loans toindividuals and businesses.
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Primarily, the microfinance
customers are large in number,scattered in far-flung areas withvery minute transaction sizes. Only
government or state bank alonecannot reach out to millions ofpotential Microfinance beneficiaries;
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In Pakistan it is estimated that as
many as 5.6 million householdsneed microfinance services butthese services reach only to less
than 1 percent, most probablybecause of the absence ofcommercial banks from the
microfinance sector.
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This way a poor person just need to
visit his local commercial bank toget access to microfinance benefits,which will help reduce many
economic problems.
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One criticism over involving the
commercial banks in microfinanceis that commercial banks willcharge higher interest rates, further
lower the standard of living and willexploit the public.
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The ground realities are totallydifferent; empirical evidence hasdemonstrated that participants inmicrofinance programs have
improved their living standards atboth the individual and householdlevel, and that this has provided
increased educational opportunitiesfor children.
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almost all girls in Grameen Bank (A
commercial bank!) clienthouseholds had some schooling,compared with the rate of 60% in
non-client households.
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No doubt on the other hand theloans provided by the commercialbanks to the microfinancebeneficiaries are a bit expensive, its
not to discourage the poor but thereis a sound reason behind it;
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Providing financial services to poor
people is quite expensive,especially in relation to the size ofthe transactions involved. A $100
dollar loan, for example, requiresthe same personnel and resourcesas a $2,000 one thus increasing per
unit transaction costs.
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Loan officers must visit the client's
home or place of work, evaluatecreditworthiness on the basis ofinterviews with the client's family
and references, and in many cases,follow through with visits toreinforce the repayment culture.
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It can easily cost US$25 to make a
micro loan. While that might notseem unreasonable in absoluteterms, it might represent 25% of the
value of the loan amount, and forcethe institution to charge a highrate of interest to cover its cost of
loan administration.
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If commercial banks are to be
involved in the micro finance by nomeans it would be a wrong decisionfor them as regard to their primary
aim, profitability.
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Yes it can. Data from the MicroBanking Bulletin reports that 63 ofthe world's top MFIs had anaverage rate of return, after
adjusting for inflation and aftertaking out subsidies programsmight have received, of about 2.5%
of total assets.
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This compares favorably with
returns in the commercial bankingsector and gives credence to thehope of many that microfinance can
be sufficiently attractive tomainstream into the retail bankingsector.
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Many feel that once microfinancebecomes mainstreamed, massivegrowth in the numbers of clientscan be achieved. According to a
recent analysis conducted by theConsultative Group to Assist thePoor (CGAP),
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the compound annual growth
rate of the worlds leadingmicrofinance providers over the
last five years has been awhopping 15%.
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Micro-insurance
Micro insurance is the provision ofinsurance to low-incomehouseholds.
Poor households are especiallyvulnerable to risk, both in the formof natural calamities as well asmore regular occurrences of illnessand accidents.
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Micro-insurance
Microfinance Institutions (MFIs) haveplayed an active role in reducing orprotecting against this vulnerability
through providing credit forincreasing income earningopportunities and through providingsavings services to build upresources that can be drawn down in
cases of emergencies.
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However, some events stilltranslate into crisis for many poorhouseholds and erode the
economic gains they have made asclients of microfinance programs.
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Micro-insurance
Credit and savings services areinadequate when households areexposed to risks which cause losses
that are beyond their means. Insurance can serve as a promising
response to such client needs.
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Today micro insurers are providing
different forms of insurance for life,health, property, disability,agriculture (crop), etc.
Poor households pay a smallpremium for limited coverage in theevent of losses.
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Basic Insurance principles
Basic principles that should beobserved by micro insuranceproviders are universal to
insurance and risk management.They include:
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Basic Insurance principles
1) Similar units exposed to risk.2) Limited policy holder control over
the insured event.
3) Existence of insurable interest.
4) Losses are determinable and
measurable.
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5) Losses should not be catastrophic.
6) Chance of loss is calculable.
7) Premiums are economically
affordable.
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State Bank of Pakistan
& Micro Financing The State Bank of Pakistan
mission is to promote monetaryand financial stability
Foster a sound and dynamic
financial system
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Its primary functions include: issue of notes,
regulation of the financialsystem,
lender of the last resort,And conduct of monetary policy
S f
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SBP secondary functions include:
The management of public debt,
Management of foreign exchange,Advising the Government on policy
matters,
Anchoring payments system, andmaintaining close relationships withinternational financial institutions.
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Responsibilities of the State Bank ofPakistan go well beyond the
conventional functions of a CentralBank, by including the economicgrowth objective in its statute and
supporting the development ofnew financial institutions topromote financial intermediation.
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SBP has also directed the use ofcredit according to developmentpriorities, providing subsidizedcredit.
St t B k P ki t t t
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State Bank Pakistan support tomicrofinance commercialisation
The State Bank of Pakistan hasencouraged the entry of privatesector institutions into microfinance
through an enabling environment.
A P ki t ' fi i l l t
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As Pakistan's financial regulator,SBP has been entrusted by the MFIs
ordinance 2001 with the licensing,regulation and supervision ofMicrofinance Banks (MFBs).
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SBP is the implementing agency for
strengthening supervision andregulation under the Rural FinanceSector Development Program
(RFDP).
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SBP is also incharge of specialfunds of more than US$70 millionto lend support to the microfinancesector and provide risk mitigation
mechanisms to poor depositors andborrowers of microfinance banks.
R l t f k
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Regulatory framework The framework (MFIs Ordinance
2001) allows the establishment ofthree categories of formalmicrofinance banks, with minimum
paid-up capital required:
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Nation wide MFBs: Rs. 500 millionProvince wide MFBs: Rs.250
million
District wide MFBs: Rs.100 million
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NGOs and other microfinanceproviders can bring their loanportfolio to contribute to up to 50%
to the capital requirements.