Microfinance Sector Development: Pakistan’s 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 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%.