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Microfinance Sector Development: Pakistan’s policy perspective and experience in financial
inclusion
Dr. Saeed Ahmed
State Bank of Pakistan
Workshop on Regulation and Supervision of the
Microfinance Sector in Morocco Rabat , December 2-3, 2014
Outline
Three Key Questions?
(Goal, Target Market, and Policy Approach)
Assessing Pakistan’s Approach towards Microfinance in the Global
Context (G-20 Principles )
Microfinance Industry Infrastructure
Microfinance Journey
Legal & Regulatory Framework
Supervisory Framework
Targeted Market Interventions
Lessons Learnt
2
What are the goals we want to
achieve through Microfinance?
Microfinance is not a panacea for poverty alleviation, but
has multidimensional impact:
Financial
Economic
Social
The purpose is to provide Inclusive Financial Services
to unbanked and under-banked masses.
Inclusive Financial Services include Loans, Savings,
Remittances, Insurance etc. which are channeled
through regulated financial institutions.
3
4
What is the Microfinance Market ?
Source: Hashemi, Syed and Richard Rosenberg. Graduating the Poorest into Microfinance – Linking Safety Nets and Financial Services. CGAP, Washington DC. 2006 and HIES, 2004-2005
Microfinance (Credit, Deposit,
Insurance and
Remittances)
Non-Poor
(21.7MM)
Transitory Vulnerable
(17.1MM)
Transitory Poor
(12.4MM)
Transitory Non-Poor
(32.2MM)
Chronic Poor
(4.6MM)
Extremely Poor
(0.8MM)
Safety Net
Programs
Total 29.5 Million Adults
Current
Penetration
12%
Small enterprises
How should we build a policy approach
towards Microfinance?
Inclusive market development is unlikely to just happen by itself. A
strategic vision is needed if a country adopts Market Development
Approach.
That vision shifts Government’s Role from ad-hoc interventions to
supporting market-based holistic approach.
An independent and strong Regulator to provide proportional &
consultative regulations for encouraging private sector to invest and
grow microfinance business.
Regulator to manage competing policy objectives (I-SIP): Inclusion
(I), Stability (S), financial Integrity (I), consumer Protection (P).
Donors’ harmonization and alignment with market-led approach.
Modernizing Market Infrastructure to support market’s innovation
and experimentation.
Safeguarding interests of customers through financial literacy
programs, consumer protection regulations, and social performance
certifications.
5
Alignment with G20 Principles
on Financial Inclusion
1. Leadership
• Government Commitment is high
(MFIs Ordinance, National Financial Inclusion Strategy, MF Strategies, Donor-
funded Programs)
• SBP’s Stewardship Role for financial inclusion
(SBP’s DF Group, MF Consultative Group, Implementation of National
Strategies, FIP)
• SBP’s Inclusive Approach
(licensing, regulation, supervision, and development)
2. Diversity:
• Institutional Diversity (MFBs, MFIs, RSPs, CBs)
• Path for transformation of MFIs into MFBs
• BB Institutional models (1-to-1, 1-to-many, and many-to-many)
• Local & international players
• Inclusive financial services (up-scaling, G2Ps, WHR, m-wallet etc.)
• Alternative Delivery Channels (Telcos, Retailers, Postal office)
6
Contd… 3. Innovation:
– Policy level:
• Enabling environment which allows experimentation
• Risk mitigation strategies (CLIS, LLIS, CIB, DPF, micro-insurance)
• Credit enhancement mechanisms (MCGF, Rural & SME GF, TFCs)
• Financial Innovation Challenge Fund (FICF)
– Industry level:
• Innovative partnerships
• Agent network
• Inter-bank fund transfer (IBFT)
• G2P payments
• Development of Inter-operability framework
4. Protection:
• Dedicated Consumer Protection Department at SBP
• Banking Ombudsmen
• Truth-in lending regulations
• MF-CIB to minimize borrowers’ over-indebtedness
• Code of Ethics – PMN
7
Contd…
5. Empowerment:
• Nation-wide financial literacy program
• Media campaigns for users’ awareness
• Grass root level farmers’ awareness program
• Agriculture and microfinance regional fairs/melas/festivals
6. Cooperation:
• Government counts on SBP to lead financial inclusion
• Consultative Groups for MF, BB, and SMEs
• Agricultural Credit Advisory Committee (ACAC), Private Sector Advisory
Committees (PSAC)
• Computerized National Identification Number by NADRA
• Regulatory Harmony (SBP-SECP, and SBP-PTA forum, NADRA)
• Donors’ harmonization
• SBP’s linkages with international agencies such as CGAP, AFI, APRACA,
Asia-pacific housing forum)
8
Contd… 7.Knowledge:
• Market Research (A2FS 2008, Value Chain study, G2P surveys, SMEs
cluster surveys, BB holistic survey, impact assessment etc.)
• Analytics Reviews (DFG review, BB Newsletter, PMR)
• CGAP study on I-SIP
• Local & international training and exposure visits for regulators and industry
• Local and international seminars
• Linkages with internationally reputed consultants/experts
8. Proportionality:
• Regulating only deposit-taking MFBs
• Specialized legal, regulatory, & supervisory framework for MFBs
• Proportional regulatory approach (aligned with the evolution of sector)
• First phase: focus was on solvency risk
• Second phase: Governance, CP & AML strengthened
• Third phase: Consolidation (recapitalization and acquisitions)
• BB regulations: Tiered account structure
• Different MCR for different level of MFBs
9
Contd…
9. Framework:
• Laws
Banking Companies Ordinance, 1962
MFIs Ordinance 2001
Anti Money Laundering Act , 2010
Payment Systems & Electronic Funds Act, 2007
• Sector-specific Regulations
• Risk-based AML frameworks
• National Microfinance Strategies 2007 &2011
• Programs Management (FIP/IAFSF/MSDP)
• National Financial Inclusion Strategy (to be released in Dec-2014)
10
Microfinance Industry Infrastructure
Industry market share in terms
of borrowers Infrastructure
Clients
3.14 M
MFB
35%
MFI 40%
NGO
5%
RSP
20%
• 10 Microfinance Banks (MFBs)
• 6 Rural Support Programs (RSPs)
• 12 Specialized Microfinance
Institutions (MFIs)
• 7 NGOs
• Outlets: 2389
• In terms of GLP of the sector, the share of MFBs is 55% 11
Mainstreaming of microfinance into
Banking (2000to present)
• Pioneer MFB established in 2000
• MF Law 2001
2000
• FIP 2008
• Pakistan Post-FMFB Partnership
• Branchless Banking Regulations
2008
• Easypaisa – 1st BB model launched
2009
• UBL Omni
2010
• 3 largest MFIs have transformed into MFBs
• 3 largest MNOs have their own MFBs
• 8 of 10 MFBs Operate Nationwide
• 8 BB players
• 185K Retail Agents
• Up-scaling through enterprise Lending
By 2014
SBP LEADERSHIP
Innovation and Growth Institutional Sustainability
Strategic Framework (2011-15) Expanding MF Outreach Strategy (2007)
12
Legal & Regulatory Framework
for Microfinance Specialized Law: Microfinance Institution Ordinance 2001:
– Functions & Powers
– Licensing & Establishment
– Financial and Operational Requirements
– Regulation and Supervision
Separate Licensing Regime:
– Transformation of NGOs into MFBs
– Establishment of Greenfield MFBs
Specific Prudential Regulations for MFBs:
– Risk Management (R)
– Corporate Governance (G)
– CDD & Anti Money Laundering (M)
– Operations / Consumer Protection (O)
Branchless banking to leverage technology and agent networks:
– Bank-led model with partnerships with MNOs (1-to-1, 1-to-∞, ∞ to ∞)
– Tiered Account structure
Rules for Payment Service Providers / Operators:
13
Licensing Process
14
Application SBP NOC
Incorporation with SECP
Commencement of business
Ingredient of a business proposal
Clarity on vision and business objectives
Detailed market analysis / survey, feasibility study
Financial /business projections along with the underlying assumptions
Governance / management structure
Sponsors’ profile along with their net worth certification
Equity plan covering present and future requirements
Article & memo of association
NGOs Transformation
15
1. Why to Transform (Motivation)
2. Transformation Continuum
3. Independent Institutional Assessment – Financial position, governance structure, human resources, control
systems and accounting and information systems.
4. Financial Position & Capacity – Detailed review of assets especially credit quality – Assessment of the real value of MFI’s obligations; respective
maturities, likely impact on the transformation – Operationally & Financially self sufficient
5. Transformation Decision – Board shall authorize Licensing application to SBP for operating as
Microfinance Bank
Why Regulate the Microfinance Sector?
Structured market development
Level playing field for fostering competition
Protecting financial system
Safeguarding public deposits
Increased integration with payment system and capital
market
16
Risk management (R)
Capital adequacy Minimum Capital requirements (MCR) vary for MFBs depending on jurisdiction size of
area of operations (district, regional, provincial, nation-wide)
Capital Adequacy Raito (CAR) for MFBs is 15% (higher than the requirement for
commercial banks of 10%) due to high risk of MFBs emanating from collateral-free
lending, vulnerability to disasters/calamities, and small depositors’ interest.
Risk management process MFBs are allowed to finance activities under three categories
o General Loan size up to PKR 150,000/- against HH income of PKR 300,000/- net of
business expenses
o Housing Loans up to PKR 0.5 million against HH income of PKR 600,000/-
o Microenterprise Loans up to PKR 0.5 million for setups that employ up to 10 persons
Limits placed on Borrowers’ Maximum Exposure
Mandatory CIB for all loans sizes
Maximum limits placed on Investments
Instructions to charge-off infected portfolio within one month of classification as loss
NPLs are rescheduled/restructured as per the policy approved by BoD. Such loans
remain classified unless serviced regularly for 6 months.
17
Classification of Assets and Provisioning Requirements
– OAEM: DPD 30 days Nil Provisioning
– Substandard: DPD 60 days 25% of Principal o/s
– Doubtful: DPD 90 days 50% of Principal o/s
– Loss: DPD 180 days 100% of Principal o/s
Maintenance of Statutory Liquidity Ratio (SLR) / Cash Reserve
Ratio (CRR)
Creation of Depositors Protection Fund (DPF)
Maintenance of Statutory Reserve
Exposure against Contingent Liabilities
Payment of Dividends
Risk management (R) …… (2)
18
1. Size and Composition of the Board
2. Remuneration to Directors
3. Responsibilities of the Board of Directors
4. Fit and Proper Criteria for CEO and Directors
5. Restriction on Certain Types of Transactions
6. Independence of Internal Audit
7. Policy Frameworks
8. Guidelines on Internal Controls & Risk Management
9. Credit Rating
10. Donations for Public Charity & Welfare
Corporate Governance (G)
19
M1: Customer Due Diligence (CDD)
1. Know Your Customer/ Customer Due Diligence Policy
1. Systems, Controls and Procedures:
2. Identity of Individual Customers
3. Verification of the Identity
4. Micro-Saving Accounts
5. Identification and Verification of Beneficial Owner
6. Anonymous Accounts
7. Purpose of Account / Relationship
8. On-Going Customer Due Diligence
9. Enhanced Due Diligence
10. Walk in Customer
11. Government Accounts
Anti Money Laundering, Terrorist
Financing and other unlawful Activities
(M)
20
M-2: Record Retention :
– Identification Record (minimum 10 years)
– Transactions Record (minimum 10 years)
M-3: Reporting of Currency/Cash Transactions (CTR)
M-4: Reporting of Suspicious Transactions (STR)
M-5: Implementation of obligations under UNSC Resolutions
Anti Money Laundering, Terrorist
Financing and other unlawful Activities
(M) ………………. (2)
21
Operations- (O)
1. Consumer Protection
– Financial Literacy
– Transparency and Disclosure
– Complaint Redressal Cell
– Fair Debt Collection Practices
2. Cash Payments Outside the Authorized Place of Business
3. Reconciliation/Settlement of Account Entries
4. Deposits
5. Statement of Account
22
Branchless Banking Regulations
BB Regulations 2008 – Revised June 2011
Flexibility of Models
Provision of basic banking services
Tiered BB Accounts
Transaction Limits
Agent Structure & Agent due diligence
Technology Risks
Consumer Protection
Licensing for pilot and commercial launch
Annual approval for agents’ expansion
23
Supervision of MFBs
Annual Onsite Examination on CAMELS framework.
Quarterly Offsite Surveillance on CAEL Rating.
Specialized Manual/system exist for supervision of MFBs.
A dedicated and trained team is responsible for
supervisory processes.
Inspection Planning is a critical phase: Analytical tools are
available for conducting loan portfolio testing, and
performance appraisal of branches and loan officers.
Key supervisory focus include assessment of corporate
governance and management’s ability to grow business
while managing risk.
In case if critical issues are not resolved by the MFB, SBP
calls a meeting with the board members of the MFB. 24
– Business Environment Ranking
• 2009: Number 11
• 2010: Number 5
• 2011: Number 3
• 2012: Number 3
• 2013: Number 3
– Regulatory Framework Ranking
• 2009: Number 7
• 2010: Number 1
• 2011: Number 1
• 2012: Number 3
• 2013: Number 3
Global Recognition of Pakistani
Microfinance Market
25
FIP aims to promote inclusive growth through provision of market based financial services to mostly the poor, small entrepreneurs, women and marginalized
communities
Microfinance Credit Guarantee
Facility (£10m)
Institutional Strengthening Fund (£10m)
Financial Innovation
Challenge Fund (£10m)
Small and Rural Guarantee Facility
(£10m)
Leverage technical assistance, surveys and technology across all facilities
Building Ecosystem through Market Interventions
26
Microfinance Credit Guarantee
Facility (£15m)
27
Linking and Leveraging Commercial Capital for MFPs through
risk-sharing facility
Key Achievements
Mobilized Rs. 11.225 billion (£70.156m) through 34 deals from
commercial banks and retail investors/ capital markets
Enabling around 600,000 new microfinance loans to poor borrowers
Leverage of around 3 times
MCGF helped develop the market and introduced poor borrowers to
mainstream financial institutions.
Way forward
MCGF will offer higher risk cover for weaker MFPs.
Institutional Strengthening Fund- ISF
(£6m)
28
Transformational Investments – MFIs to MFBs, Capacity Building,
HR, Technology, Outreach
Key Achievements
Rs.712.732million approved
by ISF Committee for 15
Microfinance Providers
funding 26 projects
Supported Transformative
Interventions including
Tameer’s EasyPaisa Branchless
Banking Product
NRSP NGO into a MFB
Capacity Building/HR
Training; 26%
Branchless Banking;
3%
IT (Systems/
Softwares), 36%
Improving Corporate Governanc
e; 11%
Business plan
/Strategic Review;
7%
Others (Internal
Assessment, Manuals),
25%
MFBs Growth in Key Indicators from
Dec 2007 to Dec 2013
Indicators Dec 2007 Dec 2013 Growth
(6 Years)
Average
Yearly Growth
Number of Depositors 146,276 2,708,845 1780% 63%
Deposits (Rs. in Million) 2,822 33,504 1090% 51%
Number of Borrowers 435,407 974,352 124% 14%
Loans/Advances
(Rs. in Million) 4,456 28,332 536% 36%
Borrowing (Rs. in Million)
4,955 8,202 66% 9%
Number of MFBs 6 10 67% 9%
Equity (Rs. in Million) Rs. 3,414 Rs. 12,343 274% 25%
Avg. Loan balance Rs. 10,234 Rs. 29,078 184% 19%
Lessons Learnt
Have Patience: scales and profits come gradually
Mobilizing Deposits is challenging in initial phase
Microfinance market may become vulnerable in the
calamity/disaster situation.
Proportionality works: Regulations should not
impose unnecessary cost on the banks.
Integrating microfinance sector with
commercial banks helps market development
Integrating MFBs directly with national payment
system is challenging
For effective supervision, licensing should
allow establishment of only competent and
qualitative MFBs
30
Thank you!
31
32
363 198
143 099
381 755 244 248
1 380
(28 489) (45 062) (196 880) (215 959)
(100 397)
KBL (2000)
FMFB (2001)
TAMEER (2005)
NRSP (2009)
FINCA (2008)
PAK OMAN (2006)
UBank (2012)
APNA (2012)
Waseela (2011)
Advans (2012)
Profit After Tax for 2013 (in Rs ‘000’)
8 859 405
3 499 053
8 331 554
4 882 451
2 036 069
117 931 341 371 41 381 178 328 44 487
KBL FMFB TAMEER NRSP FINCA PAK OMAN APNA Ubank Waseela Advans
Gross Loan Portfolio (in Rs ‘000’)
97% share 3% share
7 132 919 7 814 982
10 627 546
3 618 714 2 735 463
29 390 762 044 205 178 643 618 10 563
KBL FMFB TAMEER NRSP FINCA PAK OMAN APNA Ubank Waseela Advans
Deposits (in Rs ‘000’) 5% share 95% share
34
0 0 1 2 2 4
4 6
9 10
15
20
28
0
5
10
15
20
25
30
35
40
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Billio
n R
s
Deposits GLP
Deposits Grow gradually
33
NPLs for Last Six Years
34
2,32%
1,62%
3,50%
2,13%
1,45%
0,85%
0,00%
0,50%
1,00%
1,50%
2,00%
2,50%
3,00%
3,50%
4,00%
Dec'08 Dec'09 Dec'10 Dec'11 Dec'12 Dec'13
Write offs /GLP (adjusted) as of
Dec'13 = 1%
PAR>30 days
Floods in 2012 caused NPLs to rise to 3.5%.