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MICROFINANCEGROWTH STRATEGY 2020

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MicrofinanceGrowth Strategy 2020

i Microfinance Growth | Drivers, Catalysts and Future Strategy

Vision

Syed Nadeem Hussain Chairman PMN & CEO Tameer Microfinance Bank

Authors

Syed Mohsin AhmedCEO PMN

Ali BasharatFinancial Analyst

Acknowledgment

PMN like to thank its donors DFID, SBP, PPAF and Citi for their continued support.

MICROFINANCE GROWTH STRATEGY 2020

iiMicrofinance Growth | Drivers, Catalysts and Future Strategy

Acronyms

ADB Asian Development Bank

AKRSP Agha Khan Rural Support Program

AML Anti Money Laundering

CGAP Consultative Group to Assist the Poor

CGS Credit Guarantee Scheme

CLIS Crop Loan Insurance Scheme

CPP Consumer Protection Principles

FWBL First Women Bank Ltd.

GLP Gross Loan Portfolio

GoP Government of Pakistan

HDI Human Development Index

KBL Khushhali Bank Ltd

KF Kashf Foundation

KYC Know Your Customer

LI Livestock Insurance

MFBs Microfinance Banks

MF-CIB Microfinance Credit Information Bureau

MFPs Microfinance Providers

MNOs Mobile Network Operators

NADRA National Database Registration Authority

NBP National Bank of Pakistan

NRSP National Rural Support Program

OPP-OCT Orangi Pilot Project’s Orangi Charitable Trust

OSS Operational Self Sufficiency

PAR Portfolio at Risk

PMIC Pakistan Micro Investment Company

PMN Pakistan Microfinance Network

PPAF Pakistan Poverty Alleviation Fund

RSP Rural Support Program

SECP Securities and Exchange Commission of Pakistan

SME Small and Medium Enterprises


iii Microfinance Growth | Drivers, Catalysts and Future Strategy

Acronyms

Executive Summary

Background: Evolution of Pakistan’s Microfinance Sector

The Growth Challenge

Setting a Target: Reaching 10 million Clients

Drivers of Growth: The Low Hanging FruitGovernment InitiativesCrop Loan Insurance Scheme (CLIS) and Live Stock Insurance SchemeBranchless bankingUp scaling Loan SizesIndustry InfrastructureClient Protection Initiatives

Potential Growth Catalysts: Medium Term Framework Funding HR DevelopmentRegulatory Framework for Non-Bank MFPsMitigating Exogenous Shocks to the System

Conclusion

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Contents


ivMicrofinance Growth | Drivers, Catalysts and Future Strategy


1 Microfinance Growth | Drivers, Catalysts and Future Strategy

Pakistan’s microfinance industry currently stands at 3.1 million active borrowers with a gross loan port-folio (GLP) of PKR 61.1 billion1. Outreach in terms of active borrowers has been growing steadily due to the increase of the number of microfinance pro-viders (MFPs) working in the country, as well as the maturity of existing MFPs. Moreover, Pakistan’s microfinance sector is currently rated amongst the best in the world in terms of its policy and business environment while rapid developments in digital fi-nancial inclusion and branchless banking have led to the country being seen as a “laboratory of innova-tion” by CGAP.

Despite these positive developments, the potential market size for microfinance is 27 million clients and the current penetration rate stands at approximately 11.5 percent2. This large gap shows that the sector, despite all its achievements to date, is far from real-izing its potential and contributing significantly to the financial inclusion agenda in Pakistan. Policymakers and financial industry stakeholders have begun to

analyze and question the ability of the microfinance sector to make a significant and large scale con-tribution to the financial exclusion challenge in the country.

The question remains that with such an enabling en-vironment and extensive, sustained support from do-nors, why is the sector unable to grow and achieve the scale necessary to have a comprehensive impact? It is clear that in order for microfinance to remain rel-evant and become an important, integral part of the financial industry, the sector needs to demonstrate it can attain scale and grow sustainably, and thus, have meaningful impact on the financial inclusion landscape within Pakistan and globally.

To inform the discussion, this paper provides a sys-tematic analysis of the growth drivers that have di-rect or indirect influence on the microfinance indus-try and provides a framework to spur growth over the next five years.

Executive Summary

1 MicroWATCH, Issue 32, Qtr 2, 2014, PMN 2 MicroWATCH, Issue 32, Qtr 2, 2014, PMN


2Microfinance Growth | Drivers, Catalysts and Future Strategy

Microfinance was pioneered in Pakistan in the 1960s through Comilla Pilot Project in former East Paki-stan (present-day Bangladesh). This was followed by the launch of the Orangi Pilot Project’s Orangi Chari-table Trust (OCT) in Karachi and the Agha Khan Rural Support Program (AKRSP) in the Northern Areas of Pakistan.

The late 1990s were watershed years for the sector as it received major impetus due to recognition of the important role of microfinance in the growing econ-omy. Several microfinance initiatives were launched such as the establishment of Kashf Foundation (KF), the Urban Poverty Alleviation Program (UPAP) by the National Rural Support Program (NRSP) and the launch of the then State-owned microfinance bank (MFB) Khushhali Bank Ltd. (KBL), with assistance of the Asian Development Bank (ADB). Microfinance re-ceived a further boost with the establishment of the Pakistan Poverty Alleviation Fund (PPAF) in 1999 as an apex funding body for the sector.

Promulgation of the Microfinance Ordinance 2001 further strengthening the micro finance ecosys-tem by providing a framework for creating privately owned specialized Microfinance Banks (MFBs) under the supervision of the State Bank of Pakistan (SBP). The 2001 Microfinance Institutions Ordinance pro-vides the framework within which MFBs have been established in the country under the regulatory su-pervision of SBP. The central bank has also been playing a key role in providing strategic direction to the sector and proactively making policy adjust-

ments, in consultation with sector players, to provide an enabling environment for MF over the years.

Since then, Pakistan’s microfinance regulatory and business environment has only become stronger and has been consistently ranked among the top three globally for the past four years3. Pakistan be-came one of the first countries to issue guidelines pertaining to regulations for branchless banking in 2008, which proved to be an important catalyst for exponential growth in the digital financial inclusion space. Several leading mobile network operators and commercial banks have since then entered the sector under the premise of expanding outreach to the currently unbanked segments of the population through branchless banking initiatives. This resulted in the Consultative Group to Assist the Poor (CGAP) labeling Pakistan as a “laboratory for innovation” in branchless banking in one of its studies4.

In recent developments, the issuance of draft rules on micro-insurance by the Securities and Exchange Commission of Pakistan (SECP) in 2014 is likely to spur growth in this segment through the provision of a sound regulatory framework and practices.

Industry infrastructure has been strengthened by the establishment of the Microfinance Credit Infor-mation Bureau (MF-CIB) which includes not just the regulated MFBs but all microfinance practitioners in the industry. The on-going national roll-out of the MF-CIB is likely to restrict the prevalence of over indebtedness or multiple borrowing, particularly in

Background: Evolution of Pakistan’s Microfinance Sector

3 The Economic Intelligence Unit (EIU) of the Economist magazine has rated Pakistan in the top three consistently now for four years. ‘Global Microscope on the Micro-finance Business Environment 2013’, The Economist Intelligence Unit Limited, 2013. http://www.citigroup.com/citi/citizen/community/data/EIU_Microfinance_2013_Proof_08.pdf 4 Branchless Banking in Pakistan: A Laboratory for Innovation, Consultative Group to Assist the Poor (CGAP), 2011. http://www.cgap.org/sites/default/files/CGAP-Brief-Branchless-Banking-in-Pakistan-A-Laboratory-for-Innovation-Oct-2011.pdf



regions with a strong presence of MFPs (most no-ticeably in Punjab and Sindh).

Simultaneously, consumer protection standards have been ensured through various initiatives in the sector. The Consumer Protection Department at the SBP ensures that aspects of client protection are in-corporated in legislation and efforts are being made to refine these further to make them more holistic. The industry has also made its own efforts towards entrenching responsible consumer protection prac-tices through common platforms – such as self-reg-ulation and adoption of a voluntary industry code around client protection.

As the microfinance industry has matured and insti-tutional level business models have evolved, sever-al microfinance providers (MFPs) have moved from traditional group-based lending to individual loans. Secured lending, particularly in the form of gold-backed loans, has also increased among MFBs. Loan sizes are increasing and practitioners are gearing up to lend not only to micro-enterprises but also the lower end of the small and medium enterprise (SME) market. Focus has shifted from lending in ru-ral areas to include urban and peri-urban regions as practitioners diversify their target markets beyond agriculture based businesses. Moreover, MFPs are not limiting their offerings to credit products but also

focusing on value added products/services such as savings, micro-insurance and remittance related services.

These advancements have paved the way for a di-verse set of players to enter the industry, including mobile network operators (MNOs) and commercial banks as majority stakeholders in microfinance banks, as well as international microfinance orga-nizations. There is continued investor interest in the industry by both local and international players.

Currently, as the sector reaches 3.1 million active borrowers with a gross loan portfolio of PKR 61.1 billion, deposits of MFBs stand at PKR 36 billion5. Despite fluctuations, the Operational Self Sufficien-cy (OSS) for the industry has remained above 100 percent for the past three years. Portfolio quality is sound as the Portfolio at Risk greater than 30 days (PAR>30) has consistently remained below the five percent cut off point.

The industry is also contributing to the employment in Pakistan as it employs over 17 thousand individu-als – a figure that is steadily increasing. Key perfor-mance indicators for the industry over the last five years are summarized in Table 1.

Year 2010 2011 2012 2013 2014

Active Borrowers (In millions) 1.9 2.0 2.2 2.6 2.8

Gross Loan Portfolio (PKR in billions) 25.1 27.4 33.8 46.6 61

Active Women Borrowers (Percentage) 56 59 59 58 52

Average Loan Size (PKR in thousands) 18.5 20.2 22.3 26.0 28.0

Branches 1,405 1,550 1,460 1,606 1,747

Total Staff 12,005 14,202 14,648 17,456

Total Assets (PKR in billions) 35.8 48.6 61.9 81.5 100

Table 1Industry Performance Snapshot (2010-14)6

5 MicroWATCH, Issue 32, Qtr 2, 2014, PMN6 MicroWATCH, Multiple Issues, PMN and Pakistan Microfinance Review (PMR), Multiple Editions, PMN



Year 2010 2011 2012 2013 2014

Deposits (PKR in billions) 10.1 13.9 20.8 32.9 42.7

Total Revenue (PKR in billions) 7.5 10.1 12.5 17.3 24.3

OSS (Percentage) 99.7 108.4 109.5 118.1 119.6

PAR > 30 days (Percentage) 4.1 3.2 3.7 2.5 1.1

Exhibit 1Growth Pattern of the MF Industry

Despite the enabling environment and progressive regulatory framework, investments in industry in-frastructure and institutional strengthening, and the entry of a range of new practitioners in the market, the pace of growth in the industry has been modest over the past few years. The microfinance industry has grown from just 330,000 active borrowers in 2003 to 3.1 million in 2014 as shown in Exhibit 1. In the same time period, GLP has grown exponentially

from a mere PKR 2.6 billion to PKR 61.1 billion. The average growth rate for active borrowers has stood at 24 percent from 2003 to 2013. This growth in mi-crocredit outreach can be divided into three distinct phases; the first one from 2003-08 where the annual average growth in outreach stood around 40 percent, the second one from 2008-11 when the growth rate fell to 6 percent and the recent phase from 2011 to date with a growth rate of 15 percent.

The Growth Challenge

Earthquake Nothern Pakistan

Delinquency crisis in Punjab

Floods in 2010 & 11

IDP crisis

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Analysis of these phases shows that the initial spurt in growth came from an injection of funding and entry of new players into the sector. During the initial pe-riod, the sector received substantial funding through the Pakistan Poverty Alleviation Fund (PPAF) as well as the creation of new microfinance banks. It is per-tinent to mention the slowdown in growth over the years has been also the result of external shocks as well as internal weaknesses of the sector.

This high growth trajectory also left the sector vul-nerable for crises as institutions did not strengthen internal controls, amend processes and models, and diversify portfolios to keep up with the expansion in outreach. The sector thus, experienced delinquency crises in Punjab during 2008-10 which forced insti-tutions to go into a consolidation mode and re-think business models. This was also a difficult period in terms of the external environment, with stagnation in the country’s economic activity, escalation in the energy crisis, large scale disasters and political in-stability. However, post 2011 the industry once again began to post consistent growth on the back of prod-uct innovation, entry of new players and diversifica-tion of business models by MFPs.

While Pakistan is a difficult country in terms of its political and economic landscape, it also offers tre-mendous opportunities. Financial inclusion is low, with only 10 percent of the population engaging with the formal financial sector. The commercial bank-ing sector is clearly focused on the high end of the market, leaving the field open for microfinance orga-nizations to serve the lower end of the market. Mo-bile penetration is high, and the growing branchless banking presence is creating opportunities that did

not exist five years ago. Additionally, there are strong microfinance institutions in place, with tested busi-ness models and considerable experience.

There is also a strong expectation from the industry that it convert these opportunities into impact. With an estimated potential market size of 27 million ac-tive borrowers, the microfinance sector currently serves only 11.5 percent of its potential market. At the prevailing growth rate, we can project that it will reach approximately 6 million clients7 by 2020, still falling far short of the potential market. Clearly this is not enough: remaining relevant and making signif-icant impact requires the sector to grow much fast-er. Setting more ambitious targets, such as reaching 10 million active clients by financial year 2020, and strategizing as a sector to achieve this goal are re-quired, this also needs to be part of the National Fi-nancial Inclusion Strategy as prepared by The World Bank in partnership with SBP.

This paper attempts to provide a framework for growth of microfinance in Pakistan. This is an ambi-tion that will ensure relevance of microfinance as a tool of financial inclusion for the base of the pyramid with low income segment of the population, backed with number of active clients as a metric for inclu-sion, which is very different for the banking sector that focuses on advances in terms of rupee value. It identifies the key drivers of growth over the next five years, the challenges associated with these driv-ers and the risks for the industry as it moves into a higher growth trajectory. The objective of this paper is to inform the discussion on how Pakistan’s micro-finance sector can grow faster.

7 Microfinance refers to not just microcredit but also other financial services such as savings, insurance and remittances and technically the term “clients” should include clients of all services. However, for purposes of this paper, we use the term clients to refer to active borrowers only. This is because the public discourse on microfinance tends to focus on credit and it is the benchmark for evaluating performance of the sector.



For the microfinance industry in Pakistan to be a vibrant, dynamic, viable and relevant, it needs to expand and grow to a size where it can be counted among the pivotal players in the financial landscape. Current penetration of 11.5 percent is inadequate showing that MFPs have much to achieve. Setting an ambitious target for itself, such as reaching 10 million active borrowers by FY 2020 will not only further the industry’s goal of financial inclusion but also make it a significant feature of the financial industry. Moreover, that level of scale and growth would permanently place microfinance on the poli-cy and growth agenda of the State. That size would also increase the industry’s ability to absorb distor-tions and threats emanating from external interfer-ence whether in the form of government-led credit schemes or issues pertaining to pricing.

Concerns that such accelerated growth in the next five years could lead to a recurrence of delinquen-cy crises as witnessed by fast growing microfinance markets globally in 2008 are not unfounded. Howev-

er, the reasons that lead to these crises have been addressed, to a large extent, for the Pakistani mar-ket. Pakistan’s microfinance industry infrastructure now includes a fully functional MF-CIB, responsible finance and client protection initiatives, and a regu-latory umbrella that is being extended to cover the entire industry. A Financial Inclusion Secretariat is being formed to provide oversight and serve as a platform for engagements between the public and private sectors, interaction with each segment of the financial inclusion market and coordination at the national steering committee level.

However, reaching the target of 10 million borrowers will not be easy one for the sector given its current capacity and state. At that scale, GLP of the sector will reach up to PKR 362 billion as against PKR 211 billion if the industry continues to grow at its histor-ical growth rate of 11.4 percent as shown in the Ex-hibits 2 & 3 below.

Setting a Target: Reaching 10 Million Clients

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Exhibit 2Growth in GLP based on historical growth rate



This requires adjustments at all levels in the indus-try. The challenges of funding, risk, product devel-opment, market segmentation, use of technology and institutional development need to be analyzed and effective strategies devised if these targets are to be achieved. In the subsequent sections, we look at these challenges as well as sources of growth i.e. where and how can the industry generate the scale needed.

Drivers of Growth: The Low Hanging Fruit

There are already a number of initiatives underway that can be leveraged to accelerate growth in out-reach. These are the low hanging fruit i.e. opportu-nities that already exist in the landscape and require minimal repositioning of the sector and alteration of existing activities with marginal investment to be realized. In this section we discuss such key oppor-tunities including government-led credit and credit guarantee schemes, policy provisions by the central bank to upscale loan sizes, growth in branchless banking initiatives, strengthening of industry infra-structure and client protection initiatives.

1. Government Initiatives

The current government announced a number of ini-tiatives soon after coming into power in mid-2013,

all aimed at generating employment and alleviat-ing poverty in the country. Two schemes relevant to the microfinance industry were launched as part of these initiatives: the Prime Minister (PM) Youth Loan Scheme and the Prime Minister (PM) Interest Free Loans. Although viewed skeptically, these schemes, particularly the latter, can have important implica-tions for enhanced outreach by MFPs.

PM Youth Loan Scheme

Given that almost two-thirds of Pakistan’s population (68.4 percent) is below the age of 308, this represents a significant proportion of individuals for whom tar-geted strategies are needed in order to encourage their effective contribution to the economy. One of the challenges that the government faces is provid-ing employment opportunities for the growing youth population in the country. This is being addressed through the creation of self-employment opportu-nities, whereby the spirit of entrepreneurship is be-ing promoted and the youth are encouraged to set up their own businesses. The Government launched the Prime Minister’s Youth Loan Scheme with the objective to provide loans of up to PKR 2.0 million of a tenure of up to 8 years (with the first year being the grace period). The loans are priced at below the market rate.

The goal is that the debt equity proportion will be maintained at 90:10 and loans will be disbursed to SMEs across the country. Up to one hundred thou-

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Exhibit 3Growth in GLP with projected 10 million active borrowers

8 Pakistan: Framework for Economic Growth, Planning Commission, Government of Pakistan, April 2011.



sand loans under the scheme will be disbursed. At least half (50 percent) of the total loans are meant for women, whereas a 5 percent quota has been ear-marked for the disabled, widows and families of sha-heeds (martyrs). The Small and Medium Enterprise Development Authority (SMEDA) has been tasked with an advisory role in implementation of the loan scheme, and has provided 55 pre-feasibility cases as reference material for loan applicants and lenders.

Despite initial interest in the scheme, it has only been able to attract two public sector banks as im-

plementing partners, namely the National Bank of Pakistan (NBP) and the First Women Bank Limited (FWBL), with other commercial banks shying away from the scheme as commercial banks typically do not target the income and population segment which this scheme aims to reach, nor do these banks have

the HR capacity or skill-set to work with small in-formal enterprises. Moreover, the government is not providing funds for the scheme and only subsidizing the markup leaving banks to bear the credit risk. On the demand side, studies have consistently shown that the poor (particularly the inexperienced youth) are intimidated by banks and do not feel confident or comfortable in interacting with them.

In this situation, MFPs could offer a more feasible alternative. Microfinance is a double bottom line industry which aims at social returns by providing access to financial services to the underserved and financially excluded lower income segments of the population. MFPs have been extending unsecured loans to their borrowers successfully through both individual and group-based lending methodologies for the past three decades – with an impressive portfolio quality. Microfinance borrowers largely run informal enterprises with little documentation and limited assets, and are often accessing formal finan-cial services for the first time through the MFP. MFPs also have experience in targeting, and specially de-signing their products for women, with over 56 per-cent MFP borrowers being women. The experience, skill set and business models of MFPs put them in a strong position to roll out the youth loan scheme.

However, its implementation would require poli-cy changes see Box A, dedicated financing lines for this scheme and capacity building for MFP staff. The loan sizes ranging between PKR 200,000 to PKR 2 million as prescribed under the scheme currently are far above the average size of MFP lending, and also above the ceiling of loans that MFBs are permit-ted to make. This would require regulatory chang-es. Moreover, since this scheme includes start-up businesses, which MFPs have little experience of, it would require roll out of specialized products and risk mitigation measures to be put in place. In ad-dition, government control by disbursing approved loans through lotteries is another inhibiting factor that needs to be addressed.

PM Interest Free Loan Scheme (PM-IFL)

In order to address the issues of poverty and increas-ing unemployment in the country, an interest free microloan scheme is being extended to the poor and destitute segments of the population (those scoring between 0 to 40 on the national poverty score card). PKR 3.5 billion has been allocated for the scheme and shall be routed through the national apex, PPAF. Loan amounts of up to PKR 50,000 can be extended under the scheme and 50 percent of the loans are

Box A

Changes in the PM Youth Loan Scheme to Adapt it for Microfinance Industry

In order for MFPs to extend loan under the PM Youth Loan Scheme following changes would be required:

1. At average loans of PKR 1 million the MF industry will require a dedicated line of Rs. 20 billion to cater to proposed 200 thousand potential borrowers from NBP, FWBL and Pakistan Microfinance Investment Company (PMIC);

2. Regulatory changes that will allow MFBs to lend up to a maximum of PKR 2 Million for this scheme;

3. Extending this scheme to Non-Bank MFPs;

4. Capacity building of staff which can be carried out through the PMN-LUMS MF Center of Excellence initiative;

5. Interest rate subsidy can follow the Indi-an model where such subsidy is subject to performance and is paid once the cli-ents have repaid the loan with interest. The distribution of the subsidy can be through PPAF.

6. MFPs to carry out independent under-writing and self-selection of borrowers



earmarked for women borrowers.

This scheme has important implications for the mi-crofinance industry, especially given the overlap of functions within the implementing partners and the overlap between target market for these loans and existing MF client base. Interest free loans can dis-tort the existing market at a stage when the industry has become sustainable and is accessing commer-cial financing to meet it requirements for on-lending. In order to safeguard the MFPs, interest free loans will only be extended to those individuals that have not already been mobilized by the implementing partner for interest-based microcredit. Therefore, these loans will be extended to potential borrowers in selected areas of 62 districts of the country which exhibit low Human Development Index (HDI) scores and have low or no penetration of conventional mi-crofinance. This injection of new capital and target-ing clients that have not previously been served by MFPs would add new numbers to the outreach of the industry. It is anticipated that the funding for the scheme will be increased to PKR 10 billion and lead to over 1 million additional microfinance bor-rowers. In addition, this scheme is localized in those areas where conventional microfinance has little or no penetration, which will facilitate expanding out-reach in newer geographic markets. Moreover, this scheme has the potential to allow for borrowers of interest free loans to graduate to conventional mi-crofinance.

It is the industry view that one of the key constraints

to growth is funding. Despite caution about distor-tions that may occur, it is felt that both schemes can be useful for the industry with modifications in design and the understanding that the interest free loan scheme program can help in graduation of cli-ents to the next level and mainstreaming them into microfinance segment.

Credit Guarantee Scheme (CGS) for Small and Marginalized Farmers

In order to improve access to credit for the agricul-ture sector, particularly farmers with small land holdings, the CGS has been launched. Loans up to

PKR 100,000 can now be extended by commercial banks, specialized DFIs and MFBs to farmers having land holdings up to 5 acres in case of irrigated lands and 10 acres in case of non-irrigated lands. The Gov-ernment of Pakistan (GoP) through SBP, will provide a credit guarantee up to 50 percent loss. Total dis-bursements under this scheme are targeted to be PKR 30 billion.

Since the loan amount falls in the purview of the MFBs and the target market is made up of largely low income segments, these implementing partners are better placed as compared to commercial and specialized banks to utilize this facility. The CGS can lead to MFBs further expanding their rural outreach into low penetration areas, increasing loans sizes and rolling out new and innovative products for ru-ral borrowers. The scheme can lead to an increase of 600,000 active borrowers. This scheme appears to be tailor-made for the microfinance industry; how-ever, there is a need to extend to scheme to non-bank MFPs to increase its impact as non-bank MFPs especially Rural Support Programs enjoy excellent outreach in rural areas and are ideally positioned to utilize this scheme.

Low Cost Housing Guarantee Scheme

This scheme provides 40 percent coverage for a loan size up to PKR 1 million extended for housing purpos-es. The objective is to enable low income segments to have their own houses. Total disbursements under this scheme are PKR 20 billion.

MFBs have been planning for some time now to enter into the low cost housing segment especially since the loan limits were revised to PKR 500,000. This scheme provides an opportunity for players to expand into this untapped market segment. Howev-er, there are challenges of funding for this scheme due to the comparatively larger loan size and longer term. The industry would require mortgage refinanc-

PM-IFL has the potential to add over 1 mil-lion additional borrowers and increase the GLP by PKR 10 billion in the next three years

Credit Guarantee Scheme Salient Features

• Credit Guarantee Scheme for small and marginalized farmers can lead to further 600,000 active borrowers in the rural areas

• This will require an additional funding of PKR 30B

• 50% guarantee will be provided by the GoP



ing facilities to enter this segment. In addition, the regulatory limit for the MFBs would need to be en-hanced to PKR 1 million in order to fully utilize this scheme and extend its coverage to include non-bank MFPs. The scheme can allow up to 40 thousand addi-tional active borrowers.

The above two government backed credit guarantee schemes have the potential to increase microfinance borrowers by more than 600,000 and increase over-all GLP by PKR 50 billion in the next five years.

2. Crop Loan Insurance Scheme (CLIS) and Livestock Insurance (LI) Scheme

The Crop Loan Insurance Scheme provides insur-ance to farmers (having a landholding of 25 acres) against natural calamities, climate change and plant diseases. Similarly, the Livestock Insurance Scheme provides coverage to farmers who have got financing for up to 10 cattle.

Natural calamities, climate change and plant diseas-es have the capacity to wipe out the entire earning ability of rural families, forcing borrowers to default on their loans as was witnessed in certain areas of Punjab and Sindh in the aftermath of the floods in 2010 and 2011. As a result, MFBs were left with no options but to write off the loans and post losses which led to the slowing down of growth in outreach, as MFBs recouped their losses and stopped giving new loans in the affected regions. These insurance schemes provide an option for MFPs to mitigate po-tential losses in their rural finance portfolio which accounts for up to 57 percent of the total outreach in microfinance. Issues pertaining to its implementation have, how-

ever, caused MFBs to shy away from utilizing these schemes. Key issues include the insurance coverage being restricted to selected crops and livestock an-imals, the cap on liability to three times of premium paid which does not cover the possible extent of loss-es and basing sum insured on per acre borrowing limit. There is a need to tailor these schemes accord-ing to the needs of the microfinance industry and cli-ents (see Box B). Moreover, there is a need to bring the entire industry, not just MFBs, under the ambit of these schemes. In addition, the recent PPAF-led pilot on weather indexed and livestock insurance can also serve as a useful model to follow.

3. Branchless Banking

Using alternative delivery channels in the form of branchless banking and opportunities created by leveraging Pakistan’s technology infrastructure, MFPs have a golden opportunity to expand their out-reach, especially to rural areas where traditional infrastructure is lacking. This can result in signifi-cant cost reductions by replacing a labour-intensive business model with banking agents. The crux is that this will provide a distribution model with limit-ed up-front costs, thus, allowing MFPs to enter new markets and increase growth rapidly. This, together with identification of potential clients based on cell phone usage should help in adding clients. However, effective utilization of Branchless Banking will re-quire synergies between non-Bank MFIs and MFBs

Low Cost Housing Guarantee Scheme Sa-lient Features:

• 40% loan loss coverage for a maximum loan size of PKR 1M;

• MF industry can use this scheme to its advantage if the scheme is modified to include housing improvements;

• MF industry will be able to provide a maximum of 50,000 loans under this scheme with an average loan size of PKR. 400,000;

• This requires additional funding of ap-proximately PKR 20B.

Box B

Modifications required in CLIS & LI for Implementation by MFPs

Some of the changes needed to modify CLIS and LI scheme in order to cater to microfi-nance industry are:

1. The CLIS scheme should cover the en-tire agriculture portfolio;

2. Increase in insurance perils for LI;3. Coverage should be on the basis of port-

folio rather than individual clients;4. Since microfinance loans are collateral

free and SBP is allowing the extension of this facility to tenants and lessees, the condition that borrower provide a recording of crop in the revenue record should be condoned.



in order to increase savings and borrowers.

In Pakistan an estimated 135 million people own a cell phone, whereas, at an average, only 5 percent of Pakistani households use mobile money, and about 0.3 percent of households have a registered mobile money account. There is a huge market opportunity in this segment which branchless banking deploy-ments can effectively tap by increasing awareness and introducing innovative products to incentivize consumers to create and use mobile accounts.

Keeping in view the market potential, a number of mobile network operators and commercial banks have deployed branchless banking systems over the last few years. Currently there are eight branchless banking systems in the country. A number of MFIs

and RSPs are collaborating with branchless bank-ing channels for the collection of loans and there is scope for expansion in the future to include other services like loan disbursement, insurance and sav-ing products. The biometric verification requirement introduced for issuance of SIM cards coupled with the rich database of NADRA has also strengthened the infrastructure for providing financial services while remaining within the KYC and AML requirements of the regulatory framework (in case of MFBs).

This flurry of activity has led to Pakistan becoming one of the fastest growing markets for branchless banking. While the growth and uptake of branchless banking services has been rapid, the focus of the consumer has remained largely centered on Over-the-Counter (OTC) transactions. In order to bring the unbanked into the ambit of formal financial services, branchless banking operators need to focus beyond just OTC transactions and promote m-wallets. More-over, there is a need to develop products which pro-vide savings and insurance options to microfinance clients. While a few products have been launched there remains a great scope for further growth and innovation.

Global experience shows that branchless banking provides MFPs with options to disburse loans, collect repayments and mobilize savings. Significantly the intersection of microfinance and branchless banking has led to new emerging business models. It has fa-cilitated a new approach to microfinance by using the mobile phone, customer usage data and agents for loan applications, customer due diligence, and credit decision-making. Examples include the Bank of Phil-ippines which uses branchless banking loan origi-nation, process loan application and due diligence. Similarly, m-Bank of Philippines uses airtime used and transactions in m-wallet account to offer a loan product like an overdraft account9. Such evolution of business models can provide an ideal opportunity for the microfinance industry to grow in Pakistan where there are more than 80 million unique SIM holders and just over 3 million active borrowers. However, this model will raise two challenges: firstly wheth-er the potential borrowers can be categorized as microfinance clients and secondly whether the loan will be utilized for productive or consumption pur-poses. The former can be addressed on the basis of mobile usage whereas the latter will be an issue to be resolved.

4. Upscaling Loan Sizes

According to estimates, there are 3.8 million SMEs in the country. Over 70 percent of them can be catego-rized as small enterprises, defined as an entity that has twenty employees including contract employees and an annual turnover up to PKR 75 million10. SMEs account for more than 30 percent of the country’s GDP and make up 90 percent of all economic estab-lishments in the country11. They have the potential to generate employment, increase income and reduce poverty which has placed SME lending on the agenda of the policy makers for many years.

Although clubbed into one large group, in practice the dynamics of medium and small enterprises differ significantly, and small enterprises are considered to have more in common with mature micro enter-prises rather than with medium enterprises.

Similar to micro enterprises, small enterprises/firms in Pakistan face serious issues with access to formal finance given their informal nature, lack of docu-mentation and acceptable collateral. Although com-mercial banks have had some success with down-

Loans extended to borrowers identified via cell phone usage can lead to over 2 million potential new borrowers initially.

9 Microfinance and Mobile Banking: Blurring the Lines?, Michel Hanouch & Sarah Rotman, CGAP10 SME Business Support Fund, Ministry of Finance, Government of Pakistan11 www.sbp.org.pk



scaling to meet the needs of medium sized firms in Pakistan, small entrepreneurs remain off their radar and it seems highly unlikely that the mainstream banks will serve this segment in the near future. However, MFPs, especially the MFBs and large MFIs, seem well positioned to enter this market due to its similarities with the microfinance clientele.

The current enabling environment where SBP has al-lowed MFBs to initiate micro-enterprise lending and extending the SME Guarantee Fund to the industry is a favorable opportunity for the sector players. It will not only allow MFPs to cater to a new segment but also provide opportunities for returning clients that have graduated beyond the micro-enterprise level. However, this shift will represent some challenges to MFPs lacking expertise in larger enterprise lending. It requires significant upscaling of loan sizes from the present average loan of PKR 28,26912. In addition, the focus of conventional microfinance has been on household repayment capacity which will now have to shift to the capacity of the enterprise to repay. This will require investment into understanding the de-mands and needs of the market segment, building a different skill set amongst field staff, finding sourc-es of funds to meet the financing needs driven by the relatively larger loan sizes, developing the right products and understanding the risks.

Strengthening of the industry infrastructure in re-cent years through creation of an MF-CIB has been crucial in providing credit history of microfinance borrowers who could qualify for the larger loans and will serve the same purpose for SME financing.

MFBs are also looking at new areas such as agricul-ture value chain financing and linkages with other sectors as promising areas. Moreover, consider-able support for tapping the missing middle is now available from leading donors like USAID and DFID in the form of facilities for refinancing and technical advisory. Particularly, the DFID Economic and Asset Growth Fund (EAGR) provides MFBs both financing lines to meet the increased funding needs and tech-nical advisory options to build capacity and neces-sary infrastructure to expand into the SME segment.

5. Industry Infrastructure

The industry infrastructure has received significant support and has been the focus of various stakehold-ers over the past few years. As a consequence vari-

ous initiatives have been taken and several more are in the pipeline.

The Microfinance Credit Information Bureau (MF-CIB) covers all types of MFPs and provides positive data on borrowers creates many opportunities for MFPs as it allows them to use credit histories as complementary collateral to social or physical col-lateral. It also allows MFPs to differentiate between good and bad borrowers and offer better rates/more flexibility to the former. Also, MFPs are better able to judge credit appetite and needs of borrowers, thus developing more appropriate products. The Bureau also provides the space for developing credit scor-ing models going forward, which will further benefit MFPs. In addition, valuable linkages have been es-tablished with National Database Registration Au-thority (NADRA) for the verification of client data. As a natural benefit of the MF-CIB, the information systems of mid-tier and smaller MFPs have been upgraded.

Utilizing biometric machines installed by mobile network operators (MNOs) due to recent regulatory changes requiring biometric verification for issu-ance of mobile phone SIM card, MFBs can now open m-wallet accounts more efficiently while remaining compliant with KYC requirements. This reduction in paperwork currently required will be eliminated after online verification of personal details through NADRA and thus, remove a major impediment in the growth of m-wallets.

In addition, an ATM switch for the microfinance sector is being discussed that would initially target MFBs and eventually, non-bank MFPs. This would result in increase in popularity of micro savings and m-wallets and help in attracting clients that are not utilizing savings products offered by MFBs due to absence of clearing house membership. At a later stage it is planned to expand this switch to cover with branchless banking agents and point of sale termi-nals allowing lower income segments access to fi-nancial services that they were unable to avail.

6. Client Protection Initiatives

With exponential growth expected for the micro-finance sector in the next 3 years, it is widely rec-ognized that increased outreach and competition require corresponding efforts around client aware-ness and protection. The sector has been actively

12 MicroWATCH, Issue 32, Qtr 2, 2014, PMN



engaged in various initiatives since 2008, when the voluntary Code of Conduct for Client Protection (CP) was signed off by all PMN members.

In 2011, PMN launched a Client Protection Initiative funded by UK-Aid’s Financial Inclusion Program ad-ministered by the State Bank of Pakistan (SBP), and the Pakistan Poverty Alleviation Fund (PPAF). In for-mal collaboration with Microfinance Transparency, the CP Initiative involved collecting and publishing pricing data for MFPs in order to promote greater transparency and responsibility in pricing of micro-credit products across the country.

The CP Initiative also involved a formal collabora-tion with the Smart Campaign at the Centre for Fi-nancial Inclusion at ACCION International to conduct third-party client protection assessments. To date, 18 assessments have been completed covering over 60 percent of the market in terms of overall out-reach, as well as one Certification awarded to an MFI. For participating MFPs, assessments provide an opportunity to carry out gap analyses of practic-es in comparison with globally accepted standards of client protection, and seek recommendations for institutional improvements to better comply with these standards. For the sector, the assessments provide a unique opportunity to observe the overall state of practice in client protection; some of these observations have been documented by PMN earlier last year.

Findings from the CP Initiative reinforce the need for greater awareness among clients on Client Protec-tion issues and a need for a strong grievance redres-sal mechanism for the industry. Analysis of various crises witnessed by the microfinance sector globally has shown that over-indebtedness and client griev-ances have been the main reasons for the crises. While the issue of over-indebtedness has been ad-dressed by the establishment of MF-CIB, however, the client grievance redressal mechanism is still ab-sent from the financial ecosystem.

A multi-tiered approach for grievance redressal is required with mechanisms needed at individual MFP level, association level and one at the public level that includes SBP and SECP. Also a massive aware-ness campaign is needed to be carried out for clients to know that they have a three-tier system for ad-dressing their grievances. This would keep a check on exploitation of clients and rectify any wrongdoing, perceived or otherwise. Moreover, voluntary adop-tion and institutionalization of international stan-dards and best practices on client protection such as

the Smart Campaign will result, not only in protect-ing existing clients, but also in instilling confidence in the whole industry. Consequently, this will act as a hedge for MFPs against the risk of any undue politi-cal interference in the sector as witnessed in micro-finance crises globally.

Potential Growth Catalysts: Medium Term Framework

In order to reach 10 million borrowers in the next five years (with a GLP touching over PKR 362 billion), a number of challenges need to be addressed. There is a need for policymakers and regulators to bring non-bank MFPs under the regulatory umbrella and develop disaster risk mitigation systems at the in-dustry level. Capacity building is required to devel-op human capital. Also, enhanced funding needs are required to be met by tapping into a variety of funds. Without addressing these challenges, moving into a

MFBs need to increase the funding base by PKR 100 billion to meet increased funding needs. This will require certain out of box thinking including:

1. Synergies between traditional NBMFIs with their strengths at the grass root level and the contemporary branchless banking / mobile technology led MFBs and commercial banks to increase ac-cess of deposit accounts

2. Since the issue is not just of access, but provision of products that cater to the requirements and cash flows of the cli-ents

3. At the policy / regulation level accep-tance that MFBs are playing an im-portant role in the GoP-led agenda for financial inclusion, they need to be rec-ognized as such and hence recognized as scheduled banks. This will allow them access to surplus funds of govern-ment organizations and funds from the NGO sector that otherwise do not place their surplus funds in non-scheduled banks.

4. Also, FBR should remove an anomaly related to withholding tax on the retail clients of MFBs as they belong to the low income segment and hence do not fall within the tax payable bracket.



higher growth trajectory would remain difficult and unsustainable.

Funding

The microfinance sector in Pakistan started off with complete reliance on grants and subsidized debt to meet its funding requirements. With the growth of the sector, the funding sources have become diver-sified and the sector is currently being funded by a combination of plain vanilla debt from the national apex, debt obtained from commercial banks by uti-lizing one of the two guarantee funds, and deposits (in case of MFBs). A handful of MFPs have tapped the money market and capital market in order to raise debt. Moreover, despite continued investor interest last year saw the first successful placement of debt by an international lender in the sector.

In order to fund future accelerated growth and reach up to 10 million active borrowers, the industry would require additional debt for on-lending of up to PKR 300 billion keeping in view the prevailing growth in loan sizes and outreach. In addition, the capital for the industry would increase to PKR 45 billion.

Deposits

In addition, for MFBs to continue to meet the bulk of their needs through deposits they will need to devel-op innovative saving products and utilize branchless banking solutions. Access to the national clearing house and development of linkages between MFBs and non-Bank MFPs to mobilize savings will prove helpful in increasing the MFB deposit base. Since MFIs are prohibited from holding deposits the funds they mobilize are parked with commercial banks. One option can be that these funds be placed with MFBs and lent back to the MFIs for on-lending. The recent SBP initiative to allow MFBs to become members of national clearing house should greatly enhance their ability to mobilize deposits especially from retail depositors.

Biometric verification of SIMs being carried out re-cently by all MNOs can be transformed into an op-portunity to open m-wallets account simply at the touch of their fingertips without even going to a branchless banking agent. This can move users of over-the counter services to m-wallets resulting in large chunks of capital being moved into banking channels for the first time providing MFBs with an inexpensive source of funds. Utilizing these oppor-tunities the microfinance banks can reach a deposit base of over PKR 100 billion by 2020.

Debt

Additional debt of over PKR 200 billion shall be re-quired by the industry and the present funding av-enues will be inadequate to meet this requirement. MFPs would need to tap a variety of sources of funds to meet increased financing needs. This would in-clude issuance of commercial papers, floating bonds, obtaining clean lines from commercial fi-nancial institutions and tapping international lend-ers. In addition, funding made available for govern-ment credit schemes like the PM Interest Free Loan Scheme and the PM Youth Loan Scheme can also be utilized. These schemes alone can provide funds for on-lending to the tune of PKR 20 billion and PKR 25 billion respectively. Government credit schemes for the agri sector and low cost housing can also provide an additional PKR 50 billion to the sector.

The new entity, the Pakistan Micro Investment Com-pany (PMIC), which will be created through the PPAF spin-off would be better placed to attract financing from diverse sources and meet the increased bor-rowing need of MFPs. The new vehicle will have to provide multiple financing solutions for MFPs keep-ing in view their size, financial position, the markets segments they cover and experience curve. It is pro-jected that more than PKR 40 billion of additional debt for on-lending will be routed through the PMIC by 2020.

Over PKR 65 billion will still have to be tapped from additional sources like the capital and money mar-kets and from international lenders. Meanwhile, priority sector lending for the microfinance industry could greatly help the players meet their funding needs.

Industry will be able to raise up to PKR 100 billion debt through a mix of government credit interventions and from PMIC, how-ever, more than PKR 100 billion have to be sourced through priority sector lending, money and capital markets and international lenders.

Also its important that MFBs be allowed to lend to MFIs and other solutions found like Mudra Bank in India with a USD 3B invest-ment by the Government of India to promote availability of funding for growth.



Equity

The sector would require additional equity of PKR 45 billion over the next five year in order to meet the growth target of 10 million active borrowers with the Capital Adequacy Ratio (CAR) of 15 percent. The cur-rent growth in equity rate can result in PKR 25 billion of the gap being met. An additional PKR 20 billion can either be met by raising funds from external in-

vestors or the industry can lobby for reduction in the CAR to 10 percent. It is hoped that the maturity of the business models of MFPs and based on their finan-cial strength, regulators will agree to lower CAR to 10 percent.

It is pertinent to note that while the MFBs are ade-quately capitalized due to the recent raise in regula-

tory capital requirements, however, the same cannot be said for non-bank practitioners. Majority of the non-Bank MFIs are not adequately capitalized and their present ambiguous legal structure limits them to rely on grants or retained earnings to increase their equity. Forthcoming non-Bank MFI regulations can allow them avenues to increase their capital base by attracting commercial investors. Social and other commercial investors can play an important role in assisting the players to meet the equity gap.

Importantly in order to diversify their sources of fi-nancing MFPs need to upgrade their capacity to attract funding from commercial sources. This requires improving standards of corporate gover-nance, greater transparency and stronger internal control. Moreover, the financial teams at MFPs need to be strengthened to interact with and work along-side diverse lenders.

HR Development

A key area that needs to be focused on, if the sec-tor is to reach 10 million borrowers, is the human capital. Human resource is of critical importance for the industry given the labour intensive nature of the work. Limited staff capabilities are a serious imped-iment to achieving scale, product diversification and innovation. In order to reach 10 million borrowers, staff will have to be increased from current level of 17,000 to approximately 66,000 according to projec-tions developed by PMN. The breakdown of employ-ees is show in the Exhibit 4.

With staff capacity already an issue, a strategic ap-proach is needed for HR development in the indus-

• Projected Equity with a CAR of 15% at 10 million borrowers will be PKR 67 billion

• Equity Gap of PKR. 44B• At current ROE of 15% we will add an

additional PKR 22 billion, however since by that time most of the new institutions will also show profitability we expect the RoE to be around 20% on average. Thus adding another PKR 34 billion over the next five year.

• Remaining gap of PKR 10 billion can be managed either through reduction in CAR, or through attracting impact in-vestors.

Senior Management Middle Management FIeld Staff

10,000

667

12,667

53,333

20,000

30,000

40,000

50,000

60,000

Exhibit 4Employee breakdown with 10 million borrowers



try. Training needs differ for senior management, mid and field level staff as shown in the Box C. Ca-pacity building of senior management staff is being enhanced through exposure visits, corporate gov-ernance trainings and international trainings with focus on innovation, succession planning and lead-ership.

The industry consists of diverse player types, each having their own staff requirements. Whereas large organizations and for profit organizations can sup-port in-house training programs for their mid and field level staff. Mid-tier and smaller organizations which constitute the bulk of the industry cannot af-ford similar trainings. Keeping in view this scenario,

a microfinance training center of excellence needs to be established where technical level training can be imparted to increasing number of mid-level and field staff. With the establishment of a training center catering to the specific training needs of the micro-finance industry, the long term objective of increas-ing outreach through the development of innovative products will come to fruition.

Regulatory Framework for Non-Bank MFPs

At present, Microfinance Providers (MFPs) can be categorized into three peer groups namely Microf-inance Banks, Microfinance Institutions and Rural Support Programs. However, only MFBs are regu-lated and supervised by the State Bank of Pakistan. Currently, the MFIs and RSPs fall under four regula-tory frameworks and the respective regulatory au-thorities are as shown in the Table 2 below.

Presently, the industry has grown to a size where it is felt that regulation is needed for further growth. The regulatory framework would provide institution-al and legal cover for the sector and create access to recourse mechanisms for institutions and clients, protecting the industry against willful organized defaults as witnessed in Punjab in 2008-09. It will also help attract investment for the sector to meet its funding needs through greater standardization in disclosures, clarity in legal status and improved governance practices that will boost investor confi-dence. Moreover, it would lead to a level playing field for all MFPs as currently only MFBs face regulatory and statutory restrictions.

Box C

Multi-tiered Approach to Capacity Building

1. Grass root level training through either MFP owned training centers or NIBAF GR level training program

2. Middle level management training for mf through NIBAF and through the in-dustry owned center for excellence program with focus on innovation and linkage with the inclusive finance eco system in collaboration with LUMS

3. Senior management training through the industry-LUMS initiative and spon-sorship for international training and exposure visit.

Table 2Legal Framework and Regulator13

Legal Framework Regulator Scope

The Societies Registration Act, 1860 Provincial Government Deliver Charity Oriented Welfare Services while being fully dependent upon Grant Funding

Voluntary Social Welfare Agencies Ordi-nance, 1961 Provincial Government

To provide legal cover to societies estab-lished for promotion of science, literature and fine arts or for charitable purposes

Trust Act, 1882 Provincial Government Can be created for any lawful purpose including microfinance

Companies Ordinance, 1984 Securities and Exchange Commission of Pakistan (SECP)

Allows for Microfinance Activities but limits the range of financial services that can be provided. Does not allow for equity invest-ments and prohibits issuing dividends.

13 “Regulating Pakistan’s Non-Bank Microfinance Institutions”, Shah, M, MicroNOTE No: 14 Dec 2011



Mitigating Exogenous Shocks to the System

Since 2005, Pakistan has faced multiple disasters. These include earthquake in 2005, IDP crisis in 2009 and floods in 2010 & 2011. The impact of these events on the microfinance sector is summarized in the Ex-hibit 5 below.

The lower income stratum of the population is hard-est hit by natural disasters and this segment of pop-ulation is the same as the one targeted by microf-inance industry resulting in large losses to MFPs. With a small capital base, MFPs have little capaci-ty to absorb such losses leading to liquidity issues. Moreover, as microfinance is a double bottom line industry which tries to balance the social and finan-cial bottom lines, pursuing recoveries from calamity stricken borrowers can create political and reputa-tion risks.

In order to mitigate disaster risk effectively, multi-faceted efforts are needed at client, MFP and indus-

try levels. Clients can be secured by extending mi-cro-insurance products coupled with micro-saving options. At the meso level, MFPs need to diversify geographically and product wise. In addition, there is a need to increase their equity to have a cushion to absorb losses. MFPs located in disaster prone areas need to be better prepared for disasters by having necessary contingency plans in place. At the sector level there is a need to set up an industry-wide disas-ter risk fund and as discussed earlier to tailor gov-ernment supported CLIS and Livestock Insurance to the needs of microfinance clientele.

The sector growth has been adversely affected by the natural disasters. Floods in 2010 and 2011 and the IDP crisis in 2009 resulted in high delinquencies for the sector leading to write offs. This adversely affect-ed the financial positions of MFPs leading them to focus on building up their equity and reducing their risk appetite for growth. In absence of a disaster risk framework it is unlikely that MFPs can sustain their growth for a meaningful length of time.

2005: EarthquakeStruck AJK and KPK the hardest; 3 districts affected73,000 people killedCaused damages amounting to PKR 265 billion (US$ 5.2 billion)Microfinance portfolio worth PKR 38 million affected

2009: IDP Crisis5 districts & 2 agencies affectedPKR 97 billion (US$ 1.1 billion) in damagesMicrofinance portfolio worth PKR 200 million affected

2010: Floods60 districts affected20 million people affected, with over 1,980 reported deaths and nearly 2,946 injured and 1.6 million rendered homelessMicrofinance portfolio worth PKR 2.6 billion affectedPKR 34 million worth of microfinance infrastructure damaged

2011: Sindh Rains9 districts affectedMore than 5.5 million people affectedMicrofinance portfolio worth PKR 5.3 billion affectedPKR 34 million worth of microfinance infrastructure damagedRefinancing requirements estimated at PKR 3.3 billion

Exhibit 5Losses due to Natural Disasters



For the microfinance industry to be counted as a key player in the financial industry and play a pivotal role in financial inclusion, it needs to expand to cater to at least 10 million active borrowers. There are low hanging fruits for the industry – easily availed op-portunities in the landscape – that can be capitalized upon with little incremental investment and policy advocacy. Over the medium term additional struc-tural changes would be needed to sustain a higher growth trajectory.

The microfinance industry can utilize government directed credit schemes and other public sector ini-tiatives like credit guarantees for small and margin-alized farmers and the low cost housing guarantee scheme to its advantage to increase outreach and enter new market segments like housing. In addi-tion, the fast growing branchless banking segment can be utilized to expand outreach and provide vari-ety of services in a cost effective manner. M-wallets and linkages between MFIs and MFBs can provide another avenue for players to meet their increas-ing funding needs. Moreover, recent regulatory re-laxations allowing for upscaling of loans provide an opportunity for the sector to enter into lower end of SME market which has similar dynamics to the microfinance clientele. Thus far, the industry infra-structure has been strengthened with the establish-ment of MF-CIB and is being further enhanced with a planned ATM switch for MFPs and opening of m-wal-let accounts through biometric verification by virtue of linkages with NADRA.

However, the sector faces a number of challenges which, if overcome, can prove to be drivers of growth. There is an urgent need to bring non-bank MFPs un-der the regulatory umbrella. In addition, as evident from the impact of natural disasters on the microfi-nance industry particularly on growth, development of a sector level disaster risk fund cannot be delayed any longer. This single issue has resulted in huge losses that have damaged the capital base of MFPs and reduced their risk appetite to a great extent. An-other key challenge is having the requisite human capital. This requires sector-wide capacity building initiatives to be started to meet enhanced training needs of practitioners.

To reach out to 10 million borrowers will lead to en-hancement in the funding needs of the microfinance industry and existing resources will not be able to meet these increased requirements. MFPs would need to diversify their sources of funding whereas donors and funder would have to develop innovative and multi-tiered financing solutions for the players. The most important and central role in this must be played by the practitioners themselves. Only strong institutions can grow and expand at this rate. MFPs would need to improve their governance standards and promote transparency. In addition, there is a need to focus on their internal controls, add depth to their senior management teams and leverage tech-nology to expand outreach.

Conclusion



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