Microfinance Sector Development - ROYAUME DU 1 and 2 - Legal...Microfinance Sector Development: ... Microfinance is not a panacea for poverty alleviation, ... Media campaigns for users awareness

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  • Microfinance Sector Development: Pakistans policy perspective and experience in financial

    inclusion

    Dr. Saeed Ahmed

    State Bank of Pakistan

    Dr.Ahmed@sbp.org.pk

    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 Pakistans 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 Governments 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 markets 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)

    SBPs Stewardship Role for financial inclusion

    (SBPs DF Group, MF Consultative Group, Implementation of National

    Strategies, FIP)

    SBPs 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

    SBPs 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 MFIs 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 managements 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

    Tameers 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%.

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