pakistan microfinance review 2009: annual assessment of ......kbl khushhali bank ltd. kf kashf...

Annual Assessment of the Microfinance IndustryPakistan Microfinance Review

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Pakistan Microfinance ReviewAnnual Assessment of the Pakistan Microfinance Industry

DECEMBER 2010

KUfrom the Department forInternational Development

Ghalib NishtarChairperson Editorial Board

President, Khushhali Bank Ltd.

Dr. Saeed AhmedHead Microfinance Department

State Bank of Pakistan

Blaine StephensCOO and Director of Analysis

Microfinance Information eXchange, Inc. (MIX)

Haroon SharifSenior Regional Advisor

Department for International Development (UK)

Ahmad JamalChief Strategy Officer

Pakistan Poverty Alleviation Fund

Agha A JavadGeneral Manager

National Rural Support Programme

Salim N JiwaniProject Director – AMPER ShoreBank International

Mehr ShahAuthor and Managing Editor

Syed Muhammad AliData Collection and Compilation

Pakistan Microfinance Network is grateful to all contributing organizations for making their financial information available for the publication of the Pakistan Microfinance Review, 2009.

Pakistan Microfinance Network would like to thank DFID (UK Aid), and Citi Bank for their support in the continued production of this publication.

Editorial Board

Exchange Rates

PLEASE NOTE: For the Government of Pakistan the financial Year (FY) covers the July – June time period, e.g., FY 2009 commenced on July 1, 2008 and closed on June 30, 2009.

Source for exchange rates listed above: www.sbp.org.pk/ecodata/rates/m2m/2010/Jul/Jul.asp

Currency Symbol Exchange Rate to PKR

Euro € 107.04

Great British Pound £ 129.93

Pakistan Rupee Rs 1.0

US Dollar $ 85.58

SECTION 2:

INDUSTRY PERFORMANCE

Pakistan Microfinance Review 2009

ContentsSECTION 1:

THE YEAR IN REVIEW

SECTION 3:

THE WAY FORWARD

ANNEXURES

1.1. Macro Economy and the Microfinance Industry1.2. Policy Environment and the Microfinance Industry 1.3. Regulatory Environment and the Microfinance Industry1.4. Microfinance Industry Initiatives1.5. Conclusion

2.1. Industry Overview 2.1.1. Peer Groups

2.1.2. Outreach

2.1.3. Gender Distribution

2.1.4. Depth of Outreach

2.1.5. Portfolio Breakdown

2.2. Asset and Funding Structure 2.2.1. Asset Composition

2.2.2. Funding Profile

2.3. Profitability and Sustainability2.4. Risk Assessment 2.4.1. Credit Risk

2.4.2. Market Risk

2.4.3. Operational Risk

2.5. Efficiency and Productivity Assessment 2.5.1. Expense Structure

2.5.2. Staff Performance

2.6. Wrap-Up

3.1. Post-Flood Options 3.1.1. Short-Term Policy Approach

3.1.2. Short-Term Practitioner Approach

3.1.3. Long-Term Measures

3.2. Funding Shortfall 3.2.1. Deposits

3.2.2. Equity

3.2.3. Debt

3.3. Commercial Investors 3.3.1. Business Model

3.3.2. Market Intelligence

3.4. New Entrants and Mission Drift3.5. Strengthening Internal Controls

Annex AI:

Annex AII:

Annex B:

Annex C:

Annex D:

Annex E:

Performance Indicators – Industry (2006 – 2009)Performance Indicators – Institution and Peer Group (2009)Regional BenchmarksSources of DataAdjustments to Financial DataTerms and Definitions

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AcronymsADB Asian Development Bank

BISP Benazir Income Support Programme

CGAP Consultative Group to Assist the Poor

CIB Credit Information Bureau

CPC Consumer Protection Code

DFI Development Finance Institution

DFID Department for International Development (UK)

ECA Eastern and Central Europe

EUR Euro

FI Financial Institution

FIP Financial Inclusion Programme

FMFB The First MicroFinanceBank Ltd.

FSS Financial Self Sufficiency

FY Financial Year

GBP Great British Pound

GDP Gross Domestic Product

GLP Gross Loan Portfolio

GoP Government of Pakistan

HDI Human Development Index

IAFS Improving Access to Financial Services

IFAD International Fund for Agricultural Development

IMF International Monetary Fund

ISF Institutional Strengthening Fund

JPY Japanese Yen

KBL Khushhali Bank Ltd.

KF Kashf Foundation

KfW Kreditanstalt fur Wiederaufbau

KIBOR Karachi Inter-Bank Offer Rate

KMFB Kashf Microfinance Bank Ltd.

MCGF Microcredit Guarantee Facility

MENA Middle East and North Africa

MFB Microfinance Bank

MFCG Microfinance Consultative Group

MF-CIB Microfinance Credit Information Bureau

MFD Microfinance Division

MFP Microfinance Provider

MFI Microfinance Institution

MoF Ministry of Finance

NRSP National Rural Support Programme

OAEM Other Assets Especially Mentioned

OSS Operational Self Sufficiency

PAR Portfolio at Risk

PKR Pakistan Rupee

PMFF Pakistan Microfinance Fund

PPAF Pakistan Poverty Alleviation Fund

PRI Pakistan Remittance Initiative

PRISM Program for Increasing Sustainable Microfinance

PRSP Poverty Reduction Strategy Paper

ROA Return on Assets

ROE Return on Equity

RSP Rural Support Programme

SBP State Bank of Pakistan

SRB Staff Reference Bureau

SSC Special Savings Certificate

TAP Technical Assistance Provider

TMFB Tameer Micro Finance Bank Ltd.

UNDP United Nations Development Programme

USAID US Agency for International Development

USD United States Dollar

The year 2009 has been a crucial period for Pakistan’s microfinance industry in many ways. The most obvious development is the decline in microcredit growth rates across organizations and geographic regions. However, it is important to note that the deceleration from years of double-digit growth in microcredit has played out against encouraging reports of accelerating growth in depositor and insurance policyholder numbers following strategic and operational changes introduced by a number of microfinance providers (MFPs1). These changes have included direct tie-ups with insurance providers, and the hiring and training of additional staff and upgrading existing branches for deposit services. Thus, despite the fact that the numbers for policyholders and depositors remained small compared to overall demand, the changes initiated indicate a long-term commitment by practitioners to widening the financial choices available to low-income households. Against this backdrop, it would not be inaccurate to state that the industry is finally beginning to shake-off its purely credit-focused approach in favour of a more broad-based presence.

Moreover, the slowdown in credit growth has allowed players at the macro, meso, and micro levels to concentrate on developing much-needed industry support infrastructure to supplement organization-level risk management practices. These include the pilot credit bureau and consumer protection initiatives undertaken jointly by the central bank, donors and practitioners, coupled with the introduction and reinforcement of risk management and treasury functions by some MFPs. These initiatives are being pursued at an opportune time given the persisting challenges in the global and national economic environment. If implemented effectively, it is anticipated that they will contribute significantly to the correction of underlying industry weaknesses, in addition to improving credit discipline among clients with access to multiple credit providers - a problem globally beingrecognized as a risk to the microfinance industry.

It is also worth noting that when viewed against the backdrop of the global microcredit industry, Pakistan’s

performance trends during 2009 have not diverged significantly from a number of other regions: microcredit growth during 2008-09 has been lacklustre in a number of countries as practitioners and investors alike, continue to demonstrate (and voice) caution on rapid portfolio growth 2. Portfolio quality in terms of portfolio at risk and write-offs has also been negatively impacted. Other than growth rates, however, the industry’s performance varies marginally from previous years with no sizeable changes evident in 2009.

The Pakistan Microfinance Review (PMR) assesses the performance of Pakistan’s microfinance industry. The report provides a multi-layered assessment of the industry and its players. SECTION 1 provides a bird’s eye view of the sector, taking into account the performance of Pakistan’s macro-economy, policy and regulatory changes likely to impact the industry, and adjustments in the industry landscape based on broad initiatives jointly undertaken by macro, meso, and micro-level industry players. SECTION 2 provides a detailed analysis of the industry, disaggregating the numbers by peer group and, where necessary, by individual institution. This de-averaging exercise provides a more nuanced view of the industry. Based on the macro, meso, and micro-level assessment, SECTION 3 identifies emerging trends as well as potential challenges and opportunities for the industry and its upstream and downstream constituents (i.e., regulators, policymakers and investors, and clients, respectively), in the days to come.

It should be noted that the data used for the PMR 2009 is drawn from the audited accounts of reporting MFPs (23 in total)3. The discussion in SECTION 2 is solely backed by industry data for the year prior to publication. In SECTIONS 1 and 3 on the other hand, a more forward-looking approach has been adopted: where possible macroeconomic data from 2010 has been incorporated into the discussion to enable the reader to acquire as updated a picture of Pakistan’s industry as possible.

1 Generic term for all bank and non-bank microfinance provider organizations operating in Pakistan. 2 Microfinance Banana Skins 2009: Confronting Crisis and Change. Centre for the Study of Financial Innovation, New York, USA3 Audited financial statements for Kashf Foundation were unavailable in 2009 due to change in reporting period by the Securities and Exchange Commission of Pakistan from December to June. 24 MFPs exclusive of Kashf Foundation submitted data for PMR 2009.


1

1. The Year in Review

1.1. Macro Economy and the Microfinance Industry1.2. Policy Environment and the Microfinance Industry1.3. Regulatory Environment and the Microfinance Industry1.4. Microfinance Industry Initiatives1.5. Conclusion

SECTION 1: THE YEAR IN REVIEW

SECTION 2: INDUSTRY PERFORMANCE

SECTION 3: THE WAY FORWARD ANNEXURES

Pakistan’s persisting energy crisis. With limited ability to insulate themselves from energy shortages, such businesses suffer heavier productivity and efficiency losses compared to medium and large enterprises that have the financial capacity to install and utilize alternative energy sources. Thus, macroeconomic stresses have extended to the cross-section of Pakistani enterprises with a significant impact on small and micro businesses. This has had a direct bearing on the repayment capacity of the micro borrower. Although credit demand has continued to outstrip supply, implications for closer moni-toring of loan utilization by providers do arise as there is now a higher likelihood of loans being funnelled towards consumptive purposes.

Reinforcing the pressure on low-income households is the increasingly stressful price hike. Inflationary pressure was held down to single-digit figures during the first quarter of FY09. However, the third quarter saw inflation spike again, with food inflation touching 15.5 percent in January 2010. Since then, overall inflation has hovered in the range of 11–13 percent, with food inflation being the stickiest at 14.5 percent. Thus, disaggregated inflation figures indicate that the bottom of the pyramid did not remain insulated from these price hikes as food inflation has led the inflation index since 2006–07 (see EXHIBITS 1.2A and 1.2B).

EXHIBIT 1.2A: ANNUAL INFLATION (2000–09)

Source: http://www.sbp.org.pk/ecodata/MPM.pdf

1.1 Macro Economy and the Microfinance Industry

The Government of Pakistan (GoP) introduced a range of economic stabilization measures in 2008 and 2009. The measures were successful, to some extent, in reducing the balance of payments deficit, rebuilding foreign exchange reserves, lowering inflation, and obtaining improved ratings by international credit rating agencies. As a result, the economy grew by 4.1 percent in FY094 compared with 1.2 percent in FY08 (see EXHIBIT 1.1).5 Although the growth rate showed significant improvement over the last twelve months, economic recovery at this juncture continues to be fragile, due primarily to persisting weaknesses in Pakistan’s macroeconomic framework, the chronic energy crisis, and security risks that have not been completely mitigated.

Micro and small enterprises particularly have suffered from declining growth trends in the country. Thesebusinesses are especially vulnerable to shocks such as

EXHIBIT 1.1: GLOBAL, REGIONAL, AND NATIONAL GDP GROWTH RATES (2003–09)

Source: http://www.finance.gov.pk/survey/chapter_10/09_Poverty.pdf

4 FY: For GoP, the financial year (FY) starts in July and ends the following June. 5 Economic Survey of Pakistan 2009–10. Ministry of Finance. Government of Pakistan http://www.finance.gov.pk/survey/chapter_10/State_of_the_Economy.pdf

http://www.pmronline.info

2 SECTION 1: THE YEAR IN REVIEW



Due to the extensive level of flood damage across the country in the first quarter of FY10, significant increments in GDP growth rate are considered highly unlikely in the short-term (the next one year).


FY00

CP

I In

fla

tio

n (%

)

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

25

20

15

10

5

0

GeneralFoodNon-Food

-2

0

2

4

6

8

10

FY03 FY04 FY05 FY06 FY07 FY08 FY09

GD

P G

row

th R

ate

(%)

WorldSouth AsiaPakistan

EXHIBIT 1.2B: YEAR-ON-YEAR INFLATION (2009–10)

Source: http://www.sbp.org.pk/ecodata/MPM.pdf

A UN Interagency Assessment Mission report fielded during the period June–July 2008 showed that 28 percent of Pakistan’s population was severely food insecure in 2008, compared with 23 percent in 2005–06. Similarly, the Planning Commission’s task force on food security estimated that the poverty headcount ratio increased from 29.2 percent in FY05 to 33.8 percent in FY08, which translates into 62 million people.6 Thus, continued erosion in the value of household income (with limited capacity to plug their productivity losses) will impact the repayment capacity of microfinance clients, resulting in higher credit risk.

On the supply side, persisting inflation resulted in a KIBOR rate exceeding 12 percent as of July 2010 (see EXHIBIT 1.3). This has decreased since the high of 14 percent reported in July 2008. However, in line with maintaining a tight monetary-policy stance, the discount rate (reverse repo) has been maintained at 12.5 percent as of November 2009.7 Thus, borrowing from commercial sources will continue to be an expensive option for MFPs in 2010 and 2011 despite the presence of credit guarantee schemes for the microfinance industry and the regulatory allowance to raise debt in foreign currency from offshore lenders.

Based on aggregated data for 2009, subsidized debt continues to constitute more than 50 percent of the funds made available for microfinance (see SECTION 2.2 for more on industry funding and capital structure).

EXHIBIT 1.3: KIBOR (2005–2010)

Source: http://www.sbp.org.pk/ecodata/sir.pdf

Microfinance banks (MFBs) are also likely to face sustained competition in raising deposits: public-sector savings instruments such as Special Saving Certificates (SSCs), and Defence Saving Certificates (DSCs) continue to offer relatively high interest rates to clients. Although the interest rates offered on these instruments have declined since December 2008, at 14 percent (and relatively risk-free) they continue to offer a viable alternative to MFBs and commercial banks alike (see EXHIBIT 1.4). Thus, crowding out the private sector, including MFBs, from the deposit market will be a serious concern in the next 1–3 years.

6 Economic Survey of Pakistan 2008–09. Ch.13: Poverty. Ministry of Finance. Government of Pakistan http://www.finance.gov.pk/admin/images/survey/chapters/13-Poverty09.pdf

7 Source: State Bank of Pakistan. http://www.sbp.org.pk/Ecodata/sir.pdf


3SECTION 1: THE YEAR IN REVIEW



The upward trend in food prices is likely to continue in the wake of extensive floods in FY10 and their implications for the agriculture sector.

It seems highly unlikely that 2010 will see any significant rate cuts after the considerable damage caused by recent floods and the expected increase in emergency and relief outlays by the federal and provincial governments.

As the GoP struggles with the aftermath of the 2010 floods, an uncertain security situation, and a developing debt overhang, this trend is likely to continue over the short to medium term (1–3 years), with heavy government borrowing expected from onshore credit markets and depositors.


CPI I

nflat

ion

(%)

25

20

15

10

5

0

Feb-

09

Mar

-09

Apr

-09

May

-09

Jun-

09

Jul-0

9

Aug

-09

Sep-

09

Oct

-09

Nov

-09

Dec

-09

Jan-

10

Feb-

10

Mar

-10

Apr

-10

May

-10

Jun-

10

General Food Non-Food

1-Y

ea

r K

IBO

R R

ate

(%)

Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-108

9

10

11

12

13

14

15

Overall, the macroeconomic environment in Pakistan was challenging in 2009 and 2010. In summary, although a degree of economic recovery was experienced early in 2010 as economic growth picked up and inflation declined, the recovery was considered fragile. As a result the SBP continued to follow a tight monetary policy with marginal reduction in the discount rate. On-shore public sector borrowing also continued unabated. Thus, accessibility to favourably-priced debt and deposits from local markets remained limited. On the demand side, continued food inflation and the persisting energy crisis began to exert a degree of pressure on the repayment capacity of low-income households. In such an environment, MFPs are likely to continue rationalizing growth in credit outreach with relatively greater contraction in consumption lending (emergency and general purpose loans).

1.2 Policy Environment and the Microfinance Industry

Following its success in laying the regulatory foundation for Pakistan’s microfinance industry, the Ministry of Finance (MoF) tasked the SBP with developing a microfinance policy framework, which is currently under development and is expected to be presented to the MoF for approval in the second half of 2010.

Other policy initiatives likely to impact Pakistan’s microfinance industry include the PKR 70 billion Benazir Income Support Program (BISP), and the revised crop procurement programme and crop loan insurance scheme launched by the GoP.

Under BISP, the federal government aimed to reach out to five million poor households in FY09 with a monthly cash transfer of PKR 1,000 (USD 11).8 The programme is

EXHIBIT 1.4: INTEREST RATES ON PUBLIC-SECTOR SAVINGS INSTRUMENTS

RIC Regular Investment Certificate DSC Defence Saving CertificateSSC Special Saving Certificate PBA Pensioners’ Benefit Accounts

Source: http://www.sbp.org.pk/ecodata/sir.pdf

Moreover, the saving-to-GDP ratio in Pakistan remains the lowest among neighbouring countries (see EXHIBIT 1.5). In fact, domestic savings as a percentage of GDP declined from 11.5 percent in FY08 to 11.3 percent in FY09. The State Bank of Pakistan (SBP) has attributed the decline to the sharp reduction in overall economic activities and strong inflationary pressures in the economy, both of which have impacted the ability of households and businesses to save. Thus, macro economic pressure will reinforce the impact of public-sector borrowing, further deepening the challenge faced by MFBs in accessing deposits as a source of funding.

EXHIBIT 1.5: SAVING-TO-GDP RATIO BY COUNTRY

Source: http://www.sbp.org.pk/fsr/2006/English/Financial%20Savings.pdf

8 In FY08/09, PKR 14 billion was distributed under BISP to 1.76 million beneficiaries. Economic Survey of Pakistan 2009–10. Ch.9: Poverty. Ministry of Finance, GoP.





The widespread flood that occurred in August 2010 is unlikely to allow the GoP to reduce the fiscal budgetary deficit to less than five percent of GDP, as originally planned. Following the large-scale damage to infrastructure and agricultural produce across the country, general and food-based inflation are unlikely to fall to single-digit figures in the current fiscal year. Thus, stress on clients is likely to increase during 2010 and 2011.


Pakistan India Sri Lanka Bangladesh0

5

10

15

20

25

30

35

40

Sa

vin

g t

o G

DP

Ra

tio

(%)

14.3

37.7

18.2

32.4

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jun-

07

Jun-

08

Oct

-08

Dec

-08

Apr

-09

Jul-0

9

18

16

14

12

10

8

6

4

0

2

RICsDSCs

SSCsPBA

the largest-ever safety net initiative undertaken in Pakistan; PKR 17.8 billion had been disbursed under BISP as of March 2010.

• The price support mechanism approved by the Economic Coordination Committee of the Cabinet increased the wheat procurement price from PKR 625 to PKR 950 per 40 kg. A total of 9.2 million tons of wheat was procured under this scheme in 2008–09, resulting in a significant cash injection into the rural economy.

• In May 2009 the GoP included MFBs in its mandatory Crop Loan Insurance Scheme for five major crops: wheat, maize, rice, cotton, and sugarcane. Under this scheme the GoP committed to paying up to 2 percent of crop value in insurance premiums for all small farmers (owning less than 12.5 acres of land) in order to provide risk cover for losses sustained due to natural calamities. With this scheme MFBs, like all other commercial banks, were encouraged to increase flow of credit to farming communities.9

The effectiveness of the programmes themselves remains to be seen. However, the shift from unstructured subsidies to targeted assistance to the poor and needy is likely to have a number of direct and indirect benefits arising from a reduced federal deficit, in addition to deepening the discourse on improved alignment of policy incentives within the macro economy. The microfinance industry is also likely to benefit. Firstly, direct benefits will stem from rural clientele having greater food security and improved income levels due to improved sale prices under the revised and expanded cash procurement scheme. At the very least, this measure will reduce repayment capacity stresses caused by high inflation rates in the short-term for rural clients (this will not be the case for urban clients). Secondly, indirect benefit is likely to result from the improved alignment of policy incentives: owing to its pro-poor orientation, the microfinance business in Pakistan has often been lumped together with subsidy-based welfare initiatives. This has not worked well for an industry that could potentially be financially sustainable, based on which it could achieve significant scale as witnessed in countries like Bangladesh, Bolivia, and India. Microfinance programmes work best when targeted at populations just below and above the poverty line (see EXHIBIT 1.6).

EXHIBIT 1.6: CONTEXTUALIZING THE POLICY DISCOURSE ON MICROFINANCE

Source: Hashemi, Syed and Richard Rosenberg. Graduating the Poorest into Microfinance - Linking Safety Nets and Financial Services. CGAP, Washington DC. 2006.

Thus, targeted welfare programmes like the ones introduced by the GoP indicate that there now exists a nuanced view of poverty among policymakers i.e., different levels of poverty require different levels of state subsidy and varied instruments. It also indicates policymakers have started accepting that targeted welfare programmes are a better utilization of public-sector funds than industry-wide subsidies that are available to all consumers/clients, irrespective of their income levels.

9 State Bank of Pakistan: F. No. 1(13) Inv-II/2008. May 5, 2009





In July 2010, the SBP issued a circular for the fiscal relief of Khyber Pukhtunkhwa, the Federally Administered Tribal Areas (FATA), and the Provincially Administered Tribal Areas (PATA), i.e., parts of the country affected by on-going military operations. The circular announced the capping of interest rates at 7.5 percent per annum on all loans outstanding in these regions as of December 31, 2009. The cap was put in place for a period of six months: January–June 2010. The circular also specified that the rate differential would be reimbursed to concerned MFBs through the SBP, Peshawar. Although this policy has provisioned for reimbursing the amount due to the concerned MFBs, it may also be useful to review relief and write-off policies in light of maintaining responsible credit culture among clients. This is especially important in light of the widespread damage caused by severe flooding across the country.


Non-Poor

Transitory Non-Poor

Transitory Vulnerable

Transitory Poor

Chronic Poor

Extremely Poor

Microfinance[Credit, Deposit, Insurance

and Remittances]

Safety NetPrograms

Micro Credit

debt in foreign currency from offshore lenders. This allowance has been given to both bank and non-bank players in the industry. According to the circular issued, MFPs can now raise debt in four major currencies: USD, GBP, EUR, and JPY. The disbursed foreign currency loan funds can be immediately converted into PKR and credited to the borrowing entity’s PKR account maintained with an “authorized dealer” (bank). However, MFPs are not allowed to retain such funds in foreign currency. Authorized dealers are allowed to provide forward cover/hedging facilities on the foreign currency loans from the inter-bank market in accordance with prevailing foreign exchange regulations in Pakistan.11 Following the release of the circular, a number of international microfinance fund managers contacted the central bank, MFPs, and the Pakistan Microfinance Network (PMN) to further investigate the possibility of lending to Pakistan’s microfinance industry. During these discussions, a number of investors raised the issue of finding the required hedging instruments in the local market. The SBP requires foreign currency debt investments to have tenors exceeding two years, but hedging instruments available locally are offered for a period of six months only. The hedging solutions available for loans originated in foreign currency are a matter of significant concern for investors and recipient MFPs given the depreciation experienced by the Pakistani rupee during 2008–2010. Some investors are examining the option of taking responsibility for managing the FOREX risk. So far however, hedging options available internationally are quite costly and will add significantly to the cost of funds sourced from off-shore options.

The SBP also agreed to grant scheduled-bank status for the purpose of clearinghouse membership to MFBs that meet the specified MIS, treasury, and cash management requirements. So far, only Tameer Microfinance Bank Ltd. (TMFB) has been granted this status. Other MFBs use agent banks that are already members of the clearinghouse. The aim is to promote a level playing field for MFBs and other commercial banks in accessing institutional and high net-worth individual depositors with more sophisticated banking needs.

While easing these rules, the SBP made it compulsory for MFBs to make a credit bureau enquiry on all borrowers with exposure greater than PKR 50,000 (USD 588). In

1.3 Regulatory Environment and the Microfinance Industry

A number of regulatory amendments were introduced by the SBP in 2009. As per these changes, MFBs can extend micro loans up to PKR 150,000 (USD 1,764) as general purpose loans, and PKR 500,000 (USD 5,882) as housing loans. Borrowers’ annual income conditions have also been relaxed from PKR 150,000 to PKR 300,000 (USD 1,764–3,529) for general loans and PKR 600,000 (USD 7,058) for housing loans to allow room for the graduation of microfinance clients.10

Loan classification criteria have been relaxed in a simultaneous amendment. Loans overdue by 30 days or more but less than 60 days will be classified as “other assets especially mentioned (OAEM)”, and will require no specific provisioning. Loans overdue by 60 days but less than 90 days will be classified as “sub-standard” and will require a specific provision of 25 percent of outstanding principal net of cash collaterals. Both amendments serve to ease the limits placed on MFBs (MFIs fall outside the regulatory purview of the SBP): the former amendment allows MFBs access to a wider segment of the low-income population whereas the latter enables more aggressive utilization of available funds.

In November 2009, the SBP also allowed MFPs to access

10 The NEWS International. SBP Eases Rules for Microfinance Banks. Friday August 28, 200911 State Bank of Pakistan. http://www.sbp.org.pk/epd/2009/FEC8.htm





A recommendation made to governments in some countries is hand- outs to individual clients for amounts written off on their behalf by the government. The recipients are then instructed to deposit the handout instruments over to the MFI. Using recipients as the conduit rather than a central bank intermediary, is shown to yield a number of positives in addition to ensuring the MFI’s financial sustainability and providing support to the client in economically stressful times. Firstly, the borrower receives a clear message that his or her debt has to be repaid to the MFI regardless of the situation; secondly, the credit for the write-off and relief goes directly to the government resulting in goodwill for officeholders among constituents based on the transparent and pro-poor use of public resources.


keeping with this requirement, the SBP joined hands with the PMN and the Pakistan Poverty Alleviation Fund (PPAF) to launch a pilot microfinance credit information bureau (MF-CIB) in May 2010. The MF-CIB is currently being piloted in Lahore district before being rolled out nation-wide. The initiative aims to develop a consolidated credit bureau for the microfinance industry. So far, MFBs have been reporting to the SBP-managed e-CIB which does not provide them with access to information on non-bank MFP clients - their primary market niche. Following the launch, MFBs have been given the option to fulfill enquiry requirements from the MF-CIB once it is implemented across the country. The MF-CIB offers a low-cost option for making better-informed lending decisions. A summary of the costs of participating in the MF-CIB is given in EXHIBIT 1.7.

EXHIBIT 1.7: SUMMARY OF COSTS FOR USING MF-CIB

Source: Pakistan Microfinance Network

The SBP also continues to maintain a 15 percent capital adequacy ratio (CAR) for MFBs, compared to eight percent for commercial banks. This level is considered prudent by both practitioners and investors given the stressful

macro-economic climate of the country.

The regulatory environment has also allowed space through its “Branchless Banking Guidelines” for non-industry players to assess business opportunities offered by the microfinance market. In the case of Pakistan, interest has largely been expressed by players in the telecommunications industry who currently reach out to approximately 70 million individuals across the country. Although overall investment intelecommunications went down in FY10, a number of applications have been filed with the SBP for microfinance bank licenses (see BOX 1). Given their size and outreach, the entry of telecommunication companies can be a potential game-changer for the industry with both positive and negative implications. Joining hands with the telecommunications industry could potentially yield significant benefits in terms of reduced costs, improved penetration rates, and widespread geographic presence. The benefits however, will materialize only if both industries work together to design and develop delivery channels suited to the product and transactional needs of low-income clients. The focus must be on a double-bottom line approach to prevent mission drift.

1.4 Microfinance Industry Initiatives

A number of industry-wide initiatives have been launched during 2009 and 2010. The SBP has played a key role in setting-up and implementing funds for the microfinance industry:

• Microfinance Credit Guarantee Fund (MCGF): The Department for International Development (UK) launched its Financial Inclusion Programme (FIP) in 2008 under which GBP 10 million (USD 16.47 million) were earmarked for the MCGF. Aimed at easing liquidity pressure on MFPs, the MCGF component of FIP was developed to give incentives to banks and development financial institutions (DFIs) to provide funds to MFPs for on-lending.12 Under the MCGF, lenders can lend to MFPs at the SBP policy discount rate plus two percent. The incentives include a pari passu guarantee of 40 percent or a first-loss guarantee of 25 percent. To date, one loan has been backed with guarantees provided under the MCGF.

12 http://www.microcapital.org/microcapital-story-state-bank-of-pakistan-launches-three-microfinance-development-funds-with-proceeds-from-the-uk-Government- financial-inclusion-programme-and-the-asian-development-bank/






ITEMAMOUNT

PKR USD

Membership Subscription

(one-time only)25,000 294

Annual Renewal 5,000 59

Negative Inquiry Rate 12 0.14

Positive Inquiry Rate 17 0.14

Minimum Monthly Charge

5,000 59

Additional Branch Access

(payable on activation of service)3,000 35

By November 2009, there were 95 million mobile subscribers in Pakistan.

Approximately 25 million of these were added in 2008.1

Mobile service providers in Pakistan include:

• Mobilink• Ufone• Warid• Telenor• Zong

China Mobile launched Zong in 2008. According to the Pakistan Telecommunication Authority (PTA), Zong grew at a rate of 220 percent during 2008–2009.

Data disaggregated at the provincial level indicated a significant

• Percentage of Prepaid subscribers: Defined as the proportion of prepaid customers to total customers. The underlying assumption is that prepaid customers are more likely to shift to another service provider which is why they are compared with a service provider’s post-paid customers. The Pakistan telecom industry comprises mainly prepaid customers; post-paid customers account for just two percent of the market.• Cost of Acquisition: Defined as the cost of acquiring a new customer. This indicator helps estimate the financing requirement of a telecom firm aiming to achieve growth.5

According to the Pakistan Mobile Operator forecast, mobile phone users are expected to reach 134.8 million by 2014 i.e., approximately 75 percent of the total population of Pakistan.

increase in Punjab and Balochistan. In June 2008, Punjab had 52 million subscribers as compared to 37 million in 2007. Similarly, Balochistan showed an increase of 57 percent, resulting in 2.2 million subscribers in 2008 as compared to 1.4 million in 2007.2

The total number of cell phone subscribers and market penetration over the past five years is shown in FIGURE 1.2.

Some important key performance indicators for the telecom industry are:

• Growth Rate: Defined as the number of net subscribers added in a quarter or a year. The average growth rate for Pakistan was approximately nine percent in the last quarter of 2009.3

• Churn Rate: Defined as the numbers of customers who leave a network. Low churn rates show customer loyalty and customer satisfaction. The rate has been 8–9 percent for the period 2008–2009 because of increasing tax rates on telecom services.3

• Average Revenue per User (ARPU): Defined as the average amount that a customer spends within a specified time period i.e. the profit margin per customer. The ARPU was estimated at - 7.0 percent in the last quarter of 2009 and is expected to decrease further as a result of the price wars between mobile companies. The ARPU decreased by 20 percent from the previous year in 2009.4

• Minutes of Usage per Subscriber (MOU): Defined as the number of minutes of usage on average per month by a subscriber. The industry average increased by 9.4 percent in the last quarter of 2009: The MOU increased from 170 minutes per month to 187 minutes per month. The MOU for the industry is expected to increase, especially for Mobilink and Telenor.4

It is an established fact in the microfinance sector that infrastructure cost is a major concern as it is difficult to recover from small transactions and high default risks. The following table provides a quick analysis of benefits that both the microfinance and telecom sectors can reap if they join forces.

Researched By: Sarah Farooq, Intern at PMN (June-July 2010); Bsc Candidate 2011, Lahore University of Management Sciences (LUMS)

Source: Telecompk.net 2009

BOX 1: TELECOM INDUSTRY STATISTICS






Source: Pakistan Country Report, 2008

1 2Q10 Pakistan Mobile Operator Forecast, 2009 – 2014.”IE Market Research Corp,21 May 2010 ,24 June 20102 Bhatti,Baber. ”Investing in mobile Phone Companies in Pakistan.” telecompk.net, 3 November 2006 , 24 June 2010.3 Pakistan Telecommunication Report 2008-20094 2Q10 Pakistan Mobile Operator Forecast, 2009 – 2014.”IE Market Research Corp,21 May 2010 ,24 June 20105 http://telecompk.net/2006/11/03/investing-in-mobile-phone-companies-in-pakistan/

FIGURE 1.1: MARKET SHARE BY SERVICE PROVIDER

Mobilink

Ufone

Telenor

Warid

Zong

7.1%

19.4%

23.0% 19.0%

31.5%

100.0090.0080.0070.0060.0050.0040.0030.00

10.0020.00

0.00

60

50

40

30

20

10

0

54.70

8.303.290.22 0.52 1.16 1.61

22.21

SIM

Car

ds (M

illio

n)

SIM

Car

ds p

er 1

00Po

pula

tion

2000 2001 2002 2003 2004 2005 2006 2007 2008

39.94

Mobile DensityMobile Subscriber Base (Million)

Figure 1.2: TOTAL MARKET PENETRATION

• Institutional Strengthening Fund (ISF): Under the ISF, GBP 10 million (USD 16.47 million13) have been made available to the microfinance industry for its capacity-building needs. The fund covers the varied capacity-building needs of bank and non-bank MFPs and industry networks. To date, six grants have been finalized under ISF. • Improving Access to Financial Services (IAFS): The SBP also administers the ADB-funded IAFS fund. The fund’s first disbursement was finalized in 2010 to pilot a financial literacy project aimed at improving awareness of financial services and needs among existing and potential financial industry clients. The IAFS’s scope extends beyond microfinance - low-income clients remain a priority target group.

Disbursement under the MCGF and ISF funds is shown in EXHIBIT 1.8. Both funds have a five-year tenor (2008–2012).

EXHIBIT 1.8: DISBURSEMENT UNDER MCGF AND ISF (2009–2010)

N/A Not ApplicableSource: Department for International Development

Another fund, the Financial Innovation and Challenge Fund (also under FIP) amounting to an additional GBP 10 million will be set up in FY10. Microfinance players involved in developing innovative delivery channels and products and technology solutions with potential for scalability, will be eligible to access the proposed fund. The Fund will not be restricted to the microfinance industry.

The PPAF-III was launched in August 2009 and amounts to USD 250 million. Of this USD 40 million has been set aside for microfinance. In addition, EUR 10 million has also been placed with PPAF by the Italian Government for provision to the microfinance industry. In 2010, a number of donors in Pakistan, including DFID, the World Bank, International Finance Corporation (IFC), Kreditanstalt fur Wiederaufbau (KfW), and Asian Development Bank (ADB) joined hands with the SBP to assess the establishment of a specialized debt fund for the industry. The feasibility is being assessed, and a decision is expected by the end of FY10. A Consumer Protection Code was developed for the industry and launched in May 2009. Twenty-two MFPs became signatories to the Code, which promotes transparency in pricing, the dignified treatment of clients, and a commitment to developing efficient and effective complaint resolution systems. The implementation of the Code is planned over three years with systems to monitor compliance, awareness-raising among clients, and grievance redressal mechanisms. The Code is a self-monitoring mechanism adopted by practitioners in order to demonstrate their commitment to responsible finance.

13 Exchange rates: £ 1/PKR 140; € 1/PKR 120; $ 1/PKR 8514 Daily Times, July 22, 2009. SBP to Provide Rs 215 m Under ISF to Strengthen Microfinance Institutions






Disbursement

(PKR)Recipient Bank(s) Inception

Term/

Tenor

(years)

MCGF 1.2 billionNational

Rural Support Programme

HBL (Lead Bank), NBP, MCB, UBL, ABL, Askari Bank Ltd., NIB, Faysal Bank Ltd.

July 2010 3

ISF14

82 millionNational Ru-ral Support Programme N/A

July 2009 1

82 millionTameer

Bank Ltd. N/AJuly 2009 1

133 millionPakistan

Network N/AJuly 2009 5

6 million

Centre for Women

Cooperative Development

N/AMarch 2010 1

7.39 millionFirst

Bank Ltd. N/AMarch 2010 1

44.96 millionKashf

Bank Ltd. N/AMarch 2010 1

debt and equity funds, significant growth in terms of assets will, in all probability, be a result of investment by technology-based players preparing to engage with and step into the industry with equity investments.

1.5 Conclusion

Thus, despite the slowdown experienced in 2009 and 2010, there were positive developments witnessed within the industry. Growth in credit outreach decelerated, but growth in both deposits and microinsurance gathered considerable pace. The policy and regulatory environment did not see any major shifts and continued to be supportive overall. Although the GoP announced a relief package for MFB clients in Khyber Pukhtunkhwa, the FATA, and PATA regions in 2010, the write-off arising from a time-limited interest-rate cap was backed by the promise to reimburse all financial institutions (FIs) affected by the decision. Moreover, a variety of industry support initiatives were jointly undertaken by players at the macro, meso, and micro-levels, indicating a well-coordinated effort aimed at plugging underlying weaknesses and taking the industry forward.

With regard to FY10, the following year is expected to be a challenging one for the industry: macroeconomic pressure, energy shortages, and price hikes will continue to exert downward pressure on client incomes and levels of productivity, resulting in increased credit risk for MFPs. Simultaneously, an unexpectedly large budgetary deficit in FY10 following the widespread damage caused by the floods in July–August 2010, is likely to induce more public-sector borrowing from local markets. The guarantee schemes managed by the SBP and PPAF (MCGF and PRISM15, respectively) might be able to play a limited role in balancing out the disincentive to lend to risk-bearing activities such as microfinance, in the presence of relatively risk-free instruments offered by the GoP at attractive interest rates. The ability of the industry to leverage the donor funds available under such guarantee schemes however, will be significantly curtailed. A positive fallout of this may be the continued focus on raising deposits by MFBs, although that option also has its limitations (continued competition from public-sector saving schemes, and the capacity of micro-savers to generate significant volumes). Thus, financing will continue to be tight (and costly) over the next few months. In this context, growth from within the industry is likely to remain muted during the remainder of FY10 with continued emphasis on consolidation. In the short-term, unless industry players can access lower-cost

15 Programme for Increasing Sustainable Microfinance (PRISM) is an IFAD funded debt guarantee and equity fund managed by PPAF.






SECTION 2 provides a detailed assessment of the performance of Pakistan’s microfinance industry. Performance has been assessed on three levels: industry-wide, peer group and, where necessary, institution. The analysis is backed by 88 financial indicators compared across time and regions to develop a reliable and fair assessment.

Pakistan-specific comparisons have been made based on PMR datasets from previous years; data for regional comparisons have been sourced from the 2009 MIX MFI benchmarks (www.mixmarket.org). The numbers and ratios reported for 2009 are drawn from the audited financials of reporting MFPs (for detailed numbers see ANNEX AI and AII).

2.1 Industry Overview

By December 2009, the combined assets of Pakistan’s microfinance industry were approximatelyPKR 35.4 billion (USD 0.42 billion). The gross loan portfolio (GLP) totalled PKR 20.2 billion (USD 0.24 billion), while outreach stood at approximately 1.73 million active borrowers, and 0.46 million active depositors.

By global comparison, Pakistan’s industry is small in terms of balance sheet size and outreach (see EXHIBIT 2.1).

EXHIBIT 2.1: MICROFINANCE INDUSTRY COMPARISON BY COUNTRY (2009)

Source: http://www.mixmarket.org/, Microfinance Information eXchange; and Pakistan Microfinance Review 2009, PMN

Refer to ANNEX B for detailed regional comparisons.

However, with more than 27 million potential clients, the market opportunity available is significant.16 Moreover, an enabling regulatory environment has equipped the industry with deposit-taking organizational options aimed at establishing a balanced funding profile for the industry with a potential for creating deep-seated positive outcomes in the long-run in terms of scale and organizational strength and stability.

2.1.1 Peer Groups

Pakistan’s microfinance industry is made up of a variety of MFPs. For the purpose of comparison and benchmarking, these organizations are categorized into three peer groups: microfinance institutions (MFIs), microfinance banks (MFBs), and Rural Support Programmes (RSPs).17 Each of these peer groups is defined in some detail in BOX 2.

BOX 2: PEER GROUPS

Microfinance Institution (MFI): A non-bank, non-government organization (NGO) providing microfinance service. Organizations in this group are registered under a variety of regulations including the Societies Act, the Trust Act, and the Companies Ordinance. The MFI peer group includes local and multinational NGOs such as BRAC-Pakistan and ASA-Pakistan.

Microfinance Bank (MFB): A commercial bank licensed and prudentially regulated by the central bank of Pakistan to exclusively service the microfinance market. The first MFB was established in 2000 under a presidential decree. Since then, seven MFBs have been licensed under the Microfinance Institutions Ordinance, 2001. MFBs are legally empowered to accept and intermediate deposits from the public.

Rural Support Programme (RSP):

Also an NGO registered as a non-profit section 42 company under the Companies Ordinance. An RSP is differentiated from the MFI peer group based on the purely rural focus of its credit operations. As a group, the RSPs are registered with and supervised by the Securities and Exchange Commission of Pakistan (SECP).

16 MicroWATCH: A Quarterly Update on Microfinance Outreach in Pakistan17 Note that the peer group classification for 2009 has been altered: previously, data was classified into four categories: MFI, MFB, RSP and Other. For the PMR 2009, the “other” peer group was merged into the MFI peer group. In 2008, the “Other” peer group accounted for 0.96 percent of total active borrowers and 0.7 percent of total assets. Thus, reporting numbers separately for this peer group did not add much value for the concerned MFPs and our readers. Moreover, the MFI peer group accounts for organizations with “separated” financials for their microfinance operations, and the concerned MFPs have been able to meet this reporting requirement.


11

2. Industry Performance

2.1. Industry Overview2.2. Asset and Funding Structure2.3. Profitability and Sustainability2.4. Risk Assessment2.5. Efficiency and Productivity Assessment2.6. Wrap-Up




India Bangladesh Bolivia Mexico Pakistan

Total Assets

(USD billion)5.1 3.5 2.6 3.3 0.4

Gross Loan

Portfolio

(USD billion)

4.6 2.3 1.9 2.7 0.2

Active

Borrowers

(million)

26.5 20.2 0.87 4.4 1.7

Active

Depositors

(million)

2.0 27.4 1.9 4.1 0.46

For the same time period, the number of depositors tapped rose to 0.46 million compared to 0.25 million in 2008. Thus, in terms of depositors, the industry achieved an encouraging increase of 86 percent.18 The amount raised in deposits simultaneously increased 75 percent: by December 2009, deposits totalled PKR 7.16 billion (USD 0.08 billion) compared to PKR 4.11 billion (USD 0.05 billion) in 2008.

EXHIBIT 2.3: INDUSTRY OUTREACH (BORROWERS, DEPOSITORS, GLP, AND DEPOSITS)

*Active borrower number for 2009 includes KF outreach as of 2008

When analyzed by peer group, MFBs increased their cumulative market share from 33 percent of total outreach in 2008 to 36 percent in 2009. Part of this increase is accounted for by continued growth by individual MFBs, primarily by KBL, FMFB, and TMFB. An additional reason however, is the decline in outreach numbers for the RSP peer group which lost market share amounting to ten percentage points compared to the previous year. A primary reason for this decline was the drop in active borrowers reported by NRSP which caused the proportion of the RSP peer group as a whole to decline. Institutional sources cite limited access to funding as a key reason for the decline in outreach. However, there is a need to also analyze intra-organizational asset-liability matching capabilities so that similar mismatches can be avoided in future. The largest increase was experienced by the MFI peer group which increased market share from 27 percent to 34 percent. In addition to some growth, a primary reason for

In total, 23 MFPs submitted audited financials for the PMR 2009. As shown in EXHIBIT 2.2, the MFI peer group made up the largest number of respondents, followed by the MFBs and RSPs, respectively. New MFPs included in the list of respondents include BRAC-Pakistan (BRAC-P), ASA-Pakistan (ASA-P), and Jinnah Welfare Society (JWS). Kashf Foundation (KF) was unable to submit audited financials for PMR 2009 due to a change specified by the SECP in the financial reporting period from December to June. Two approaches have been followed to account for this gap: firstly, the omission has been accounted for by including KF data for 2008 in industry totals for 2009; secondly, numbers for KF have been extracted from data for both years to accurately determine trends between 2008 and 2009. Thus, compared to previous years the PMR 2009 covers a smaller proportion of the total dataset for the microfinance industry.

EXHIBIT 2.2: PMR 2009 DATA PROVIDERS

Refer to ANNEX C for a complete list of reporting organizations.

2.1.2 Outreach

By December 2009, total outreach in terms of active borrowers was reported at 1.73 million clients compared to 1.70 million in 2008, exhibiting a negligible increase of two percent. The increase in GLP was even less, at just one percent.

18 Only includes depositors of MFBs.






MFB

MFI

RSP30%

52%

17%

In terms of number of organizations

GL

P a

nd

De

po

sits

(PKR

Bill

ion)

Ou

tre

ach

(Mill

ion)

0

5

10

15

20

25

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2006 2007 2008 2009*

1.27

0.85

1.70 1.73

0.46

0.25

Active BorrowersDepositors Deposits

GLP

this increase is the inclusion of four additional organiza-tions in the dataset for 2009: ASA-P, BRAC-P, JWS, and Akhuwat.

EXHIBIT 2.4: ACTIVE BORROWERS BY PEER GROUP

* Includes KF data for 2008

Seven MFPs account for 84 percent of total outreach. The four largest (NRSP, KBL, KF, FMFB) jointly account for 72 percent. These four MFPs have consistently maintained their market positions. However, some new names are worthy of mention this year: by December 2009,

EXHIBIT 2.5: ACTIVE BORROWERS BY ORGANIZATION

Includes KF data for 2008

BRAC-P and TMFB were reaching out to 45,011 and 70,671 clients, respectively. Although a number of other MFPs are close to the outreach achieved by BRAC-P, it is worth noting that similar to its high growth entry in South Asia and Africa, BRAC-P has grown rapidly in just over two years after entering the Pakistan market in 2007.

2.1.3 Gender Distribution

Overall, 56 percent of credit outreach was accounted for by women clients compared to 47 percent in the previous year. By including 2008 data for KF, the MFI peer group accounts for 54 percent of the total number of women clients reached; RSPs account for 28 percent, and MFBs for 18 percent. Thus, compared to the other peer groups, the MFI peer group continues to focus heavily on women clients with nearly 90 percent outreach to women. Even without including outreach numbers for KF, the proportion of women clients for the MFI peer group is 75 percent.

EXHIBIT 2.6: GENDER-BASED CREDIT OUTREACH BY PEER GROUP

The MFB peer group demonstrated the lowest proportion of women clients at only 18 percent of total industry outreach. For the MFB peer group as a whole, 28 percent of portfolio was accessed by women clients. One of the reasons for the heavier focus on male clients is the fact that some organizations in the MFB peer group specialize in larger individual loan products primarily targeted at male clients e.g., TMFB and KMFB. However, these two MFBs account for only 14 percent of total outreach by the peer group, which indicates that focus on reaching women clients by MFBs as a whole needs to be






34 33 36

34

27

34

32

40

30

-

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2007 2008 2009*

Ou

tre

ach

(Mill

ion)

MFB MFI RSP

0 100 200 300 400 500

BRAC-P

PRSP

TMFB

KF

NRSP

FMFB

KBL

MF

P

45

82

71

400

320

200

329

Outreach (Thousand)

28%

89%

51%

72%

11%

49%

-

0.10

0.20

0.30

0.40

0.50

0.60

0.70Male Female

Ou

tre

ach

(Mill

ion)

Peer Group

MFB MFI RSP

EXHIBIT 2.8: DEPTH OF OUTREACH BY PEER GROUP

An accurate assessment of depth of outreach is important to determine whether the lower loan sizes are actually being utilized by poorer borrowers, or if the industry has slipped into funding the consumption needs of their existing, less-poor clients. In the case of Pakistan, given the fact that many clients are repeat borrowers it is unlikely that the MFPs have been adjusting their market niche downwards. A more likely explanation of the falling loan size is the inflation-induced erosion of loans resulting in consistent reductions in the real value of loans. Coupled with limited adjustment in terms of targeting, such a situation can have significant implications for the industry. Firstly, consumption lending without the required client due diligence can add to the debt burden of poor households. Secondly, mismatched loans can increase the credit risk faced by MFPs. The PMN is

EXHIBIT 2.9: SECTOR-WISE DISTRIBUTION OF MICROFINANCE PORTFOLIO

Source: Follow-up telephonic interviews

strengthened. Similarly, deposit services offered by MFBs also remain skewed towards male depositors, with only 17 percent women depositors in 2009.

EXHIBIT 2.7: ACTIVE BORROWERS AND DEPOSITORS BY GENDER


MFBs need to assess the reasons underlying their current performance to improve uptake of women clients for their credit and deposit services. A lasting commitment to tapping women clients can be demonstrated by developing innovative products and delivery channels that account for the savings habits and preferences of women clients, and meeting their transactional convenience.

2.1.4 Depth of Outreach

A proxy indicator is sometimes used to assess the depth of an MFP’s credit operations: average loan balance per borrower as a proportion of per capita gross national income (GNI). An MFP is considered poverty-focused when this indicator is less than 20 percent of GNI (the indicator does have limitations as many other factors such as new products and pace of growth are likely to impact aggregate average loan balance, but have nothing to do with targeted clients). Pakistan’s microfinance industry has been a larger loan size product. Organizations like NMFB, TMFB, KMFB, and CWCD fall into this category. The larger MFPs however (KBL, FMFB, NRSP and KF), continue to fall into the below-20 percent category.






Agriculture

Livestock

Micro Enterprise

Other

11.2%

37.5%

17.1%

34.2%

Borr

ower

Dep

osito

r

Borr

ower

Dep

osito

r

Borr

ower

Dep

osito

r

Borr

ower

Dep

osito

r

2006 2007 2008 2009*

0.0

0.4

0.8

1.2

1.6

2.0

Male Female

48%

52%

49%

51%

53%

82%

18%

83%

17%

44%

56%47%

Ou

tre

ach

(Mill

ions

)

2007 2008 2009

Av

era

ge

Lo

an

Ba

lan

ce/G

DP

0%

5%

10%

15%

20%

25%MFIMFB

RSPCut-Off

currently conducting an independent study to assess whether or not Pakistan’s industry has inadvertently shifted to consumption lending (on use of loans not backed by product offering). The results of the study will be made available in the last quarter of 2010.

2.1.5 Portfolio Breakdown The largest proportion of the industry’s credit portfolio is directed towards agriculture lending (the proportion directed towards agriculture is considerably less without NRSP and PRSP data). Microenterprise lending comes in at a close second, followed by loans for livestock. The smallest proportion of loans is extended for purposes encompassed in the “other” category, which mainly constitutes consumption lending and housing loans.

As expected, the RSP peer group focuses most heavily on agricultural lending, followed by the MFB peer group. The MFI peer group focuses more heavily on microenterprise (which includes trade and services). Moreover, MFIs also contribute a larger proportion of their portfolio to “other” purposes such as health, education, and emergency loans i.e., consumption lending. The MFBs contribute the lowest proportion to this head.

Although consumer lending is considered to be riskier than lending for productive purposes such as agriculture and livestock, it is regarded as an important financial service which can be used to smooth household consumption. The important thing is for an MFP to be able to ascertain and monitor loan utilization so that adequate risk control measures may be put into place.

2.2 Asset and Funding Structure

The industry’s balance sheet crossed the PKR 35 billion (USD 0.42 billion) mark in the current reporting period. Growth in total assets however, was sluggish during 2008–09 amounting to only 6.75 percent. Total assets grew by 45.2 percent in the previous reporting period. The MFB peer group continues to account for a growing proportion of industry assets. The RSPs on the other hand, experienced a significant reduction during 2008–09. A primary reason for the reduction was NRSP’s inability to access sufficient and timely refinancing due to which a simultaneous decline in advances had to be made. Whether this inability to maintain its credit lines to clients impacted subsequent repayments or not, will become

EXHIBIT 2.10: TOTAL ASSETS BY PEER GROUP


clearer with data for the following reporting period.

Approximately 85 percent of total industry assets were concentrated in seven organizations by December 2009 (see EXHIBIT 2.11). More than 15 MFPs account for the remaining 15 percent, indicating a significantly concentrated industry.

EXHIBIT 2.11: LARGEST MFPS BY ASSET BASE (2009)


Individually, KBL has the largest asset base (PKR 6.6 billion), closely followed by FMFB (PKR 6.1 billion), and NRSP (PKR 6 billion). Although all three peer groups are represented within the largest asset holder group, the number of MFBs is noticeable. New MFBs that have recently entered the ranks include TMFB and KMFB.






KMFB

PRSP

TMFB

KF

NRSP

FMFB

KBL

- 1.0

6.59

6.07

2.80

4.96

5.96

2.28

1.19

2.0 3.0 4.0 5.0 6.0 7.0

MF

P

Total Assets (PKR Billion)

0.0

4.0

8.0

12.0

16.0

20.0

2006 2007 2008 2009*

Ass

ets

(PKR

Bill

ion)

MFBMFI

RSP

assets invested in loan portfolio. The proportion invested in advances declined during 2008–09 for both RSPs and MFIs. For the MFB peer group, the number went up primarily due to the lower base in 2008. The utilization ratio for the microfinance industry as a whole decreased to 55 percent from 58 percent in the previous reporting period. This trend is in line with the macroeconomic situation of the country, which has prompted a number of MFPs to reduce exposure through slower growth in portfolio and reduced consumption lending. The MFPs began to fear a larger proportion of loans being diverted to meet consumptive needs as clients began to get stressed with inflation and reduced productivity gains. The MFPs slowed the sign-up of new clients to minimize this possibility.

2.2.2 Funding Profile

The funding profile varies even more significantly by peer group. The MFB peer group has the most balanced funding structure with debt, equity, and deposits showing up in substantial proportions. In fact, the proportion of deposits increased in 2009 to account for 40.3 percent of total MFB assets. The increase occurred primarily due to further expansion of FMFB’s and TMFB’s deposit-taking programmes, and the introduction of deposit products by KBL and KMFB. It is worth noting that of the total deposit base tapped by the MFB peer group, more than 70 percent is accounted for by FMFB, followed by TMFB at 18 percent. Moreover, according to a PMN study titled

EXHIBIT 2.13: FUNDING PROFILE BY PEER GROUP (2009)

Only MFB deposits included

2.2.1 Asset Composition

The bulk of industry assets is composed of advances. However, analysis by peer group suggests a significantly differentiated asset composition for the three peer groups. The MFBs maintain the highest proportion of highly liquid assets i.e., cash and bank balances. The amount of cash held was reduced significantly in 2009. However; it continues to account for more than 25 percent of the MFB peer group’s assets. This number has usually been maintained at less than 20 percent for commercial banks in Pakistan. Cash and bank balances provide instant liquidity, but they also have an opportunity cost in terms of lost revenue from portfolio and other investments. The RSP peer group also demonstrates a higher propensity for maintaining liquid assets. The MFI peer group maintains the lowest proportion: in 2009 the number rose, but remained below 15 percent. The proportion of fixed assets in the overall balance sheet remains low for all three peer groups. However, a significant increase in the RSP peer group was noticeable in 2009. Thus, by 2009 the MFB and RSP peer groups had the largest proportion of non-earning assets in their asset mix.

EXHIBIT 2.12: ASSET COMPOSITION BY PEER GROUP (2008, 2009)


The MFB and MFI peer groups invested more than ten percent of their assets in short and long-term financial instruments. The MFI peer group had the largest proportion of advances with more than 70 percent of






Pro

po

rtio

n o

f To

tal

Ass

ets

MFB MFI RSP

0%

20%

40%

60%

80%

100%

120%

2009 20082008 2009 2008 2009

Advances

Investments

Fixed Assets

Cash

49%

13%

5%

33%

54%

15%

6%

26%

79%

12%

1%

8%

73%

12%

1%

14%

76%

3%

1%

20%

64%

6%

4%

26%30%

17% 17%

30%

83% 83%

40%

Deposits* Debt Equity

0

2

4

6

8

10

12

14

16

18

20

MFB MFI RSPPeer Group

Fu

nd

ing

Pro

file

(PKR

Bill

ions

)

Significance of Small Deposits for Microfinance Providers, less than ten percent of FMFB’s assets were backed by deposits from small depositors as of 2008. Institutional depositors accounted for more than 80 percent. This was the case despite the fact that more than 90 percent of its depositors was made up of small-ticket depositors. This raised important implications for targeting only a low-income niche if a significant proportion of the MFB balance sheet was to be funded via deposits.

The MFI and RSP peer groups are not legally empowered to intermediate deposits. Thus, their funding profiles consist of only debt and reserves (treated as equity for accounting purposes). Both peer groups have heavy debt obligations amounting to more than 80 percent of their total balance sheet. Subsidized debt makes up approximately 70 percent of the overall debt accessed by both peer groups, most of which is sourced from PPAF. With the KIBOR rate at more than 12 percent, little incentive exists for either peer group to improve its investment readiness and access to commercial debt. Thus,commercial debt makes up less than 30 percent of the total debt provided to the sector. In fact commercial debt as a proportion of total debt declined substantially in 2009. A primary reason for this was the settlement by NRSP of a PKR 1.6 billion syndicated loan from commercial banks.

Overall, equity increased by only three percent in FY09 compared to 24.9 percent in FY08. Backed by a central bank-monitored regulatory framework, the MFB peer group accounts for approximately 64 percent of the equity invested in the industry. The remainder is made up of the reserves of the MFI and RSP peer groups.

Thus, overall a significant proportion of the microfinance industry’s assets continue to be backed with debt. This trend is not likely to change significantly in the short to medium term as non-deposit-taking institutions form a significant part of the microfinance industry. Although deposits have increased as a proportion of the total balance sheet sported by the MFB peer group, they continue to account for less than 25 percent of total GLP for the industry as a whole. As growth in the sector resumes, a key test for MFBs will be the ability to grow deposits simultaneously in order to maintain/improve this ratio. grew by 45.2 percent in the previous reporting period.

EXHIBIT 2.14: FUNDING STRUCTURE OF PAKISTAN’S MICROFINANCE INDUSTRY


2.3 Profitability and Sustainability

Profitability ratios for the industry improved marginally during 2009. However, both return on equity (ROE) and return on assets (ROA) remained in the red. Although globally, Pakistan’s microfinance industry remains one of the less profitable, it is worth noting that some RSPs and MFIs did report profitable operations in 2009 with ROAs of 2.2 percent for NRSP, 7.8 percent for TRDP, 4.1 percent for OLP and 2.8 percent for OPP.

EXHIBIT 2.15: PROFITABILITY AND SUSTAINABILITY RATIOS (2009)

ECA: Eastern Europe and Central Asia MENA: Middle East and North Africa

Source: The Microbanking Bulletin (Vol. 19), Microfinance Information eXchange






8% 12% 12% 20%

57%

59%

63%

56%

35%

28%

24% 23%

Deposits Debt Equity

2006 2007 2008 2009*-

5

10

15

20

25

30

35

40

Africa Asia ECA MENA Pakistan

Capital Asset Ratio 24.3 16.4 27.3 45.4 23.4

Debt to Equity Ratio 2.4 4.6 2.7 0.9 3.3

Deposit to Loan 56.1 28.8 - - 35.4

Utilization Ratio 62.8 75.9 82.0 74.7 57.1

ROA (0.2) 1.8 1.1 3.4 (5.57)

ROE 2.3 11.2 3.0 10.2 (22.99)

Two primary factors contribute to low profitability in the industry. The first factor is yield on portfolio. This is a proxy indicator that shows actual returns on the loan book of an MFP. The industry continued to demonstrate a low portfolio yield when compared to other regions in 2009. Under-priced assets have the potential to significantly impact profitability in FIs given the proportion of overall revenue contributed by returns from portfolio. This factor is equally important for MFPs.

EXHIBIT 2.17: REGIONAL COMPARISON OF NOMINAL YIELD ON GLP


EXHIBIT 2.18 indicates the proportion of overall revenue contributed by loan portfolio. More recently, a larger proportion is being contributed by financial services.

EXHIBIT 2.18: SOURCES OF REVENUE


Sustainability indicators also showed improvement, although the industry as a whole has not yet achieved financial or operational self-sufficiency. Regional comparisons show that Pakistan’s microfinance industry continues to lag behind, although the gap has narrowed marginally in recent years as improvements in efficiency and productivity, and increases in yield have taken effect. The handful of organizations with above 100 percent OSS and FSS increased from five MFPs in 2008 to seven in 2009. These organizations belong to all three peer groups.

EXHIBIT 2.16: REGIONAL COMPARISON OF FINANCIAL SELF-SUFFICIENCY AND OPERATIONAL SELF SUFFICIENCY RATIOS







2005 2006 2007 2008 20090

20

40

60

80

100

120

FS

S (%

)

PakistanAsiaAfrica

ECAMENA

0

20

40

60

80

100

120

140

2005 2006 2007 2008 2009

PakistanAsiaAfrica

ECAMENA

OS

S (%

)

PakistanAsiaAfrica

ECAMENA

2005 2006 2007 2008 2009

No

min

al Y

ield

(%)

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

Financial ServicesFinancial AssetsLoan Portfolio

-

1

2

3

4

5

6

7

8

9

2006 2007 2008 2009*

Re

ve

nu

e (P

KR B

illio

ns)

However, this amount is less than ten percent of overall revenue. Thus, MFPs need to give serious consideration to rationalizing the revenue drivers of their organizations, with special attention given to pricing their loan products since portfolio revenue is the largest contributor. The increase in revenue from loan portfolio (1.8 times) has lagged behind increases in costs since 2006: financial expense increased 2.4 times, provisioning expense increased three times, and personnel and administrative expenses increased 1.2 times. Thus, revenue increases from loan portfolio have not kept pace with the increasing costs of MFPs.

The second factor underlying low profitability is the relatively high personnel ratio for Pakistan. Although the personnel ratio in recent years has been reduced signifi-cantly, it continues to be higher than industry averages achieved in South Asia and ECA.

EXHIBIT 2.19: REGIONAL COMPARISON OF PERSONNEL EXPENSE RATIOS


It is also important to point out that without raising prices or finding new markets or product channels in order to raise profits, some businesses attempt to increase the bottom-line simply by cutting expenses. While laying-off employees and reducing product quality can initially boost earnings and may even be necessary in cases where a company has lost its competitiveness, there are only so many operating expenses that management can cut before the quality of business operations is affected. Thus, MFPs in Pakistan need to balance both facets of their profitability: reduce costs where possible to cut organizational slack, and increase prices, improve staff

productivity, target alternative market niches and expand programmes to grow into their upfront investments in staff and infrastructure. This will help them chip away at their losses from both ends of the spectrum in order to build profitable and efficient organizations.

2.4 Risk Assessment

A variety of risks can impact the viability and sustainability of financial institutions (FIs). Therefore, serious effort is deployed by FIs to assess risk and formulate and implement risk mitigation strategies. Some of the most common types of risks faced by lending institutions are described below.

2.4.1 Credit Risk

Credit risk, also known as default risk, is defined as the risk of financial loss stemming from a borrower's failure to repay a loan. Credit risk arises whenever a borrower is expecting to use future cash flows to pay a current debt obligation. Thus, credit risk can result in lost principle, interest, and increased costs of recovery.

The last two years have been challenging for Pakistan’s microfinance industry. Nearly all MFP clients faced stressful macroeconomic conditions which have had a direct bearing on credit risk. Moreover, rapidly expanding outreach over a sustained period has also given rise to industry-specific stresses such as increased competition among MFPs and overlapping operational jurisdictions resulting in multiple lending to clients. Coupled with limited industry support infrastructure, credit risk increased during FY09. Thus, higher portfolio at risk (PAR) for 90 days and above, accompanied by larger write-offs was reported (see EXHIBIT 2.20). The PAR past due 30 days declined compared to FY08. A primary reason for this was the significantly higher write-offs and a relaxation of provisioning requirements by the SBP in 2009. It is worth mentioning that PAR and write-off ratios for the industry are likely to be higher based on reports of increased delinquency in Punjab during 2008 and 2009, but it is difficult to put an exact number on the increase with the data made available in 2009. The PMN extracted the data of non-reporting MFPs from cumulative industry numbers in 2008 and 2009 to assess the performance of reporting MFPs. As a result, the proportion of write-offs increased to 3.6 percent of GLP; PAR > 90 days also went up marginally. Although PAR for Pakistan’s microfinance industry






0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

PakistanAsiaAfrica

ECAMENA

2005 2006 2007 2008 2009

Pe

rso

na

l E

xp

en

se t

o G

LP

MFPs increased their risk coverage ratios from 194 percent to 465 percent. Loans are provisioned according to age, and a big denominator indicates the presence of older loans in the portfolio. Microfinance providers are also exercising caution in growing their portfolios in addition to investing a smaller proportion of the funds available in GLP, with a direct impact on industry growth. The ratio of active borrowers to loans dropped to 1:1 as compared to 1:1.3 in the previous year, indicating that MFPs are no longer lending for multiple purposes to clients. These are all tell-tale signs of the persisting risk that is being experienced and perceived by sector players. It is important to mention here that a CIB has been launched with specific focus on the microfinance industry. Although the initiative is currently in a pilot phase, it is expected to play a significant role in reducing the credit risk faced by users of the system as it will provide a means for minimizing client duplication by reducing informational asymmetries and improving client discipline.

2.4.2 Market Risk

Market risk, also referred to as systematic risk, is the risk that the value of a portfolio will decrease due to a change in market risk factors. Four standard market risk factors are stock prices, interest rates, foreign exchange rates, and commodity prices.19

Market conditions in Pakistan have become stressed in the past two years. The SBP has maintained a tight monetary policy with discount rates aimed at mopping up financial liquidity in order to rein in inflation. Moreover, a large devaluation of the Pakistani rupee caused the local currency to weaken against all major currencies. However, the volatility experienced in 2007 and 2008 has passed, with 2009 displaying lower and more stable inflation rates and exchange rate fluctuations. The full force of the impact of market risk has been muffled for Pakistan’s microfinance industry as less than 25 percent of industry assets are backed by commercial debt and no borrowing in foreign currency from off-shore sources has occurred so far. In the medium term (3–5 years) however, market risk is likely to become a more important factor for the industry as MFPs begin to access more commercial debt including foreign currency debt

remains within the five percent limit prescribed by experts, it is worth noting that when viewed together with write-offs credit risk is obviously an increasingly important aspect for practitioners to control (see EXHIBITS 2.20A and B).

EXHIBIT 2.20A: PORTFOLIO AT RISK AND WRITE-OFF RATIO (2006–2009)

* Includes KF data for 2008** KF data extracted for 2008 and 2009

EXHIBIT 2.20B: PORTFOLIO AT RISK AND WRITE-OFF (2006–2009)

In keeping with the deterioration in portfolio quality,






19 http://www.investopedia.com/terms/m/marketrisk.asp

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Ac

tiv

e B

orr

ow

ers

(Tho

usan

ds)

PA

R, W

rite

-off

0%

1%

2%

3%

4%

5%

6%

2006 2007 2008 2009*

PAR > 90 days Write Off Cut-OffActive Borrower PAR > 30 days Write Off**

Write Off Par > 30 Days Cut-Off

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

2006 2007 2008 2009*

2.9%

2.3%

2.0%

3.1%

1.8%

2.1%

3.2%

1.9%


from off-shore sources, and reduce their dependence on subsidized debt from donors. Foreign exchange (FOREX) risk and interest rate risk will become more worrying factors with a direct bearing on their cost of capital; financial expense currently contributes 27 percent of the industry’s direct costs of doing business.

The increased perception of market risk did however have an impact on the liquidity risk faced by the industry. As macroeconomic pressure increased, investors drew back from refinancing arrangements with some MFPs, giving rise to significant funding shortfalls and contracting portfolios. This occurred despite the timely and complete payment by MFPs of all commercial banks dues.

2.4.3 Operational Risk

Operational risk is risk arising from the execution of a company's business functions. It is a very broad concept which focuses on the risks arising from the people, systems, and processes through which an organization operates. It also includes categories such as fraud risks, legal risks, and physical or environmental risks. Thus, operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. In addition to financial losses, operational risk can result in non-financial losses such as reputational damage. As organizations have expanded in size and geographic spread, they are being exposed to operational risks resulting from increased competition (client overlapping and poaching, internal controls), delegation of fiduciary and non-fiduciary responsibilities down to organizational hierarchy (employee fraud and high turnover), and MIS expansion (accessibility to timely data, data security, and confidentiality).

Keeping in view the above mentioned risks, a number of sector-wide initiatives such as a Consumer Protection Code, a CIB and an SRB have been launched. The effectiveness of these initiatives however, remains to be seen as it will be highly dependent on the ability and willingness of MFPs to internalize the resources made available to them. Moreover, institution-specific mitigation strategies will be a primary determinant of the effectiveness of organizations in reducing the operational risks they face.

2.5 Efficiency and Productivity Assessment

This section assessed selective efficiency and productivity indicators for the industry. Improvements in efficiency and productivity can have a direct and indirect impact on the costs of doing business and can contribute to an improved bottom-line.

2.5.1 Operating Expense to Average GLP

Operating expense (administrative and personnel expense) for the microfinance industry is in the vicinity of 20 percent of GLP. This is acceptable by regional standards. There does however, exist a variation in the industry: the MFB peer group has a higher ratio at 30 percent of GLP, the RSPs and MFPs sport OPEX ratios below 20 percent of GLP. There is also a range within each peer group, for example FMFB and KBL have achieved ratios below their peer group average. For other organizations like BRAC-P and ASA-P, the ratios are higher than the average for their peer group because these organizations are newcomers to the local market and are still in the process of setting up their systems and staff. Performance is xpected to improve over the next few years for such organizations.

EXHIBIT 2.21: OPEX AND TOTAL REVENUE COMPARED TO GLP


The expense breakdown of the industry has not changed significantly since last year. It is worth noting that personnel and administrative expense for the industry






0

5

10

15

20

25

GL

P (P

KR B

illio

n)

Re

ve

nu

e a

nd

OP

EX

(PKR

Bill

ion)

GLP OPEX Total Revenue

2006 2007 2008 2009*0

5

10

15

20

25

2.5.2 Borrowers and Depositors–per-Staff

The number of borrowers-per-staff declined in 2009 contrary to the trend demonstrated in 2006, 2007, and 2008. Primary reasons cited include additional hiring for the deposit-taking activities of MFBs and conscious management decisions in most MFPs to slow-down portfolio growth. The decline in the personnel allocation ratio also indicates that new hires are not involved on the lending side of the microfinance business. Another reason contributing to the decline in the borrower-to-staff ratio is that some new entrants (ASA-P, BRAC-P) have been hiring staff as they establish their presence in the country. The additional staff is expected to yield improved productivity numbers relatively quickly as programmes are expanded in the short to medium term (1–3 years). A similar strategy is being followed by the MFBs who have hired staff for their deposit-taking operations. Although depositors-per-staff numbers have increased marginally since the previous year, significant improvement is likely to begin showing up in the next two years.

EXHIBIT 2.23: BORROWERS AND DEPOSITORS-PER-STAFF

2.6 Wrap Up

In summary, credit growth in Pakistan’s microfinance industry stalled for the first two quarters of the year before a modest restart in the second half of 2009. MFBs focused more heavily on deposit-mobilization. As a result, the proportion of industry assets backed by deposits increased to a promising 20 percent. Thus, some industry players continued to grow their non-credit activities despite a slowdown on the credit side.

account for more than 50 percent of total costs. However, of the total expenses of the industry, personnel and administrative expenses have increased 1.2 times each compared to a three-fold increase in loan loss provisioning, and a 2.4 times increase in financial expense. The composition of expenses also varies by peer group. As already mentioned above, the MFB peer group has the highest operating expense. By contrast, the MFI and RSP peer groups have higher financial expenses because both peer groups are not allowed to intermediate deposits and must depend on more costly commercial debt to fund and grow their portfolios.

EXHIBIT 2.22: COST BREAKDOWN


When viewed in terms of overall industry revenue, operating expenses amount to more than 50 percent of total revenue. This proportion has declined significantly over the years (OPEX amounted to 88 percent of total revenue in 2006) partially due to a reduction in costs, and partially due to an increase in revenue. To further reduce OPEX ratios, MFPs must be careful of the choices they make: indiscriminate slashing on personnel and administrative costs can result in higher employee turnover and thinner-than-required layers of control. Thus, there is a need to institute balanced cost-cutting and revenue generation measures that will enable the development of sustainable and efficient MFPs in Pakistan.






Loan Loss Exp Financial ExpAdmin Exp Personnel Exp

Pro

po

rtio

n o

f To

tal

Co

st

29.2%

38.5%

9.5%

22.8%

23.3%

28.9%

22.7%

24.6%

22.9%

30.5%

19.8%

26.8%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2008 2009

Borrowers per StaffDepositors per Staff

0

20

40

60

80

100

120

140

160

2006 2007 2008 2009*

Bo

rro

we

rs a

nd

De

po

sito

rs/

Sta

ff


In terms of financial performance, the industry did not experience any severe shocks: PAR and write-offs increased to some extent, but did not overshoot the five percent danger mark.20 Provisioning amounts have been increased significantly, indicating continued caution by industry players. Investors have also demonstrated caution; commercial debt made available to the industry went down in 2009 with simultaneously limited equity injections. Within this context however, it becomes increasingly important to state that despite the drawback in credit lines, MFPs have been able to pay back all commercial liabilities with no cases of default arising during 2009. Moreover, a number of players remain poised to make equity injections into the industry, pending their microfinance banking license approvals from the SBP.

Industry performance in terms of profitability and sustainability also maintained a positive trend; although on both sets of ratios the overall industry continues to be in the red. A number of reasons contributed to this low profitability. Firstly, there is a need to review revenue drivers within the industry, especially asset pricing. Secondly, although personnel expense is now more in line with regional averages, there continues to be room for improvement when compared with benchmarks for South Asia and ECA. Thirdly, there is need to grow into the investments made so far in terms of additional hires and expanded branch networks in order to average out the impact of upfront investments.






20 This number should be read with caution as 2009 data for KF could not be included in the dataset for the PMR 2009. To address this weakness, PAR and write-off numbers for KF were excluded from the datasets for 2008 and 2009 to determine the performance of the industry at large. These results are shown in Exhibit 2.20 and indicate that although PAR and write-offs did increase to some extent, portfolio quality for reporting MFPs continues to be robust without KF in the dataset.





3.1. Post-Flood Options3.2. Funding Shortfall3.3. Commercial Investors3.4. New Entrants and Mission Drift3.5. Strengthening Internal Controls

The subject of SECTIONS 1 and 2 was the past performance of Pakistan’s microfinance industry. The aim of this part of the report is to lay out a potential roadmap for the future. A number of opportunities and challenges pertaining to the sector have been identified in the following sub-sections. Each of these opportunities and challenges requires joint efforts by all organizations that play (or have the potential to play) a key role in Pakistan’s microfinance industry. This section therefore takes into account the entire ecosystem of the industry at the macro, meso, and micro levels; anything less would produce less than optimal results.

3.1 Options for the Microfinance Industry in the Post-Flood Scenario

An immediate challenge faced by Pakistan’s microfinance industry is the damage caused by the recent floods in July and August 2010. Preliminary estimates indicate that one-tenth of the industry’s credit portfolio has been directly affected.21 In addition to this industry-wide estimate, important factors to keep in mind within the overall context of the flood are:

• The Varying Levels of Damage to Individual MFPs:

MFPs have been affected to varying degrees largely depending on the extent of organizational presence and outreach in flood-affected districts (see EXHIBIT 3.1). The damage includes portfolio as well as infrastructure losses. • The Full Impact of the Flood in Terms of Damage to

Clients: A substantial amount of damage to clients will be realized over time, especially if irrigation, communication, and market-access infrastructure are not rehabilitated in time for the rabi (winter) planting season. Such delays will not only impact the local economy of flood-affected rural communities, but can also have significant implications over the next one year in terms of food security for urban clients. Thus, the timeliness of assistance will be a key factor in determining the length of time and support needed for recovery.

EXHIBIT 3.1: MFP PRESENCE IN FLOOD-AFFECTED DISTRICTS

The SBP Governor also recognized the challenges ahead and stated that the present scenario does not bode well for the agenda on financial inclusion as a significant proportion of the flood-hit population could be pushed below the poverty line. The SBP Governor urged FIs to play a facilitative role in rebuilding affected areas. “The agriculture, microfinance and SME sectors need special support of the banking industry in order to re-start the process of income generation,” he stressed.22

3.1.1 Short-Term Policy Approach

The recent flood has been globally recognized as a major natural disaster. However, despite the scale of damage, a systematic assessment process when writing-off financial sector assets is needed in order to allow a degree of accuracy to be maintained in determining individual organizational losses, thereby avoiding issues of moral hazard. Based on lessons learned from the 2005 earthquake in Pakistan and natural disasters across the world (the earthquake in Haiti earlier this year, and the East Asian Tsunami in 2004), the GoP joined hands with the World Bank and the ADB to carry out a damage need assessment for the financial sector. The exercise included an assessment of damage to the microfinance industry. Moreover, the SBP formed committees comprising banks

21 PMN presentation titled: Microfinance and the Floods. September 20, 201022 SBP Press Release. Floods Provide Banks Opportunity to Increase Financial Inclusion: Shahid Kardar. September 30, 2010

3. The Way Forward

KBL

TMFB

FMFB

POM

FB

KMFB KF

Asa

sah

SWW

S

SAFW

CO SDF

BRAC

-P

ASA

-P

CWCD

Akh

uwat

NRS

P

PRSP

SRSP

TRD

P

OC

T

Bra

nch

es

(%)

Bra

nch

es

(No.

)

0%

20%

40%

60%

80%

100%

120%

0

50

100

150

200

250

300

350Proportion of Branches Number of Branches





between safety net and livelihoods programmes and MFPs may also be explored to effectively extend client support.

3.1.2 Short-Term Practitioner Approach

At the micro level, MFPs need to conduct thorough case-by-case assessments of their clients to determine the level of damage sustained. Some options generally recommended in post-disaster situations include: making loan terms flexible; relaxing or suspending repayment schedules; varying instalment amounts; staggering interest rates; or providing new loans to help the poor resume their businesses. The loan officers of ASA in Bangladesh offer much-needed safety nets by delivering the savings of borrowers to their homes in crisis scenarios. Loan write-offs by MFPs are generally discouraged for three reasons: firstly, write-offs benefit different people to different degrees (those with larger loans receive greater benefit); secondly, experience has shown that writing-off loans is likely to cause “repayment apathy” on future loans; and thirdly, writing-off many loans can cause serious de-capitalisation of MFPs. Thus, MFPs should think carefully about channelling grants directly to their clients. Moreover, to help clients recoup their losses, it is important that MFPs position themselves to re-lend so that clients can rebuild their businesses and assets. In the case of Pakistan, it is imperative for practitioners to begin lending before the onset of the winter season so that the next cropping cycle is not missed.

3.1.3 Long-Term Measures

In the medium to long term, MFPs should assess a number of measures to minimize risk from future disasters:

• Diversify Portfolio: Maintain or increase diversity in portfolios by investing in multiple sectors (agriculture, livestock, trade, service) and geographies. A diversified portfolio is relatively better equipped to weather sector and/or geography-specific risks such as military opera-tions, floods, and urban unrest.

and itself on agriculture, SMEs, and microfinance to review and propose measures to mitigate the financial difficulties of clients in the flood-affected areas of the country. The committees have finalized their recommendations for rehabilitating businesses, and for encouraging banks to resume lending in the affected areas at the earliest so that clients can recoup their losses and resume their regular income streams. The recommendations comprise a mix of relief and risk sharing mechanisms. According to the SBP such subsidy-based interventions are generally discouraged by central banks as they “create market and price distortions, promote mis-allocation of scarce credit resources and have monetary implications”.23 However, keeping in view the special circumstances, such activities will be pursued for a limited period (two years) for flood affected areas, with the cost to be borne by the Federal Government.

Similarly, to provide a holistic picture for the industry, the PMN is in the process of preparing estimates of the losses sustained by its non-bank members while simultaneously advocating for:

1. The implementation of a write-off mechanism that maintains credit discipline without impacting client behaviour;

2. A sector-wide approach with extension of fiscal support to both MFBs and MFIs to back needed write-offs;

3. The implementation of a pricing subsidy mechanism that helps clients and without distorting the market.

Within this context, it is important for policymakers and donors to keep in mind that:

1. Generally, MFPs have limited capital and it would be difficult for them to absorb large write-offs. This means assistance needs to be quick and timely to be effective so that MFPs are able to provide the needed relief to their clients through rescheduling or restructuring of existing loans.

2. Synergies will need to be created to provide necessary relief to clients. Experience shows that although clients may need grants or write-offs following the floods, these need to be channelized in a transparent manner to prevent credit discipline impairment. Collaboration

23 SBP Press Release. Floods Provide Banks Opportunity to Increase Financial Inclusion: Shahid Kardar. September 30, 2010






• Partner with Insurance Firms to Provide/Raise

Awareness of Insurance Products: The MFPs also need to investigate the possibility of providing a variety of insur-ance products to their clients through partnerships with insurance companies. These could include crop and livestock insurance, housing insurance, and life insurance. • Risk Mitigation Fund: Players at the macro, meso, and micro levels in the industry need to work together to assess the need for a disaster management fund. This will be especially useful in the case of MFPs that operate in disaster-prone locations, such as the FANA, AJK, and coastal regions of the country. Such MFPs should also assess the possibility of setting up emergency cash funds to cover the cost of loan defaults caused by a disaster. Examples of such mitigation funds can be found in Latin America, Africa, and Bangladesh.

3.2 Funding Options for the Microfinance Industry

The PMN recently developed estimates of the industry’s financing gap.24 The shortfall was estimated in terms of debt, equity, and deposits using three different growth scenarios (see EXHIBIT 3.2). It is essential for the industry to draw in additional funds in all three categories to maintain a balanced funding profile.

EXHIBIT 3.2: TOTAL FUNDING GAP BY 2015 (AT 10 PERCENT, 25 PERCENT, AND VARIABLE GROWTH RATE)

3.2.1 Deposits

During 2008–09, MFBs stepped up efforts to tap deposits. As a result, approximately 40 percent of total MFB assets and 20 percent of total industry assets were being funded through deposits in 2009, compared to 18 percent and 12 percent, respectively in 2008. Despite this improvement, it is pertinent to mention that only one MFB (FMFB) continues to account for 70 percent of total deposits mobilized, and more than 90 percent of the deposit amount is yielded by institutional depositors. Thus, MFBs need to encompass the following into their deposit-mobilization strategies:

• Develop differentiated products to capture both the high-end and the low-end of the market. Research findings indicate that small ticket deposits significantly augment an MFB’s cost of doing business, and on their own may be unlikely to yield the funds required for signifi-cant growth and expansion;

• Study the savings habits of the low-end of the market (and women clients) in order to maximize the amount of deposits tapped from the base of the pyramid;

• Develop partnerships with both non-industry and industry players willing to allow use of existing networks to bring down delivery costs;

• Strengthen brands and improve marketing to target clientele.

3.2.2 Equity

In 2009, equity increased by only 3 percent, compared to 42 percent in 2008. This slowdown becomes especially noticeable considering the increasing leverage for the industry: in 2009 the debt-to-equity ratio rose to 3.27 from 1.89 in 2006. Although the ratio for the industry as a whole is not alarming, it is important to point out that leverage ratios for some MFPs increased significantly; in some instances leverage for individual institutions went as high as 21.8. Some of the largest MFPs also displayed debt-to-equity ratios of over nine, indicating heavy borrowing unmatched by equity injections. This issue has presented itself to players in the MFB peer-group who are


24 Shah, Mehr and Syed Mohsin Ahmed. Estimated Funding Shortfall in Pakistan’s Microfinance Industry (2010–2015). Pakistan Microfinance Network. August, 2010

PK

R (B

illio

n)

Growth Rates (%)

0

30

60

90

120

150

180

210

10 25 Variable

13.07

37.38

71.84

63.0747.79

46.39

27.20

11.08

26.61

Debt DepositEquity






3.2.3 Debt

Pakistan’s microfinance industry continues to be significantly dependent on debt from donors and the national apex. In recent years, the allocation of increasing amounts of donor money to market-development initiatives has raised some concern among industry players who consider the shift indicative of a growing propensity among donors to divert available funds from pure on-lending. Since 2007, donors have invested considerable amounts in developing guarantee funds for the industry (MCGF and PRISM), funding the development of a credit bureau, funding the national network to strengthen coordination and knowledge management, and providing access to grants for improving savings programmes and branchless banking initiatives. Even donors willing to provide money for on-lending prefer to tie the amount into initiatives aimed at providing access in low-penetration areas and improving gender distribution.

This shift in donor preference heralds a significant change for the industry. Within this changing ecosystem, each player needs to play a calibrated and responsible role so that industry players can grow consistently more financially self-sufficient without collapsing from an immediate choking-off of funding. Therefore, it is recommended that subsidized donor debt be withdrawn systematically.

A number of initiatives have already been undertaken at the meso level to help commercial sector players enter the industry. The focus was initially on local players. However, in 2009, the SBP also allowed borrowing from off-shore sources in foreign currency. International investors such as Blue Orchard, Planis, and Grameen Crédit Agricole showed interest as a result. However, the overall response from commercial players has been lacklustre. In such a scenario, donors should assess the possibility of providing continued debt, but priced consistently closer to the market. This will serve a dual purpose: firstly, it will serve as a demonstration effect for the local commercial banking industry. Secondly, it will improve the absorptive capacity and readiness of local MFPs for commercial debt. Subsidized debt however, continues to be an option to incentivize MFPs to move into remote sparsely-populated areas, provide innovative products, reach out to poorer clients, and establish start-ups.

required to maintain CAR ratios of 15 percent. Thus, drawing further equity into the industry is a matter of increasing concern. Two-sided effort will be required to draw in additional equity: MFPs need to improve their candidature for equity injections, and equity investors need to be propositioned to invest in the microfinance industry.

Equity investors make their commitments contingent on a number of internal and external factors. Although external factors such as country risk cannot be altered by industry players, MFPs are in a position to alter and strengthen considerations dependent on internal factors. These include balance sheet strength, profitability, governance structure, and the strength of the management team. Moreover, MFPs need to be cognizant of the fact that equity is an expensive form of financing: it requires a significant amount of groundwork in terms of finding the right match because unlike debt, equity investments come with a dilution of decision-making power. A mismatched investor can have significant implications in terms of mission drift, board composition, and organizational culture. Nevertheless, Pakistan’s microfinance industry does need equity investment if it is to continue along the growth trajectory of a few years ago. Within the regulatory environment of the country, foreign equity investors can benefit from the allowance to repatriate 100 percent of profits, in addition to having a 100 percent equity stake. At the meso and micro levels, the industry needs to engage more actively with microfinance equity funds. Globally recognized names include BlueOrchard, Catalyst Microfinance Investors, Grameen Foundation Equity Funds, Oiko Credit, and other members of the Council of Microfinance Equity Funds. Within Pakistan, there is a need to engage more effectively with DFIs and pension/insurance funds. This will not only serve to raise awareness of the industry’s equity needs among equity investors, but will also help MFPs improve their understanding of the changes required at the organizational level to draw in additional equity.

A number of MFPs have also recently raised the issue of establishing a local equity fund. Industry players at the macro, meso, and micro levels must discuss together the need for such a fund.






The MFPs need to ensure that their organizations are an attractive option for debt investors to access additional debt. Fortunately, a number of MFPs have already started to recognize the need to diversify their funding base. (see SECTION 3.3.1 for details).

3.3 Where is the Commercial Investor?

Only a handful of commercial investors in Pakistan have engaged with the local microfinance industry. This has occurred despite the active engagement of commercial investors with microfinance organizations in Latin America, Eastern Europe, and India and the existence of two guarantee funds (MCGF and PRSIM) within the country. Moreover, Pakistan’s microfinance market provides a significant opportunity to commercial investors: at less than 10 percent outreach, there is ample room for rapid growth and expansion in the years to come. In fact, the industry is expected to need additional funds amounting to PKR 121 billion (USD 1.43 billion) in the next five years to reach approximately 20 percent of the total market.25 Within this context, it is important to analyze the factors keeping the local commercial investor away. Based on local market perceptions, there is apprehension regarding two important factors: 1) the profit-generation capacity of MFPs backed by a viable business model; and 2) the debt/equity absorption capacity of industry players i.e., commercial investors are concerned about the capacity of MFPs to service debt.

3.3.1 Developing a Viable Microfinance Business Model for Pakistan

Pakistan’s microfinance industry continues to experiment with varied business models ranging from individual lending models with loans backed by physical collateral, right down the continuum to solidarity group lending (SGL) models with loans extended on the basis of social collateral to groups of borrowers encompassing up to 25 individuals. The former extend loans of PKR 75,000 (USD 850). The latter have an average loan size of PKR 12,000 (USD 150). The performance of MFPs using these varied

lending methodologies is so far not differentiable by peer-group, geography, profitability, or the ability to acquire scale. To commercial investors, this inability to demonstrate persistent success through any one of the models in use translates into the absence of viable microfinance business models. A number of experts have viewed the variety of models in use positively due to broader market access (through varied products aimed at differing market niches and sectors) and healthy portfolio diversification. However, reports of continued multiple-borrowing and challenges of sustainability have brought the purported benefits from the diversity of lending models in Pakistan into question. It is important for the concerned organization to achieve consistent growth together with improvements in profitability to convince an investor of the viability of an MFP’s business model. In addition to the above, an MFP needs to demonstrate a well-functioning governance structure, efficient operations complete with robust internal controls, and the ability and intention to achieve and maintain growth and financial sustainability.

3.3.2 Improved Market Intelligence for Investors and Investment Readiness among MFPs

The PMN has been promoting the financial transparency initiative among its members since 2001 to facilitate commercial investors. As a result, there is a vast amount of financial performance information on the industry (accessible online: www.pmronline.info). Similar social performance information will be made available for the industry starting 2010. The PMN is also in the process of developing an investor package which will provide industry-wide quantitative and qualitative information, as well as financial and social performance ratios distilled to the institutional level to assist investors with their investment decisions. Other meso-level players that regularly engage with the microfinance industry include ShoreBank International-Pakistan and IFC. These organizations have engaged with the industry from time to time to improve governance practices, risk mitigation strategies, internal controls, and management information systems. To add further impetus to this


25 This estimate does not account for the damage caused by recent floods in the country.






3.5 Strengthening Internal Control Measures and Risk Mitigation Strategies

Since 2006, microcredit outreach has increased two-fold. Two significant challenges that have arisen from the expansion include: 1) Increased competition from new and existing MFPs; and 2) Multiple borrowing among clients resulting in reports by some MFPs of increasing delinquencies in heavily serviced urban pockets since 2008. When coupled with less than optimal internal control systems, the latter has the potential to become a very serious threat to individual MFPs as well as the microfinance industry as a whole. A number of initiatives have been undertaken on an industry-wide level in response to these risks:

• In May 2010, a pilot credit bureau for the microfinance industry was launched in one district of the country. The plan is to roll out the MF-CIB across the country following an initial phase. • Industry players have also come together to develop a staff referral bureau (SRB) whereby employees with fraudulent employment records are flagged on a centralized database.

Although these systems have been introduced to aid MFPs in mitigating risks on a number of fronts, it is important to emphasize that to benefit from these tools, MFPs have to first institute and then optimize the utilization of these tools through institution-specific policies and procedures. The sooner these are put into place, the more quickly the benefits will begin to show up. Without institutional commitment to utilizing the MF-CIB and SRB, the risks which this infrastructure is meant to mitigate, are unlikely to recede.

Moreover, these industry-wide tools are in no way meant to provide a substitute to the internal control system of an MFP. Organizations still need to ensure that they have robust risk mitigation strategies and internal control measures in place. A well-functioning management information system is an important component of this system: a well-structured MIS can provide managers with timely and adequate information to support informed decision-making. Thus, a combination of strong internal controls, backed by this industry support infrastructure can go a long way in mitigating the vital risks faced by Pakistan’s microfinance industry.

process, commercial investors should engage more frequently with industry representatives to help focus the investment readiness initiatives undertaken by the industry.

3.4 New Entrants and Mission Drift

The Branchless Banking Guidelines introduced by the SBP in 2008 resulted in increased interest in the industry by non-bank players such as the telcos, technology firms, and retail service chains. The option has been especially attractive for players in Pakistan’s telecommunications industry where increasing competition has forced prices down to some of the lowest levels globally, highlighting the need for offering value-added services to maintain customer loyalty and reduce churn rates. Given the sensitive nature of financial services, the microfinance industry makes a good candidate for telcos to engage with. Simultaneously for the microfinance industry, a union with the telcos carries significant allure: given the telcos’ scale in outreach (exceeding 70 million subscribers), and the potential for cost-saving, it appears to be a win-win solution. One telco has already acquired an MFB as a result, while others are in the process of acquiring a licence or exploring the possibility of acquisition to lauch operations. In theory, the synergies arising from such partnerships can have significant advantages for both the telco and the MFP in question. In reality however, the synergies for individual MFPs and the microfinance industry at large will emerge only when its defining characteristics are maintained. In addition to the differences arising from the nature of services provided by both parties (financial versus consumer), it is also important to take into account the double-bottom line orientation of microfinance. By virtue of being the larger players in terms of financial and outreach numbers, telcos engaging with the microfinance industry have the potential to impact this mission: it is therefore imperative for the industry to effectively communicate the underlying reasons that have prompted MFPs to target populations at the base of the pyramid (BOP). To demonstrate and reaffirm the industry’s commit-ment to clients at the BOP sector players need to ensure that the necessary contractual and operational measures have been put into place.


31

AN

NEX A

:PERFO

RMA

NCE IN

DICATO

RS

AN

NEX B:

REGIO

NA

L BENCH

MA

RKS

AN

NEX C:

SOU

RCES OF D

ATA

AN

NEX D

:A

DJU

STMEN

TS TO

FINA

NCIA

L DATA

ANNEXURES

AN

NEX E:

TERMS A

ND

DEFIN

ITION

S

Annex A-I: Performance Indicators - Industry Aggregate (2006-09)


33

Annex A: Performance Indicators

Annex A-I: Performance Indicators - Industry Aggregate (2006-09)Annex A-II: Performance Indicators – Individual Institutions and Peer Groups (2009)

Annex B: Regional BenchmarksAnnex C: Sources of Data

Annex D: Adjustments to Financial DataAnnex E: Terms and Definitions




INFRASTRUCTURE

2006 2007 2008 2009*

Total Assets (PKR 000) 17,535,983 22,862,066 33,193,784 35,432,759

1,073 1,165 1,277 1,379

7,342 9,529 11,499 13,474

Growth Rate

Total Assets

* Based on Kashf Foundation financials for 2008


- 30.4% 45.2% 6.7%

- 8.6% 9.6% 8.0%

- 29.8% 20.7% 17.2%

FINANCING STRUCTURE

2006 2007 2008 2009*

Total Assets (PKR 000) 17,535,983 22,862,066 33,193,784 35,432,759

Total Equity (PKR 000) 6,077,925 6,418,594 8,018,344 8,292,183

Total Debt (PKR 000) 11,457,585 16,443,471 25,175,440 27,140,576

Commercial Liabilities (PKR 000) 2,475,376 2,723,484 6,252,075 4,143,793

Deposits (PKR 000)** 1,448,803 2,845,014 4,111,730 7,161,634

Gross Loan Portfolio (PKR 000) 8,444,919 12,749,983 20,001,190 20,240,995

Ratios

Equity-to-Asset Ratio 34.7% 28.1% 24.2% 23.4%

Commercial Liabilities-to-GLP 29.3% 21.4% 31.3% 20.5%

Debt-to-Equity Ratio 1.9 2.56 3.14 3.27

Deposits-to-GLP 17.2% 22.3% 20.6% 35.4%

Deposits-to-Total Assets 8.3% 12.4% 12.4% 20.2%

GLP-to-Total Assets 48.2% 55.8% 60.3% 57.1%

** Only MFB deposits included

Branches (including Head Office)

Total Staff


Total Staff








OUTREACH

2006 2007 2008 2009*

Active Borrowers 835,460 1,267,182 1,695,421 1,729,174

Active Women Borrowers 434,122 640,868 803,795 962,611

Gross Loan Portfolio (PKR 000) 8,445,099 12,749,983 20,001,190 20,240,995

Annual Per Capita Income (PKR)** 57,000 57,000 81,000 86,000

Number of Loans Outstanding 887,108 1,351,462 1,791,688 1,729,174

Number of Depositors*** 1,364,470 1,143,551 248,842 463,361

Number of Deposit Accounts*** 749,897 494,709 248,842 463,361

Number of Women Depositors*** 542,120 508,000 44,081 78,427

Deposits Outstanding (PKR 000)*** 2,349,383 3,617,332 4,111,730 7,161,634

Proportion of Active Women Borrowers (%) 52.0% 50.6% 47.4% 55.7%

Average Loan Balance per Active Borrower (PKR) 10,100 10,100 11,797 11,706

Average Loan Balance per Active

Borrower/Per Capita Income

17.7% 17.7% 13.78% 13.6%

Average Outstanding Loan Balance (PKR) 9,500 9,400 11,163 11,706

Average Outstanding Loan

Balance / Per Capita Income

16.7% 16.6% 13.8% 13.6%

Proportion of Active Women Depositors (%) 39.7% 44.4% 17.7% 16.9%

Average Saving Balance per Active

Depositor (PKR)

1,700 3,200 16,523 15,456

Active Deposit Account Balance (PKR) 3,100 7,300 16,523 15,456

** Source: http://data.worldbank.org/indicator/NY.GDP.PCAP.CD Economic Survey of Pakistan "08, 09". Per capita income numbers are available in USD. An average rate for USD/PKR during the year have been taken to convert these numbers into PKR. Currency devalution is the major cause of almost 80% increase in per capita income between 2006 and 2008. *** Only MFB deposits included



35







FINANCIAL PERFORMANCE(Figures in PKR 000)

2006 2007 2008 2009*

Revenue from Loan Portfolio 1,493,902 2,746,985 4,202,506 5,428,016

Revenue from Other Financial Assets 611,657 638,909 831,602 1,245,966

Revenue from Financial Services 16,517 32,347 80,552 977,884

Total Revenue 2,122,076 3,418,241 5,114,660 7,651,866

Less : Financial Expense 460,666 876,871 1,556,375 2,182,834

Gross Financial Margin 1,661,410 2,541,370 3,558,285 5,469,033

Less: Loan Loss Provision Expense 302,616 363,353 1,440,324 1,610,139

Net Financial Margin 1,358,794 2,178,018 2,117,962 3,858,894

Personnel Expense 1,084,180 1,476,490 1,828,726 2,479,440

Admin Expense 791,179 1,122,978 1,507,667 1,857,849

Less: Operating Expense 1,875,359 2,599,468 3,336,393 4,337,290

Net Income Before Tax (516,566) (421,450) (1,218,432) (478,396)

Provision for Tax (22,401) 75,179 (1,001) 5,353

Net Income/(Loss) Before Adjustments (494,164) (496,629) (1,217,431) (483,749)

Adjusted Financial Expense on Borrowings 199,690 299,219 242,377 87,767

351,898 417,278 669,689 1,318,219

Adjusted Loan Loss Provision Expense 545 64,590 11,699 -

Adjusted Operating Expense - - - -

Total Adjustment Expense 552,132 781,087 923,765 1,405,987

Net Income/(Loss) After Adjustments (1,046,297) (1,277,716) (2,141,195) (1,889,736)

Average Total Assets 15,646,074 20,055,650 27,996,183 33,875,053

Average Total Equity 5,509,135 6,115,580 7,177,338 8,216,925

Ratios

Adjusted Return-on-Assets (6.7%) (6.4%) (7.6%) (5.6%)

Adjusted Return-on-Equity (19.0%) (20.9%) (29.8%) (23.0%)

80.4% 89.0% 80.8% 94.1%

66.5% 74.0% 70.5% 80.2%

Inflation Adjustment Expense

Operational Self Sufficiency (OSS)

Financial Self Sufficiency (FSS)









OPERATING INCOME

(Figures in PKR 000)

2006 2007 2008 2009*

Revenue from Loan Portfolio 1,493,902 2,746,985 4,202,506 5,428,016

Total Revenue 2,122,076 3,418,241 5,114,660 7,651,866

Adjusted Net Operating Income / (Loss) (1,068,698) (1,202,537) (2,113,788) (1,884,383)


Gross Loan Portfolio (Opening Balance) 5,602,086 8,283,941 12,698,918 19,958,947

Gross Loan Portfolio (Closing Balance) 8,445,099 12,749,983 20,001,190 20,240,995

Average Gross Loan Portfolio 7,032,593 10,516,962 16,350,054 20,099,971

8.9% 7.9% 12.0% 20.8%

Total Revenue Ratio

(Total Revenue-to-Average Total Assets)

13.6% 17.0% 18.3% 22.6%

(50.4%) (32.5%) (41.3%) (24.6%)

Yield on Gross Portfolio (nominal) 21.2% 26.1% 25.7% 27.0%

Yield on Gross Portfolio (real) 11.4% 16.9% 12.2% 5.1%

** Source: http://www.sbp.org.pk/ecodata/pricei.pdf

OPERATING EXPENSE(Figures in PKR 000)

2006 2007 2008 2009*

Adjusted Total Expense 3,190,774 4,620,778 7,228,448 9,536,250

Adjusted Financial Expense 1,012,254 1,593,368 2,440,032 3,588,821

Adjusted Loan Loss Provision Expense 303,161 427,943 1,452,023 1,610,139

Adjusted Operating Expense 1,875,359 2,599,468 3,336,393 4,337,290

Adjustment Expense 552,132 781,087 895,356 1,405,987


Ratios

Adjusted Total Expense-to-Average Total Assets 20.4% 23.0% 25.8% 28.2%

Adjusted Financial Expense-to-Average Total Assets 6.5% 7.9% 8.7% 10.6%

Adjusted Loan Loss Provision

Expense-to-Average Total Assets

1.9% 2.1% 5.2% 4.8%

Adjusted Operating Expense-to-Average Total Assets 12.0% 13.0% 11.9% 12.8%

Adjusted Personnel Expense 6.5% 7.4% 6.5% 6.5%

Adjusted Admin Expense 5.1% 5.6% 5.4% 5.8%

Adjustment Expense-to-Average Total Assets 3.5% 3.9% 3.2% 4.2%

Inflation Rate **

Adjusted Profit Margin

(Adjusted Profit/(loss)-to-Total Revenue)




37







OPERATING EFFICIENCY

2006 2007 2008 2009*

Adjusted Operating Expense (PKR 000) 1,875,359 2,599,468 3,336,393 4,337,290

Adjusted Personnel Expense (PKR 000) 1,084,180 1,476,490 1,828,726 2,479,440

Average Gross Loan Portfolio (PKR 000) 7,023,593 10,516,962 16,350,054 20,099,971

Average Number of Active Borrowers 754,250 1,143,320 1,685,382 1,730,924

Average Number of Active Loans 796,604 1,209,237 1,635,342 1,730,924

Adjusted Operating Expense-to-Average Gross

Loan Portfolio26.7% 24.7% 20.4% 21.6%

Adjusted Personnel Expense-to-Average Gross

Loan Portfolio15.4% 14.0% 11.2% 12.3%

Average Salary/GDP Per Capita 3.3 2.7 2.0 2.14

Adjusted Cost per Borrower (PKR) 2,500 2,300 2,000 2,506

Adjusted Cost per Loan (PKR) 2,400 2,100 2,000 2,506

PRODUCTIVITY

2006 2007 2008 2009*

Number of Active Borrowers 835,460 1,267,182 1,695,421 1,729,734

Number of Active Loans 887,108 1,351,462 1,791,688 1,729,734

Number of Active Depositors 1,364,470 1,143,551 248,842 463,361

Number of Deposit Accounts 750,077 494,709 248,842 463,361

7,342 9,529 11,499 13,474

4,513 5,734 6,916 7,587

114 133 147 128

121 142 156 128

185 221 245 228

197 236 259 228

186 120 22 34

102 52 22 34

Personnel Allocation Ratio 61.5% 60.2% 60.1% 56.3%


Total Staff

Total Loan Officers

Borrowers per Staff

Loans per Staff

Borrowers per Loan Officer

Loans per Loan Officer

Depositors per Staff

Deposit Accounts per Staff









RISK(Figures in PKR 000)

2006 2007 2008 2009*

Portfolio at Risk > 30 days 194,821 396,159 426,693 375,269

Portfolio at Risk > 90 days 109,525 283,676 190,350 243,624

Adjusted Loan Loss Reserve 378,716 484,409 1,680,846 1,745,650

205,216 209,238 299,986 633,854

Gross Loan Portfolio (GLP) 8,445,099 12,749,983 20,001,190 20,240,995

Average Gross Loan Portfolio 7,023,593 10,516,962 16,350,054 20,099,971

Portfolio at Risk (>30)-to-GLP 2.3% 3.1% 2.1% 1.9%

Portfolio at Risk(>90)-to-GLP 1.3% 2.2% 1.0% 1.2%

2.9% 2.0% 1.8% 3.2%

Risk Coverage Ratio (Adjusted Loan Loss

Reserve-to-Portfolio at Risk >30days)

194.4% 122.3% 393.9% 465.2%


Write Off-to-Average GLP

Loan Written Off during Year

INFRASTRUCTURE

MFB

KBL TMFB POMFB FMFB RMFB NMFB KMFB Sub

Age 9 4 4 8 5 5 2

Total Assets (PKR 000) 6,587,779 2,799,484 720,826 6,068,007 70,831 351,411 1,191,856 17,790,193

107 39 14 88 9 5 27 289

2,002 791 150 1,531 27 94 443 5,038

MFI

KF

*

SA

FW

CO

DA

ME

N

CS

C

CW

CD

AS

A-P

BR

AC

-P

JWS

Ak

hu

wa

t

OP

P

Asa

sah

Su

ng

i

OR

IX

Su

b*

Age 13

15 13

9 18 1 2 18 9 22 7 15

17

Total Assets (PKR 000)

4,9

59,5

60

245

,268

529

,614

316

,597

260

,673

149

,418

851

,710

169

,875

117

,347

408

,945

417

,674

39,

368

315

,541

8,7

81,5

91

158

17

20

17

19

35

88 6

22 6

23 5

8

424

1,91

7

171

202

177

168

233

826 57

91

116

191 31

49

4,2

29

RSP

NRSP PRSP SRSP TRDP Sub

Age 16 11 18 12

Total Assets (PKR 000) 5,963,775 2,276,685 77,617 542,897 8,860,975

516 78 12 60 666

3,019 916 44 228 4,207


Total Staff

Annex A-II: Performance Indicators – Individual Institutions and Peer Groups (2009)

Bank licensed and prudentially regulated by the State Bank of Pakistan to exclusively service the microfinance market

Non-governmental organization providing only microfinance services

Non-governmental organization running microfinance operation as part of multi-dimensional development programme with specific focus on rural areas

Microfinance Bank (MFB)

Microfinance Institution (MFI)

Rural Support Program (RSP)


39








Total Staff


Total Staff

* Numbers for 2008 (except for institution’s age)








FINANCING STRUCTURE


MFB


Total Assets 6,587,779 2,799,484 720,826 6,068,007 70,831 351,411 1,191,856 17,790,193

Total Equity 2,076,920 1,125,152 678,459 593,210 36,978 238,587 524,782 5,274,089

Total Debt 4,510,859 1,674,332 42,367 5,474,797 33,853 112,823 667,073 12,516,105

Commercial Liabilities 157,637 - - - - - - 157,637

Total Deposits* 190,033 1,267,829 24,547 5,219,008 30,838 110,906 318,473 7,161,634

Gross Loan Portfolio (GLP) 3,630,205 1,539,841 100,571 2,778,352 884 92,074 424,125 8,566,051

Weighted Average

Equity-to-Asset Ratio (%) 31.5 40.2 94.1 9.8 52.2 67.9 44.0 29.6

Commercial Liabilities-to-GLP (%) 4.3 0.0 0.0 0.0 0.0 0.0 0.0 1.8

Debt-to-Equity Ratio 2.2 1.5 0.1 9.2 0.9 0.5 1.3 2.4

Deposits-to-GLP (%) 5.2 82.3 24.4 187.8 3490.2 120.5 75.1 83.6

Deposits-to-Total Assets (%) 2.9 45.3 3.4 86.0 43.5 31.6 26.7 40.3

GLP-to-Total Assets (%) 55.1 55.0 14.0 45.8 1.2 26.2 35.6 48.2

* Only MFB deposits recorded


41








MFI

KF

*

SA

FW

CO

DA

ME

N

CS

C

CW

CD

AS

A-P

BR

AC

-P

JWS

Ak

hu

wa

t

OP

P

Asa

sah

Su

ng

i

OR

IX

Su

b*

TotalAssets

4,95

9,56

0

245,

268

529,

614

316,

597

260,

673

149,

418

851,

710

169,

875

117,

347

408,

945

417,

674

39,3

68

315,

541

8,78

1,59

1

TotalEquity

994,

336

58,6

65

66,4

78

30,4

62

11,4

31

9,45

7

(53,

190)

27,8

60

115,

321

209,

149

(15,

724)

33,2

22

34,8

32

1,52

2,30

0

TotalDebt

3,96

5,22

4

186,

603

463,

135

286,

135

249,

243

139,

961

904,

900

142,

015

2,02

5

199,

795

433,

397

6,14

6

280,

709

7,25

9,29

1

CommercialLiabilities

1,56

6,05

2 -

97

- - - -

2,30

0 -

32,2

87

92,6

11

-

94,7

22

1,78

8,07

0

GrossLoanPortfolio(GLP)

3,48

3,14

9

212,

928

422,

704

197,

086

153,

196

120,

300

363,

183

103,

747

95,7

11

348,

606

260,

611

21,3

33

195,

332

5,97

7,88

7

Weighted

Average

Equity-to-AssetRatio(%) 20.0

23.9

12.6 9.6

4.4

6.3

-6.2

16.4

98.3

51.1

-3.8

84.4

11.0

17.3

CommercialLiabilities-to-GLP(%) 45.0 0.0

0.0

0.0

0.0

0.0

0.0

2.2

0.0

9.3

35.5 0.0

48.5

29.9

Debt-to-EquityRatio 4.0

3.2

7.0

9.4

21.8

14.8

-17.

0

5.1

0.02 1.

0

-27.

6

0.2

8.1

4.77

GLP-to-TotalAssets(%) 70.2

86.8

79.8

62.3

58.8

80.5

42.6

61.1

81.6

85.2

62.4

54.2

61.9

68.1

*KF numbers for 2008









RSP


Total Assets 5,963,775 2,276,685 77,617 542,897 8,860,975

Total Equity 835,789 606,568 (7,716) 61,153 1,495,795

Total Debt 5,127,986 1,670,117 85,333 481,744 7,365,180

Commercial Liabilities 1,536,397 661,689 - - 2,198,087

Gross Loan Portfolio (GLP) 4,601,408 769,620 32,451 293,579 5,697,057

Weighted

Average

Equity-to-Asset Ratio (%) 14.0 26.6 -9.9 11.3 16.9

Commercial Liabilities-to-GLP (%) 33.4 86.0 0.0 0.0 38.6

Debt-to-Equity Ratio 6.1 2.8 -11.1 7.9 4.92

GLP-to-Total Assets (%) 77.2 33.8 41.8 54.1 64.3

* Only MFB deposits recorded


43







OUTREACH

MFB


Number of Active Borrowers 329,421 70,671 8,092 199,792 52 4,000 14,192 626,220

Number of Active

Women Borrowers 77,385 26,345 2,119 69,563 12 - 492 175,916

Gross Loan Portfolio (PKR 000) 3,630,205 1,539,841 100,571 2,778,352 884 92,074 424,125 8,566,051

Annual Per Capita Income (PKR)* 86,000 86,000 86,000 86,000 86,000 86,000 86,000 86,000

Number of Loans Outstanding 329,421 70,671 8,092 199,792 52 4,000 14,192 626,220

Number of Depositors 74,995 122,538 15,971 189,878 5,178 11,453 43,348 463,361

Number of Deposit Accounts 74,995 122,538 15,971 189,878 5,178 11,453 43,348 463,361

Number of Women Depositors 17,249 7,352 2,715 49,368 - - 1,743 78,427

Deposits Outstanding (PKR 000) 190,033 1,267,829 24,547 5,219,008 30,838 110,906 318,473 7,161,634

Weighted Average

Percentage of Women

Borrowers (%)23.5 37.3 26.2 34.8 23.1 0.0 3.5 28.1

Average Loan Balance (PKR) 11,020 21,789 12,428 13,906 16,992 23,018 29,885 13,679

Average Loan Balance / Annual

Per Capita Income (%)12.8 25.3 14.5 16.2 19.8 26.8 34.7 15.9


Balance (PKR)11,020 21,789 12,428 13,906 16,992 23,018 29,885 13,679


Balance / Annual Per Capita

Income (%)

12.8 25.3 14.5 16.2 19.8 26.8 34.7 15.9

Percentage of Women

Depositors (%)23.0 6.0 17.0 26.0 0.0 0.0 4.0 16.9

Average Saving Balance Per

Active Depositor (PKR)2,534 10,346 1,537 27,486 5,956 9,684 7,347 15,456

Active Deposit Account Balance

(PKR) 2,534 10,346 1,537 27,486 5,956 9,684 7,347 15,456

* Source: http://www.finance.gov.pk/survey/chapter_10/01_Growth_and_Investment.pdf








MFI

KF

**

SA

FW

CO

DA

ME

N

CS

C

CW

CD

AS

A-P

BR

AC

-P

JWS

Ak

hu

wa

t

OP

P

Asa

sah

Su

ng

i

OR

IX

Su

b**

Number of Active Borrowers

319

,517

23,

430

44,

912

15,

241

8,9

10

18,

283

45,

011

9,3

58

15,

013

34,

874

34,

007

2,1

21

16,

326

587

,003

Number of Active Women Borrowers

319

,219

10,

974

44,

912

14,

784

2,5

08

18,

231

45,

011

8,7

19

4,5

03

2,5

16

34,

007

1,7

74

14,5

75

521

,733

Gross Loan Portfolio (PKR 000)

3,4

83,1

49

212

,928

422

,704

197

,086

153

,196

120

,300

363

,183

103

,747

95,

711

348

,606

260

,611

21,

333

195

,332

5,9

77,8

87

Annual Per Capita Income (PKR)*

86,

000

86,

000

86,

000

86,

000

86,

000

86,

000

86,

000

86,

000

86,

000

86,

000

86,

000

86,

000

86,

000

86,0

00

Number of Loans Outstanding

319

,517

23,

430

44,

912

15,

241

8,9

10

18,

283

45,

011

9,3

58

15,

013

34,

874

34,

007

2,1

21

16,

326

587

,003

Weighted

Average

Percentage of Women Borrowers (%) 99.9

46.8

100

97.0

28.1

99.7

100

93.2

30.0 7.2

100

83.6

89.3

88.9

Average Loan Balance (PKR)

10,9

01

9,08

8

9,41

2

12,9

31

17,1

94

6,58

0

8,06

9

11,0

86

6,37

5

9,99

6

7,66

3

10,0

58

11,9

64

10,1

84Average Loan Balance/Annual

Per Capita Income (%) 12.7

10.6

10.9

15.0

20.0 7.7

9.4

12.9 7.4

11.6 8.9 12 14 12

Average Outstanding Loan Balance (PKR)

10,9

01

9,08

8

9,41

2

12,9

31

17,1

94

6,58

0

8,06

9

11,0

86

6,37

5

9,99

6

7,66

3

10,0

58

11,9

64

10,1

84


Balance / Annual Per Capita Income (%) 12.7

10.6

10.9

15.0

20.0 7.7

9.4

12.9 7.4

11.6 8.9

11.7

13.9

11.8

** KF numbers for 2008 * Source: http://www.finance.gov.pk/survey/chapter_10/01_Growth_and_Investment.pdf


45







RSP


Number of Active Borrowers 399,969 81,754 7,218 27,010 515,951

Number of Active Women Borrowers 208,071 36,194 3,322 17,375 264,962

Gross Loan Portfolio (PKR 000) 4,601,408 769,620 32,451 293,579 5,697,057

Annual Per Capita Income (PKR)* 86,000 86,000 86,000 86,000 86,000

Number of Loans Outstanding 399,969 81,754 7,218 27,010 515,951

Weighted

Average

Percentage of Women Borrowers (%) 52.0 44.3 46.0 64.3 51.4

Average Loan Balance (PKR) 11,504 9,414 4,496 10,869 11,042

Average Loan Balance/Annual Per Capita

Income (%)13 11 5 13 13

Average Outstanding Loan Balance (PKR) 11,504 9,414 4,496 10,869 11,042

Average Outstanding Loan Balance / Annual

Per Capita Income (%)13.4 10.9 5 12.6 12.8

* Source: http://www.finance.gov.pk/survey/chapter_10/01_Growth_and_Investment.pdf








FINANCIAL PERFORMANCE

MFB


Revenue from Loan Portfolio 824,491 347,393 37,443 804,264 2,129 26,814 129,472 2,172,006

Revenue from Other Financial Assets 258,234 170,726 37,540 173,600 5,930 23,398 52,887 722,314

Revenue from Financial Services 506,726 62,204 7,135 104,276 2,994 2,837 30,454 716,626

Total Financial Revenue 1,589,451 580,323 82,119 1,082,140 11,054 53,048 212,812 3,610,947

Less : Financial Expense 256,875 115,144 35 407,753 1,013 4,410 30,360 815,591

Gross Financial Margin 1,332,576 465,179 82,083 674,386 10,040 48,639 182,452 2,795,356

Less: Loan Loss Provision Expense 95,281 9,331 4,117 40,752 9,807 2,980 81,768 244,036

Net Financial Margin 1,237,295 455,848 77,967 633,634 233 45,658 100,684 2,551,320

Personnel Expense 559,414 318,565 39,204 308,186 4,797 24,608 148,748 1,403,521

Admin Expense 424,917 235,557 46,981 292,896 8,616 20,540 146,856 1,176,363

Less: Operating Expense 984,331 554,122 86,185 601,081 13,412 45,148 295,604 2,579,884

Net Income Before Tax 252,964 (98,274) (8,218) 32,553 (13,180) 510 (194,920) (28,564)

Provision for Tax 6,365 2,543 (1,422) 5,392 - 260 (7,950) 5,188

Net Income/(Loss) Before

Adjustments 246,600 (100,817) (6,796) 27,161 (13,180) 250 (186,971) (33,752)

Adjusted Financial Expense on

Borrowings 68,040 7,260 - 2,591 - - - 77,891

344,471 215,363 80,779 74,059 8,352 14,165 120,592 857,782

Less: Total Adjustment Expense 412,511 222,623 80,779 76,650 8,352 14,165 120,592 935,672

Net Income/(Loss) After

Adjustments (165,911) (323,440) (87,575) (49,489) (21,532) (13,915) (307,563) (969,425)

Average Total Assets 6,636,761 2,547,597 590,100 5,081,130 75,121 272,264 1,195,150 16,398,122

Average Total Equity 1,978,198 1,135,372 553,599 579,860 43,250 163,469 618,268 5,072,015

Weighted

Average

Adjusted RoA (%) -2.5 -12.7 -14.8 -1.0 -28.7 -5.1 -25.7 -5.9

Adjusted RoE (%) -8.4 -28.5 -15.8 -8.5 -49.8 -8.5 -49.7 -19.1

118.9 85.5 90.9 103.1 45.6 101.0 52.2 99.2

90.9 64.4 48.0 96.1 33.9 79.5 40.3 78.9

Operational Self Sufficiency (OSS) (%)

Financial Self Sufficiency (FSS) (%)



CONTINUED ON PAGE 48>

47







MFI

KF

*

SA

FW

CO

DA

ME

N

CS

C

CW

CD

AS

A-P

BR

AC

-P

JWS

Ak

hu

wa

t

OP

P

Asa

sah

Su

ng

i

OR

IX

Su

b*

Revenue from Loan Portfolio

1,0

75,3

68

45,

059

107

,267

50,

961

39,

325

25,

885

106

,317

26,

462 -

52,

688

100

,013

4,38

8

52,1

07

1,6

85,8

41

Revenue from Other Financial Assets

158

,859

1,2

05

9,7

59

5,1

52

1,7

68

868

19,

484

3,3

59

2,4

30

32,

453

1,8

74

1,86

1

3,9

21

242

,993

Revenue from Financial Services 2,5

50

6,5

12

11,

188

14,

706

13,

862

366

2,5

83

3,4

85

8,8

26

846

2,0

18 0

2,2

96

69,

239

Total Financial Revenue

1,2

36

,77

7

52

,77

6

12

8,2

15

70

,81

9

54

,95

5

27

,12

0

12

8,3

84

33

,30

6

11

,25

6

85

,98

7

10

3,9

05

6,2

49

58

,32

4

1,9

98

,07

3

Less : Financial Expense

362

,797

9,1

34

37,

992

17,

512

20,

230

1,7

79

30,

910

7,3

86

10,

973

49,

413 0

13,6

77

561

,801

Gross Financial Margin

87

3,9

81

43

,64

2

90

,22

3

53

,30

7

34

,72

6

25

,34

1

97

,47

4

25

,92

0

11

,25

6

75

,01

5

54

,49

1

6,2

49

44

,64

7

1,4

36

,27

2

Less: Loan Loss Provision Expense

1,2

01,4

55

2,6

38

18,

467

35,

198

22,

516

15

12,

616

1,1

80

2,0

65

2,8

29

665

302

1,2

99,9

46

Net Financial Margin

(3

27

,47

4)

41

,00

4

71

,75

6

18

,10

9

12

,21

0

25

,32

6

84

,85

8

24

,73

9

11

,25

6

72

,95

0

51

,66

2

5,5

84

44

,34

5

13

6,3

26

Personnel Expense

293

,263

23,

654

38,

280

33,

008

23,

040

19,

000

81,

067

11,

663

9,9

12

5,1

41

40,

200

1,11

4

12,4

13

591

,756

Admin Expense

138

,567

21,

485

22,

327

20,

619

14,

046

15,

233

40,

884

8,8

54

6,0

52

26,

061

32,

200

2,00

5

15,0

46

363

,379

Less: Operating Expense

43

1,8

30

45

,13

9

60

,60

8

53

,62

7

37

,08

6

34

,23

3

12

1,9

50

20

,51

7

15

,96

4

31

,20

2

72

,40

0

3,1

19

27

,45

9

95

5,1

35

Net Income Before Tax

(7

59

,30

4)

(4

,13

4)

11

,14

9

(3

5,5

18

)

(2

4,8

76

)

(8

,90

7)

(3

7,0

92

)

4,2

22

(4

,70

8)

41

,74

7

(2

0,7

38

)

2,4

64

16

,88

6

(8

18

,80

9)

Provision for Tax

- - - -

165

- - - - - - -

165

Net Income/(Loss) Before Adjustments

(7

59

,30

4)

(4

,13

4)

11

,14

9

(3

5,5

18

)

(2

4,8

76

)

(9

,07

2)

(3

7,0

92

)

4,2

22

(4

,70

8)

41

,74

7

(2

0,7

38

)

2,4

64

16

,88

6

(8

18

,97

4)








CONTINUED FROM PAGE 47>

MFIK

F*

SA

FW

CO

DA

ME

N

CS

C

CW

CD

AS

A-P

BR

AC

-P

JWS

Ak

hu

wa

t

OP

P

Asa

sah

Su

ng

i

OR

IX

Su

b*

Adjusted Financial Expense on Borrowings

-

2,0

15 -

340

-

3,1

98 -

315

- - - -

3,2

00

9,0

68

149

,389

5,4

20

7,9

82

8,3

88

3,0

13

3,6

24

(2,8

11)

2,5

71

15,

715

32,

041

(5,9

44)

5,8

60

3,2

04

228

,453

Less: Total Adjustment Expense

14

9,3

89

7,4

35

7,9

82

8,7

28

3,0

13

6,8

22

(2

,81

1)

2,8

86

15

,71

5

32

,04

1

(5

,94

4)

5,8

60

6,4

04

23

7,5

20

Net Income/(Loss) After

Adjustments

(9

08

,69

3)

(1

1,5

69

)

3,1

66

(4

4,2

46

)

(2

7,8

89

)

(1

5,8

94

)

(3

4,2

81

)

1,3

37

(2

0,4

23

)

9,7

07

(1

4,7

94

)

(3

,39

6)

10

,48

1

(1,0

56

,49

4)

Average Total Assets

4,5

11,7

84

213

,458

492

,679

284

,126

246

,411

84,

420

593

,520

128

,838

100

,950

348

,027

363

,500

34,

662

258

,170

7,6

60,5

48

Average Total Equity

1,2

10,4

18

45,

321

61,

692

40,

396

16,

170

13,

993

(32,

801)

22,

738

98,

826

187

,331

(19,

020)

31,

262

26,

974

1,7

03,3

00

Weighted

Average

Adjusted RoA (%) -20.

1

-5.4

0.6

-15.

6

-11.

3

-18.

8

-5.8

1.0

-20.

2

2.8

-4.1

-9.8

4.1

-13.

8

Adjusted RoE (%) -75.

1

-25.

5

5.1

-109

.5

-172

.5

-113

.6

-104

.5

5.9

-20.

7

5.2

-77.

8

10.9

38.9

-62.

0

62.0

92.7

109.

5

66.6

68.8

75.3

77.6

114.

5

70.5

194.

4

83.4

165.

1

140.

7

70.9

57.6

82.0

102.

5

61.5

66.3

63.3

78.9

104.

2

35.5

112.

7

87.5

64.8

121.

9

65.4

* KF numbers for 2008


Financial Self Sufficiency (FSS) (%)



49







RSP


Revenue from Loan Portfolio 1,341,611 137,302 25,161 66,096 1,570,170

Revenue from Other Financial Assets 112,047 89,862 - 78,748 280,658

Revenue from Financial Services 186,251 - - 5,768 192,019

Total Financial Revenue 1,639,910 227,164 25,161 150,612 2,042,847

Less : Financial Expense 655,570 112,186 6,324 31,362 805,442

Gross Financial Margin 984,340 114,978 18,837 119,250 1,237,405

Less: Loan Loss Provision Expense 25,155 13,459 9,074 18,469 66,157

Net Financial Margin 959,185 101,519 9,762 100,781 1,171,248

Personnel Expense 409,794 30,735 11,292 32,343 484,164

Admin Expense 250,475 26,758 12,511 28,363 318,107

Less: Operating Expense 660,270 57,493 23,802 60,706 802,271

Net Income Before Tax 298,915 44,026 (14,040) 40,076 368,977

Net Income/(Loss) Before Adjustments 298,915 44,026 (14,040) 40,076 368,977

Adjusted Financial Expense on Borrowings - - - 809 809

135,241 96,339 - 405 231,985

Less: Total Adjustment Expense 135,241 96,339 - 1,214 232,794

Net Income/(Loss) After Adjustments 163,674 (52,313) (14,040) 38,862 136,183

Average Total Assets 7,308,102 1,918,453 94,198 495,632 9,816,384

Average Total Equity 808,669 591,433 (2,071) 43,579 1,441,609

Weighted

Average

Adjusted RoA (%) 2.2 -2.7 -14.9 7.8 1.4

Adjusted RoE (%) 20.2 -8.8 678.0 -89.2 9.4

122.3 124.0 64.2 136.3 122.0

111.1 81.3 64.2 134.8 107.1 Financial Self Sufficiency (FSS) (%)










OPERATING INCOME

MFB


Revenue from Loan Portfolio 824,491 347,393 37,443 804,264 2,129 26,814 129,472 2,172,006

Total Financial Revenue 1,589,451 580,323 82,119 1,082,140 11,054 53,048 212,812 3,610,947

Adjusted Net Operating

Income/(Loss) (159,546) (320,897) (88,997) (44,097) (21,532) (13,655) (315,512) (964,237)


Gross Loan Portfolio

(Opening Balance)3,093,336 906,852 125,241 2,111,403 28,235 68,794 552,580 6,886,440


(Closing Balance)3,630,205 1,539,841 100,571 2,778,352 884 92,074 424,125 8,566,051

Average Gross Loan Portfolio 3,361,770 1,223,347 112,906 2,444,877 14,559 80,434 488,352 7,726,246

20.8 20.8 20.8 20.8 20.8 20.8 20.8 20.8

Weighted

Average

Financial Revenue Ratio (Total

Financial Revenue-to-Average Total

Assets) (%)

23.9 22.8 13.9 21.3 14.7 19.5 17.8 22.0

-10.0 -55.3 -108.4 -4.1 -194.8 -25.7 -148.3 -26.7

Yield on Gross Portfolio

(nominal) (%)24.5 28.4 33.2 32.9 14.6 33.3 26.5 28.1

Yield on Gross Portfolio (real) (%) 3.1 6.3 10.2 10.0 -5.1 10.4 4.7 6.1

* Source: http://www.sbp.org.pk/ecodata/MPM.pdf

Annual Inflation Rate (2009)* (%)

Adjusted Profit Margin (Adjusted

Profit/(loss)-to-Financial

Revenue) (%)


51







MFIK

F**

SA

FW

CO

DA

ME

N

CS

C

CW

CD

AS

A-P

BR

AC

-P

JWS

Ak

hu

wa

t

OP

P

Asa

sah

Su

ng

i

OR

IX

Su

b**

Revenue from Loan

Portfolio

1,0

75,3

68

45,

059

107

,267

50,

961

39,

325

25,

885

106

,317

26,

462 -

52,

688

100

,013

4,3

88

52,

107

1,6

85,8

41

Total Financial

Revenue

1,2

36,7

77

52,

776

128

,215

70,

819

54,

955

27,

120

128

,384

33,

306

11,

256

85,

987

103

,905

6,2

49

58,

324

1,9

98,0

73

Adjusted Net

Operating Income/(Loss)

(908

,693

)

(11,

569)

3,1

66

(44,

246)

(27,

889)

(15,

730)

(34,

281)

1,3

37

(20,

423)

9,7

07

(14,

794)

(3,3

96)

10,

481

(1,0

56,3

29)


4,5

11,7

84

213

,458

492

,679

284

,126

246

,411

84,

420

593

,520

128

,838

100

,950

348

,027

363

,500

34,

662

258

,170

7,6

60,5

48


(Opening Balance)

3,1

78,7

84

141

,602

325,

383

153,

311

116,

335

10,8

65

229,

235

60,2

23

69,

573 -

225

,768

8,7

50

156

,498

4,6

76,3

27


(Closing Balance)

3,4

83,1

49

212

,928

422

,704

197

,086

153

,196

120

,300

363

,183

103

,747

95,

711

348

,606

260

,611

21,

333

195

,332

5,9

77,8

87

Average Gross Loan

Portfolio

3,3

30,9

67

177

,265

374

,043

175

,199

134

,765

65,

583

296

,209

81,

985

82,

642

174

,303

243

,190

15,

041

175

,915

5,3

27,1

07

20.8

20.8

20.8

20.8

20.8

20.8

20.8

20.8

20.8

20.8

20.8

20.8

20.8

20.8

Weighted

Average

Financial Revenue Ratio

(Total Financial Revenue-to-

Average Total Assets) (%)

27.4

24.7

26.0

24.9

22.3

32.1

21.6

25.9

11.2

24.7

28.6

18.0

22.6

26.1

-73.

5

-21.

9

2.5

-62.

5

-50.

7

-58.

0

-26.

7

4.0

-181

.4

11.3

-14.

2

-38.

8

6.7

-52.

9

Yield on Gross

Portfolio (nominal) (%)

32.3

25.4

28.7

29.1

29.2

39.5

35.9

32.3

0.0

30.2

41.1

29.2

29.6

31.6

Yield on Gross

Portfolio (real) (%)

9.5

3.8

6.5

6.9

6.9

15.5

12.5

9.5

-17.

2

7.8

16.8

58.2

89.0

9.0

* Source: http://www.sbp.org.pk/ecodata/MPM.pdf** KF numbers for 2008

Annual Inflation

Rate (2009)* (%)

Adjusted Profit Margin

(Adjusted Profit/(loss)-to-

Financial Revenue) (%)








RSP


Revenue from Loan Portfolio 1,341,611 137,302 25,161 66,096 1,570,170

Total Financial Revenue 1,639,910 227,164 25,161 150,612 2,042,847

Adjusted Net Operating Income/(Loss) 163,674 (52,313) (14,040) 38,862 136,183


Gross Loan Portfolio (Opening Balance) 7,354,447 653,628 71,965 316,139 8,396,179

Gross Loan Portfolio (Closing Balance) 4,601,408 769,620 32,451 293,579 5,697,057

Average Gross Loan Portfolio 5,977,927 711,624 52,208 304,859 7,046,618

20.8 20.8 20.8 20.8 20.8

Weighted

Average

Financial Revenue Ratio (Total Financial

Revenue-to-Average Total Assets) (%)22.4 11.8 26.7 30.4 20.8

10.0 -23.0 -55.8 25.8 6.7

Yield on Gross Portfolio (nominal) (%) 22.4 19.3 48.2 21.7 22.3

Yield on Gross Portfolio (real) (%) 1.4 -1.2 22.7 0.7 1.2

*Source: http://www.sbp.org.pk/ecodata/MPM.pdf

Annual Inflation Rate (2009)* (%)

Adjusted Profit Margin (Adjusted Profit/

(loss)-to-Financial Revenue) (%)


53







OPERATING EXPENSE

MFB

KBLTMFB POMFB FMFB RMFB NMFB KMFB Sub

Adjusted Total Expense 1,748,998 901,220 171,116 1,126,237 32,586 66,703 528,324 4,575,183

Adjusted Financial Expense 669,386 337,767 80,814 484,403 9,366 18,575 150,952 1,751,263

Adjusted Loan Loss

Provision Expense 95,281 9,331 4,117 40,752 9,807 2,980 81,768 244,036

Adjusted Operating Expense 984,331 554,122 86,185 601,081 13,412 45,148 295,604 2,579,884

Adjustment Expense 412,511 222,623 80,779 76,650 8,352 14,165 120,592 935,672


Weighted

Average

Adjusted Total Expense-to-

Average Total Assets (%)26.4 35.4 29.0 22.2 43.4 24.5 44.2 27.9

Adjusted Financial Expense-to-



Expense-to-Average Total Assets (%)1.4 0.4 0.7 0.8 13.1 1.1 6.8 1.5

Adjusted Operating Expense-to-


Adjusted Personnel Expense (%) 8.4 12.5 6.6 6.1 6.4 9.0 12.4 8.6

Adjusted Admin Expense (%) 6.4 9.2 8.0 5.8 11.5 7.5 12.3 7.2

Adjustment Expense-to-Average

Total Assets (%)6.2 8.7 13.7 1.5 11.1 5.2 10.1 5.7








MFI

KF

*

SA

FW

CO

DA

ME

N

CS

C

CW

CD

AS

A-P

BR

AC

-P

JWS

Ak

hu

wa

t

OP

P

Asa

sah

Su

ng

i

OR

IX

Su

b*

Adjusted Total Expense

2,1

45,4

71

64,

345

125

,049

115

,065

82,

844

42,

849

162

,665

31,

969

31,

679

76,

281

118

,698

9,6

45

47,

843

3,0

54,4

02

Adjusted Financial Expense

512

,186

16,

568

45,

974

26,

240

23,

243

8,6

01

28,

099

10,

272

15,

715

43,

013

43,

469

5,8

60

20,

081

799

,322

Adjusted Loan Loss Provision Expense

1,2

01,4

55

2,6

38

18,

467

35,

198

22,

516

15

12,

616

1,1

80 -

2,0

65

2,8

29

665

302

1,2

99,9

46

Adjusted Operating Expense

431

,830

45,

139

60,

608

53,

627

37,

086

34,

233

121

,950

20,

517

15,

964

31,

202

72,

400

3,1

19

27,

459

955

,135

Adjustment Expense

149

,389

7,4

35

7,9

82

8,7

28

3,0

13

6,8

22

(2,8

11)

2,8

86

15,

715

32,

041

(5,9

44)

5,8

60

6,4

04

237

,520


4,51

1,78

4

213,

458

492,

679

284,

126

246,

411

84,4

20

593,

520

128,

838

100,

950

348,

027

363,

500

34,6

62

258,

170

7,6

60,5

48

Weighted

Average

Adjusted Total Expense-to-

Average Total Assets (%)

47.6

30.1

25.4

40.5

33.6

50.8

27.4

24.8

31.4

21.9

32.7

27.8

18.5

39.9

Adjusted Financial Expense-

to-Average Total Assets (%) 11.4

7.8

9.3

9.2

9.4

10.2

4.7

8.0

15.6

12.4

12.0

16.9

7.8

10.4

Adjusted Loan Loss Provision Expense-to-

Average Total Assets (%) 26.6

1.2

3.7

12.4

9.1

0.0

2.1

0.9

0.0

0.6

0.8

1.9

0.1

17.0

Adjusted Operating Expense-to-Average

Total Assets (%)

9.6

21.1

12.3

18.9

15.1

40.6

20.5

15.9

15.8

9.0

19.9

9.0

10.6

12.5

Adjusted Personnel Expense (%) 6.5

11.1

7.8

11.6

9.4

22.5

13.7

9.1

9.8

1.5

11.1

3.2

4.8

7.7

Adjusted Admin Expense (%) 3.1

10.1

4.5

7.3

5.7

18.0

6.9

6.9

6.0

7.5

8.9

5.8

5.8

4.7

Adjustment Expense-to-Average Total

Assets (%)

3.3

3.5

1.6

3.1

1.2

8.1

-0.5

2.2

15.6

9.2

-1.6

16.9

2.5

3.1



55







RSP


Adjusted Total Expense 1,476,236 279,477 39,200 111,750 1,906,664

Adjusted Financial Expense 790,811 208,525 6,324 32,576 1,038,236

Adjusted Loan Loss Provision Expense 25,155 13,459 9,074 18,469 66,157

Adjusted Operating Expense 660,270 57,493 23,802 60,706 802,271

Adjustment Expense 135,241 96,339 - 1,214 232,794


Weighted

Average

Adjusted Total Expense-to-Average

Total Assets (%)20.2 14.6 41.6 22.5 19.4

Adjusted Financial Expense-

to-Average Total Assets (%)10.8 10.9 6.7 6.6 10.6


Expense-to-Average Total Assets (%) 0.3 0.7 9.6 3.7 0.7

Adjusted Operating Expense-to-Average

Total Assets (%)9.0 3.0 25.3 12.2 8.2

Adjusted Personnel Expense (%) 5.6 1.6 12.0 6.5 4.9

Adjusted Admin Expense (%) 3.4 1.4 13.3 5.7 3.2

Adjustment Expense-to-Average

Total Assets (%)1.9 5.0 0.0 0.2 2.4

OPERATING EFFICIENCY

MFB


Adjusted Operating

Expense (PKR 000) 984,331 554,122 86,185 601,081 13,412 45,148 295,604 2,579,884

Adjusted Personnel

Expense (PKR 000) 559,414 318,565 39,204 308,186 4,797 24,608 148,748 1,403,521

Average Gross Loan

Portfolio (PKR 000) 3,361,770 1,223,347 112,906 2,444,877 14,559 80,434 488,352 7,726,246

Average Number of Active

Borrowers 321,136 70,671 9,473 183,992 827 3,168 16,207 605,472

Average Number of

Active Loans 321,136 70,671 9,473 183,992 827 3,168 16,207 605,472

Weighted

Average

Adjusted Operating

Expense-to-Average GLP (%)29.28 45.3 76.3 24.6 92.1 56.1 60.5 33.4

Adjusted Personnel

Expense-to-Average GLP (%)16.64 26.0 34.7 12.6 32.9 30.6 30.5 18.2

Average Salary/GDP per Capita 3.25 4.68 3.04 2.34 2.07 3.04 3.90 3.24

Adjusted Cost per Borrower (PKR) 3,065 7,841 9,098 3,267 16,228 14,251 18,240 4,261

Adjusted Cost per Loan (PKR) 3,065 7,841 9,098 3,267 16,228 14,251 18,240 4,261









57







MFI

KF

*

SA

FW

CO

DA

ME

N

CS

C

CW

CD

AS

A-P

BR

AC

-P

JWS

Ak

hu

wa

t

OP

P

Asa

sah

Su

ng

i

OR

IX

Su

b*

Adjusted Operating Expense (PKR 000)

431

,830

45,

139

60,

608

53,

627

37,

086

34,

233

121

,950

20,

517

15,

964

31,

202

72,

400

3,1

19

27,

459

955

,135

Adjusted Personnel Expense (PKR 000)

293

,263

23,

654

38,

280

33,

008

23,

040

19,

000

81,

067

11,

663

9,9

12

5,1

41

40,

200

1,1

14

12,

413

591

,756

Average Gross Loan Portfolio (PKR 000)

3,3

30,9

67

177

,265

374

,043

175

,199

134

,765

65,

583

296

,209

81,

985

82,

642

174

,303

243

,190

15,

041

175

,915

5,3

27,1

07

Average Number of Active Borrowers

307

,457

20,

737

40,

905

16,

141

7,3

36

9,7

13

36,

281

7,5

17

11,

703

28,

281

28,

899

1,2

67

15,

752

531

,985

Average Number of Active Loans

307

,457

20,

737

40,

905

16,

141

7,3

36

9,7

13

36,

281

7,5

17

11,

703

28,

281

28,

899

1,2

67

15,

752

531

,985

Weighted

Average

Adjusted Operating Expense-

to-Average GLP (%)

13.0

25.5

16.2

30.6

27.5

52.2

41.2

25.0

19.3

17.9

29.8

20.7

15.6

17.9

Adjusted Personnel Expense-

to-Average GLP (%)

8.8

13.3

10.2

18.8

17.1

29.0

27.4

14.2

12.0

2.9

16.5

7.4

7.1

11.1

Average Salary/GDP per Capita 1.7

8

1.61

2.20

2.17

1.59

0.95

1.1

4

2.38

1.27

0.52

2.4

5

0.42

2.9

5

1.6

3 Adjusted Cost per Borrower (PKR)

1,40

5

2,17

7

1,48

2

3,32

3

5,05

5

3,52

4

3,36

1

2,73

0

1,36

4

1,10

3

2,50

5

2,46

3

1,74

3

1,79

5

Adjusted Cost per Loan (PKR)

1,40

5

2,17

7

1,48

2

3,32

3

5,05

5

3,52

4

3,36

1

2,73

0

1,36

4

1,10

3

2,50

5

2,46

3

1,74

3

1,79

5









RSP


Adjusted Operating Expense (PKR 000) 660,270 57,493 23,802 60,706 802,271

Adjusted Personnel Expense (PKR 000) 409,794 30,735 11,292 32,343 484,164

Average Gross Loan Portfolio (PKR 000) 5,977,927 711,624 52,208 304,859 7,046,618

Average Number of Active Borrowers 482,916 77,963 7,218 25,370 593,467

Average Number of Active Loans 482,916 77,963 7,218 25,370 593,467

Weighted

Average

Adjusted Operating Expense-

to-Average GLP (%)

11.0 8.1 45.6 19.9 11.4

Adjusted Personnel Expense-

to-Average GLP (%)

6.9 4.3 21.6 10.6 6.9

Average Salary/GDP per Capita 1.58 0.39 2.98 1.65 1.34

Adjusted Cost per Borrower (PKR) 1,367 737 3,298 2,393 1,352

Adjusted Cost per Loan (PKR) 1,367 737 3,298 2,393 1,352


59







PRODUCTIVITY

MFB


Number of Active Loans 329,421 70,671 8,092 199,792 52 4,000 14,192 626,220

Number of Active Depositors 74,995 122,538 15,971 189,878 5,178 11,453 43,348 463,361

Number of Deposit Accounts 74,995 122,538 15,971 189,878 5,178 11,453 43,348 463,361

2,002 791 150 1,531 27 94 443 5,038

647 544 37 1,005 6 48 218 2,505

Weighted

Average

165 89 54 130 2 43 32 124

165 89 54 130 2 43 32 124

509 130 219 199 9 83 65 250

509 130 219 199 9 83 65 250

37 155 106 124 192 122 98 92

37 155 106 124 192 122 98 92

Personnel Allocation Ratio (%) 32.3 68.8 24.7 65.6 22.2 51.1 49.2 49.7

Total Staff

Total Loan Officers

Borrowers per Staff

Loans per Staff



Savers per Staff

Saving Accounts per Staff








MFI

KF

*

SA

FW

CO

DA

ME

N

CS

C

CW

CD

AS

A-P

BR

AC

-P

JWS

Ak

hu

wa

t

OP

P

Asa

sah

Su

ng

i

OR

IX

Su

b*

Number of Active Loans

319

,517

23,

430

44,

912

15,

241

8,9

10

18,

283

45,

011

9,3

58

15,

013

34,

874

34,

007

2,1

21

16,

326

587

,003

1,9

17

171

202

177

168

233

826

57

91

116

191

31

49

4,2

29

950

65

98

75

56

141

495

24

67

18

78

24 33

2,1

24

Weighted

Average

167

137

222 86 53 78 54 164

165

301

178 68 333

139

167

137

222 86 53 78 54 164

165

301

178 68 333

139

336

360

458

203

159

130 91 390

224

1,93

7

436 88 495

276

336

360

458

203

159

130 91 390

224

1,93

7

436 88 495

276

Personnel Allocation Ratio (%) 49.6

38.0

48.5

42.4

33.3

60.5

59.9

42.1

73.6

15.5

40.8

77.4

67.3

50.2


RSP


Number of Active Loans 399,969 81,754 7,218 27,010 515,951

3,019 916 44 228 4,207

2,389 448 29 92 2,958

Weighted

Average

132 89 164 118 123

132 89 164 118 123

167 182 249 294 174

167 182 249 294 174

Personnel Allocation Ratio (%) 79.1 48.9 65.9 40.4 70.3

Total Staff

Total Loan Officers

Borrowers per Staff

Loans per Staff



Total Staff

Total Loan Officers

Borrowers per Staff

Loans per Staff




61







RISK

MFB


Portfolio at Risk > 30 days 24,717 13,588 4,351 23,828 85 15,589 4,383 86,541

Portfolio at Risk > 90 days 25,617 4,824 3,290 14,163 485 3,737 12,761 64,877

Adjusted Loan Loss Reserve 74,257 26,594 3,960 52,790 393 4,182 15,333 177,508

101,423 1,182 4,961 31,614 19,131 4,701 76,266 239,277

Gross Loan Portfolio 3,630,205 1,539,841 100,571 2,778,352 884 92,074 424,125 8,566,051

Average Gross Loan Portfolio 3,361,770 1,223,347 112,906 2,444,877 14,559 80,434 488,352 7,726,246

Weighted

Average

Portfolio at Risk(>30)-to-GLP (%) 0.7 0.9 4.3 0.9 9.6 16.9 1.0 1.0

Portfolio at Risk(>90)-to-GLP (%) 0.7 0.3 3.3 0.5 54.9 4.1 3.0 0.8

3.0 0.1 4.4 1.3 131.4 5.8 15.6 3.1

Risk Coverage Ratio (Adjusted Loan

Loss Reserve-to-Portfolio at

Risk>30days) (%)

300.4 195.7 91.0 221.5 460.8 26.8 349.8 205.1

Write Off

Write Off-to-Average GLP (%)








MFI

KF

*

SA

FW

CO

DA

ME

N

CS

C

CW

CD

AS

A-P

BR

AC

-P

JWS

Ak

hu

wa

t

OP

P

Asa

sah

Su

ng

i

OR

IX

Su

b*

Portfolio at Risk > 30 days

151

,184

346

7,4

23

7,9

14

18,

436

120

3,9

21 - -

691

704

-

3,73

0

194

,470

Portfolio at Risk > 90 days

12,

019

8,0

33

14,

217

44,

633

33,

091 7

2,2

46 - -

97

44,

574 -

1,83

0

160

,747

Adjusted Loan Loss Reserve

1,2

67,8

65

2,6

38

12,

460

10,

415

11,

189

15

12,

616 - - -

7,3

45

665

302

1,3

25,5

10

31,

433

4,4

59

6,3

24

28,

988

18,

826 -

6,0

67 - - - -

207

0

96,

303


3,4

83,1

49

212

,928

422

,704

197

,086

153

,196

120

,300

363

,183

103

,747

95,

711

348

,606

260

,611

21,

333

195

,332

5,9

77,8

87

Average Gross Loan Portfolio

3,3

30,9

67

177

,265

374

,043

175

,199

134

,765

65,

583

296

,209

81,

985

82,

642

174

,303

243

,190

15,

041

175

,915

5,3

27,1

07

Weighted

Average

Portfolio at Risk(>30)-to-GLP (%) 4.3

0.2

1.8

4.0

12.0

0.1

1.1 - -

0.2

0.3 -

1.9

3.3

Portfolio at Risk(>90)-to-GLP (%) 0.3

3.8

3.4

22.6

21.6

0.0

0.6 - -

0.0

17.1

-

0.9

2.7

0.9

2.5

1.7

16.5

14.0

0.0

2.0 - -

0.0

0.0

1.4

0.0

1.8

Risk Coverage Ratio ( Adjusted Loan Loss

Reserve-to-Portfolio at Risk>30days) (%) 838.

6

762.

3

167.

9

131.

6

60.7

12.5

321.

7 - -

0.0

1042

.8 -

8.1

681.

6


Write Off



63







RSP


Portfolio at Risk > 30 days 84,481 2,557 2,343 4,877 94,259

Portfolio at Risk > 90 days 0 1,150 6,731 10,119 18,000

Adjusted Loan Loss Reserve 154,047 74,176 9,074 5,333 242,631

255,299 0 8,163 34,812 298,274

Gross Loan Portfolio 4,601,408 769,620 32,451 293,579 5,697,057

Average Gross Loan Portfolio 5,977,927 711,624 52,208 304,859 7,046,618

Weighted

Average

Portfolio at Risk(>30)-to-GLP (%) 1.8 0.3 7.2 1.7 1.7

Portfolio at Risk(>90)-to-GLP (%) 0.0 0.1 20.7 3.4 0.3

4.3 0.0 15.6 11.4 4.2

Risk Coverage Ratio ( Adjusted Loan Loss

Reserve-to-Portfolio at Risk>30days) (%)182.3 2900.9 387.2 109.4 257.4

Write Off









Annex B: Regional Regional Microfinance Industry Benchmarks [2008]Regional Benchmarks (2008)

Africa

(Sub

Sahara)

Eastern

Europe &

Central Asia

Latin

America

Middle East

& North

Africa

South

Asia

All

Regions

Outreach

Number of MFI 275 194 292 384 60 190 1395

Number of Borrowers (millions) 7.5 14.6 3.0 14.1 2.5 44.4 86.2

Number of Voluntary Savers (millions) 18.0 25.7 5.2 14.4 0.1 32.4 95.8

Depth of Outreach

Average Loan Balance per Borrower ($) 626 684 4,008 1,341 746 912 1,588

Average Loan Balance per

Borrower (% of GNI per Capita)138 48 155 47 44 115 97

Balance Sheet

Gross Loan Portfolio ($ million) 3,335 8,185 10,065 16,739 1,178 4,697 44,199

Voluntary Savings ($ million) 1,890 6,457 899 6,674 0 203 16,124

Total Assets ($ million) 5,512 12,030 13,366 21,100 1,557 7,000 60,565

Total Equity ($ million) 1,173 1,340 2,106 3,441 527 1,348 9,936

Operating Expense

(% Avg. Gross Loan Portfolio)44 24 19 39 25 18 30

Cost per Borrower ($) 187 102 610 294 121 283 301

Cost per Borrower (% GNI per Capita) 41 8 24 9 8 32 21

ROA - avg. -3.0 1.5 3.1 0.7 1.1 -1.4 0.4

ROA - median 1.1 2.8 2.9 2.3 2.9 1.0 2.1

ROE - avg. -9.0 4.1 16.9 -0.5 -6.9 -4.5 1.4

ROE - median 3.6 13.9 11.3 8.8 4.1 8.7 8.9

Portfolio Quality

PAR > 30 days

(% of Avg. Gross Loan Portfolio)9.3 6.7 4.4 7.1 6.4 5.6 6.7

2.2 1.1 0.6 2.6 2.0 1.1 1.1

Updated on December 31, 2009Source: Reproduced from document prepared by The MIX, Microfinance at a Glance - 2008.

Efficiency

East Asia

&

Pacific

Profitability

Write-off Ratio

(% of Avg. Gross Loan Portfolio)


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Annex C: Sources of Data [2009]

and Disclosures







Reporting MFPsPrior to Obtaining PMN Membership

Category MFP

Reporting RecordAnnual Reporting

Period

2009 2008 2007 2006 Start End

MFBs

Jan Dec

Khushhali Bank Ltd. (KBL) Jan Dec

Network MicroFinance Bank Ltd. (NMFB) Jan Dec

Jan Dec

Jan Dec

Jan Dec

The First MicroFinanceBank Ltd. (FMFB) Jan Dec

MFIs

Akhuwat X Jul Jun

ASA-Pakistan Jan Dec

Asasah Jul Jun

BRAC-Pakistan X Jan Dec

Community Support Concern (CSC) Jan Dec

Centre for Women Cooperative Development (CWCD) X X Jan Dec

Development Action for Mobilization and Emancipation (DAMEN) Jan Dec

Jinnah Welfare Society (JWS) Jul Jun

Kashf Foundation (KF) X Jan Dec

Orangi Pilot Project (OPP) Jul Jun

Rural Community Development Society (RCDS) X Jan Dec

Sindh Agricultural and Forestry Workers Cooperative Organization (SAFWCO) Jul Jun

ORIX Leasing Pakistan (OLP) Jul Jun

Sungi Development Foundation (SDF) X X Jan Dec

RSPs

National Rural Support Programme (NRSP) Jul Jun

Punjab Rural Support Programme (PRSP) Jul Jun

Sarhad Rural Support Programme (SRSP) X X Jul Jun

Thardeep Rural Development Programme (TRDP) Jul Jun

Kashf Microfinance Bank Ltd. (KMFB)

Pak-Oman Microfinance Bank Ltd. (POMFB)

Rozgar Microfinance Bank Ltd. (RMFB)

Tameer Microfinance Bank Ltd. (TMFB)








Microfinance Bank (MFB)

Kashf Microfinance Bank Ltd. (KMFB)

• KMFB provided PMN with its audited accounts. The numbers reported in the PMR match these reports.

• A.F. Ferguson audited KMFB’s annual accounts for the year ending December 31, 2009.

• The financial statements have been presented as per the requirements of the State Bank of Pakistan.

• All necessary adjustments to KMFB data have been made in order to remove subsidies. Adjustments were not made for loan loss provisioning expense, since KMFB is aggressive in its policies as required by the SBP. Adjustment for cost of borrowing was not made since there are no borrowings.

• KMFB prepares accounts on historical cost basis using the accrual system of accounting.

• Related party transactions have been appropriately disclosed in notes to the financial statements.

• Grant income has been properly disclosed in financial statements; there is disclosure on grants in notes to the financial statements.

• The following numbers have been taken from KMFB’s MIS: i). rural-urban clients; ii). Male-female clients; iii). Number of Staff; iv). Number of credit officers; and v). Number of branches (also available in audited accounts).

• As per CGAP requirements portfolio quality, sustainability/profitability and asset/liability management ratios are presented to represent a true and fair picture to stakeholders.

Khushhali Bank Ltd. (KBL)

• KBL provided PMN with its audited accounts. The numbers reported in the PMR match these reports.

• A.F. Ferguson audited KBL’s annual accounts for the year ending December 31, 2009.


• All necessary adjustments to KBL’s data have been made in order to remove subsidies. Adjustments were not made for loan loss provisioning expense, since KBL is aggressive in its policies, as required by the SBP.

• KBL prepares its accounts on historical cost basis using the accrual system of accounting.


• Grant income has been properly disclosed in financial statements; there is disclosure on grants in notes to the financial statements.

• The following numbers have been taken from KBL’s MIS: i). rural-urban clients; ii). Male-female clients; iii). Portfolio aging; iv). Number of Staff; v). Number of credit officers; and vi). Number of branches (also available in audited accounts).


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Network Microfinance Bank Ltd. (NMFB)

• NMFB provided PMN with its audited accounts. The figures reported in the PMR match these reports.

• Ernest & Young audited NMFB’s annual accounts for the year ending December 31, 2009.


• All necessary adjustments to NMFB data have been made in order to remove subsidies. Adjustment for cost of borrowing was not made since NMFB is only accessing commercial sources of borrowing. Similarly, no adjustment was made on loan loss provisioning expense; NMFB is aggressive in its policies, as required by the SBP.

• NMFB prepares accounts on historical cost basis using the accrual system of accounting.

• Data on distribution of clients in terms of the urban-rural mix is not available in the disclosures. However, given that NMFB only works in Karachi and its peri-urban areas, the actual numbers can be deduced accurately.


• Numbers taken from the bank’s MIS include: i). Male-female clients; ii). Portfolio Aging and Write-Offs (verified from audited accounts); iii). Number of Staff; iv). Number of credit officers; and v). Number of branches (also available in audited accounts).


Pak-Oman Microfinance Bank Ltd. (POMFB)

• POMFB reported its audited accounts in newspapers, from whence the accounts were obtained. The numbers reported in the PMR match these reports.

• A.F. Ferguson audited POMFB’s annual accounts for the year ending December 31, 2009.


• All necessary adjustments to the POMFB data have been made in order to remove subsidies. No adjustments were made to financial cost since POMFB was not using any concessional or commercial borrowing during the reported period. Similarly, no adjustment was made on loan loss provisioning expense; POMFB is aggressive in its policies, as required by the SBP.

• POMFB prepares accounts on historical cost basis using the accrual system of accounting.


• The grant income has been properly disclosed in financial statements as well as there is a proper disclosure on grants in notes to the financial statements.








• The following numbers have been taken from POMFB’s MIS: i). rural-urban clients; ii). Male-female clients; iii). Portfolio Aging and Write-Offs (verified from audited accounts); iv). Number of Staff; v). Number of credit officers; and vi). Number of branches (also available in audited accounts).


Rozgar Microfinance Bank Ltd. (RMFB)

• RMFB provided PMN with its audited accounts. The figures reported in the PMR match these reports.

• RSM International audited RMFB’s annual accounts for the year ending December 31, 2009.


• All necessary adjustments to RMFB data have been made in order to remove subsidies. No adjustments were made to financial cost since RMFB was not using any concessional or commercial borrowing during the reported period. Similarly, no adjustment was made on loan loss provisioning expense; RMFB is aggressive in its policies, as required by the SBP.

• RMFB prepares accounts on historical cost basis using the accrual system of accounting.



• Data on distribution of clients in terms of the urban-rural mix is not available in the disclosures. However, given that RMFB only works in Karachi and its peri-urban areas, the actual numbers can be deduced accurately.

• Numbers taken from the bank’s MIS include: i). Male-female clients; ii). Portfolio Aging and Write-Offs (verified from audited accounts).

• Data on the number of staff, proportion of credit officers, and the number of branches is available in the audited accounts.


Tameer Microfinance Bank Ltd. (TMFB)

• TMFB provided PMN with its audited accounts. The numbers reported in the PMR match these reports.

• KPMG audited TMFB’s annual accounts for the year ending December 31, 2009.


• All necessary adjustments to TMFB data have been made in order to remove subsidies. Adjustments were not made for loan loss provisioning expense, since TMFB is aggressive in its policies as required by the SBP. Adjustment for cost of


69







borrowing was not made since these are all commercial borrowings. TMFB prepares accounts on historical cost basis using the accrual system of accounting.



• The following numbers have been taken from TMFB’s MIS: i). rural-urban clients; ii). Male-female clients; iii). Number of Staff; iv). Number of credit officers; and v). Number of branches (also available in audited accounts).


The First Microfinance Bank Ltd. (FMFB)

• FMFB provided PMN with its audited accounts. The numbers reported in the PMR match these reports.

• KPMG audited FMFB’s annual accounts for the year ending December 31, 2009.


• All necessary adjustments to FMFB data have been made in order to remove subsidies. No adjustments were made to financial cost since FMFB was not using any concessional or commercial borrowing during the reported period. Similarly, no adjustment was made on loan loss provisioning expense; FMFB is aggressive in its policies, as required by the SBP.

• FMFB prepares accounts on historical cost basis using the accrual system of accounting.



• There is a proper disclosure regarding the loan portfolio and write-offs.

• The following numbers have been taken from FMFB’s MIS: i). rural-urban clients; ii). Male-female clients; iii). Portfolio Aging and Write-Offs (verified from audited accounts); iv). Number of Staff; v). Number of credit officers; and vi). Number of branches (also available in audited accounts).









Microfinance Institution (MFI)

Akhuwat

• Akhuwat provided PMN with its audited accounts. The numbers reported in the PMR match these reports.

• A.F.Ferguson & Co audited Akhuwat’s annual accounts for the year ending June 30, 2009.

• Akhuwat prepares its financial statements under the historical cost convention and in conformity with accepted accounting practices.

• There is proper disclosure on the balance sheet of loan portfolio, and loan loss provision; expense charged during the year is disclosed on the income statement.

ASA Pakistan Ltd. (ASA-P)

• ASA-P provided PMN with its audited accounts. The numbers reported in the PMR match these reports.

• KPMG audited ASA’s annual accounts for the year ending December 31, 2009.

• ASA prepares its financial statements under the historical cost convention and in conformity with accepted accounting practices.

• There is no adjustment on cost of borrowing since ASA’s actual cost is higher than the adjusted cost. Similarly, no adjustment was made to loan loss provisioning expense; ASA is aggressive in its policies.

• The following numbers have been taken from the organization’s MIS: i). rural-urban clients; and ii). Male-female clients; • There is proper disclosure on the balance sheet of loan portfolio, and loan loss provision; expense charged during the year is disclosed on the income statement.

• The related party transactions have been properly disclosed in notes to the financial statements.

• The grant income should be properly presented in financial statements as well as there should be a disclosure on grants in notes to the financial statements.


Asasah

• Asasah provided PMN with its audited accounts. The numbers reported in the PMR match these reports.

• Grant Thornton audited Asasah’s annual accounts for the year ending June 30, 2009.

• All necessary adjustments to Asasah’s data have been made in order to remove subsidies.

• The following adjustments were not made: i). Adjustment on inflation, since Asasah has negative equity; ii). Cost of borrowing, since Asasah’s actual cost is more than the adjusted cost; and iii). Loan loss provisioning expense, since


71







Asasah is aggressive in its provisioning policies.

• Asasah prepares its financial statements under the historical cost convention, in conformity with accepted accounting practices.

• There is proper disclosure on movement in portfolio, loan loss provisioning, and write-off.




BRAC-Pakistan

• BRAC-Pakistan provided PMN with its audited accounts.

• Ernst & Young audited the BRAC Pakistan. The financial year is from 1st January to 31st December.

• BRAC prepares its financial statements under the historical cost convention and in conformity with accepted accounting policies.

• BRAC is an integrated program, therefore, prepares separate financial accounts for all its programs. The audit is done and a consolidated audit report is prepared with clear differentiations of both revenue and costs for each program in light of accounting standards.

Community Support Concern (CSC)

• CSC provided PMN with its audited accounts. The numbers reported in the PMR match these reports.

• Rafaqat Mansha Mohsin Dossani Masoom & Co. audited the annual accounts of CSC for the year ending at 31st December 2009.

• All necessary adjustments to CSC data have been made in order to remove subsidies. There is no adjustment on cost of borrowing since CSC’s actual cost is higher then the adjusted cost. Similarly, no adjustment was made to loan loss provisioning expense; CSC is aggressive in its policies.

• CSC prepares its financial statements under the historical cost convention and in conformity with accepted accounting practices.

• The following numbers have been taken from the organization’s MIS: i). rural-urban clients; ii). Male-female clients; iii). Aging on number of loans and value of portfolio (not verifiable from audited accounts); iv). Number of Staff; v). Number of credit officers; and vi). Number of offices.










• The related party transactions should be presented in notes to the financial statements.


Centre for Women Cooperative Development (CWCD)

• CWCD provided PMN with its audited accounts. The numbers reported in the PMR match these reports.

• Ernest & Young audited the annual accounts for CWCD for the year ending at 31st December 2009.

• All necessary adjustments to CWCD data have been made in order to remove subsidies. There is no adjustment on cost of borrowing since CWCD’s actual cost is higher then the adjusted cost. Similarly, no adjustment was made to loan loss provisioning expense; CWCD is aggressive in its policies.

• CWCD prepares its financial statements under the historical cost convention and in conformity with accepted accounting practices.

• The following numbers have been taken from the organization’s MIS: i). rural-urban clients; ii). Male-female clients; iii). Aging on number of loans and value of portfolio (not verifiable from audited accounts); iv). Number of Staff; v). Number of credit officers; and vi). Number of offices.



• The related party transactions should be presented in notes to the financial statements.


Development Action for Mobilization and Emancipation (DAMEN)

• DAMEN provided PMN with its audited accounts. The numbers reported in the PMR match these reports.

• Ernest & Young audited the annual accounts for DAMEN for the year ending at 31st December 2009.

• Although DAMEN is a multi-dimensional development organization accounts for its microfinance function are kept separate.

• All necessary adjustments to DAMEN data have been made in order to remove subsidies. There is no adjustment on cost of borrowing since DAMEN’s actual cost is higher then the adjusted cost. Similarly, no adjustment was made to loan loss provisioning expense; DAMEN is aggressive in its policies.


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• DAMEN prepares its financial statements under the historical cost convention and in conformity with accepted accounting practices.


• The following numbers have been taken from the organization’s MIS: i). rural-urban clients; ii). Male-female clients; iii). Aging on number of loans and value of portfolio (verifiable from audited accounts); iv). Breakup for the number of loans doubtful; v). Number of Staff; vi). Number of credit officers

• DAMEN has proper disclosure in terms of movement in portfolio, loan loss provisioning and write off.

• The related party transactions should be presented in the notes to the financial statements.


Kashf Foundation (KF)

• KF did not provide audited accounts for PMR 2009 due to SECP’s requirement to shift year end from December to June.

Orangi Pilot Project (OPP)

• OPP provided PMN with its audited accounts. The numbers reported in the PMR match these reports.

• Hyder & Company audited OPP’s annual accounts for the year ending June 30, 2009.

• Although OPP is a multi-dimensional development organization, accounts for its microfinance function are kept separate.

• OPP prepares four separate sets of audited accounts for four different credit projects. It will be more useful if consoli dated audited accounts of the four projects are prepared.

• Revenue and expenditure are recognized on cash basis.

• All necessary adjustments to OPP data have been made in order to remove subsidies. There is no adjustment on cost of borrowing since OPP’s actual cost is higher then the adjusted cost. Similarly, no adjustment was made to loan loss provisioning expense; OPP is aggressive in its policies.

• OPP prepares its financial statements under the historical cost convention, in conformity with accepted accounting practices.

• The following numbers have not been reported by the organization: i). rural-urban clients; ii). Male-female clients; iii). Aging on number of loans and value of portfolio (not verifiable from audited accounts); iv). Loan Loss provisioning and Write-Off; v). Number of Staff; vi). Number of credit officers; and vii). Number of offices.

• There is proper disclosure on movement in loan portfolio; however there is no disclosure on loan loss provisioning and write-off.








• The grant income should be properly presented in financial statements as well as there should be a disclosure on grants in notes to the financial statements.

• The related party transactions should be properly disclosed in notes to the financial statements.


Rural Community Development Society (RCDS)

• RCDS did not provide audited accounts for PMR 2009.

Sindh Agricultural and Forestry Workers Coordinating Organization (SAFWCO)

• SAFWCO provided PMN with its audited accounts. The numbers reported in the PMR match these reports.

• Grant Thornton audited the annual accounts for DAMEN for the year ending June 30, 2009.

• Although SAFWCO is a multi-dimensional development organization accounts for its microfinance function are kept separate. • Income and expense are booked on an accrual basis.

• All necessary adjustments to SAFWCO data have been made in order to remove subsidies.

• SAFWCO prepares its financial statements under the historical cost convention and in conformity with accepted accounting practices using the principles of fund accounting.

• The following numbers have been taken from the organization’s MIS: i). rural-urban clients; ii). Male-female clients; iii). Aging on number of loans and value of portfolio (not verifiable from audited accounts); iv). Number of Staff; and v). Number of credit officers.

• There is proper disclosure on movement in portfolio, loan loss provisioning, and write-off. Figures on loan loss provisioning, OLP, and loan loss reserve are disclosed in the financial statements.




Jinnah Welfare Society (JWS)

• JWS provided PMN with its audited accounts. The numbers reported in the PMR match these reports.

• Ijaz Tabassum & Co. audited the annual accounts for JWS for the year ending at 30th June 2009.


75







• JWS prepares its financial statements under the historical cost convention and in conformity with accepted accounting practices. Revenue is recognized on receipt basis.

• The following numbers have been taken from the organization’s MIS: i). rural-urban clients; ii). Male-female clients; iii). Aging on number of loans and value of portfolio (verified from audited accounts); iv). Number of Staff; v). Number of credit officers; and vi). Number of branches (also available in audited accounts).

• There should be a proper disclosure on movement in portfolio, loan loss provisioning, and write-off.

• The related party transactions have been properly disclosed in notes to financial statements.


Orix Leasing Pakistan Ltd. (OLP)

• OLP has provided its audited accounts for the reporting period to PMN.

• OLP’s accounts were audited by KPMG (Taseer Hadi and Co.).

• However, given that OLP’s audited accounts do not disclose figures related to its Microfinance Division (MFD), the data reported in the PMR is not verifiable with audited accounts.

• OLP has separate staff and offices for microfinance. OLP’s MFD has provided data specific to its microfinance operations.

• OLP prepares its financial statements under the historical cost convention in using accrual system of accounting.

• Adjustments to the data have been made as per the PMN’s adjustment policies. These adjustments are in line with international practices being followed by The MIX. Sungi Development Foundation (SDF)

• SDF has provided PMN with its audited accounts for its entire organization.

• Ernst & Young, Pakistan conducted audit for SDF for financial year 2009. SDF’s financial year starts in January and ends on December 31st.

• SDF is an integrated program therefore; its audit reflects a consolidated picture. Necessary adjustments are made for the micro-credit program in light of information provided to PMN.

• SDF maintains separate financials for its microcredit program.








Rural Support Programme (RSP)

National Rural Support Programme (NRSP)

• NRSP has provided its audited accounts for the reporting period to PMN and the figures tally with the reported data.

• Ernest & Young audited the annual accounts for NRSP for the year ending June 30, 2009.

• NRSP has prepared separate financial statements for its microfinance operations for the first time.

• All necessary adjustments to NRSP data have been made in order to remove subsidies. Adjustments have also been made for financial cost, and inflation on equity. There is no adjustment on loan loss provisioning expense, since NRSP is aggressive in its policies and all loans > 90 days past due are 100% provisioned for.

• NRSP prepares its financial statements under the historical cost convention, in conformity with accepted accounting practices.

• Data on distribution of clients in terms of the urban-rural mix is not provided in the disclosures. However, given that NRSP has a separate program for urban areas and rural areas and their information is available separately, the disaggregation can be made quite accurately. The data on gender segregation was taken from the MIS and is not available in notes to the accounts.

• The ageing of portfolio in rupee value is not verifiable from audited accounts. Both ageing on the number of loans and value of portfolio was obtained from the MIS. There is proper disclosure on movement in portfolio and write-offs. It will be valuable if NRSP could provide separate disclosure on movement in provisioning of portfolio.

• Data on the number of total staff, loan officers and branches has been drawn from audited accounts.



Punjab Rural Support Programme (PRSP)

• PRSP has provided its audited accounts for the reporting period to PMN. • KPMG (Taseer Hadi and Co.) audited the annual accounts for PRSP for the year ending on June 30, 2009.

• Since PRSP is an integrated programme the following resource allocation process was followed:

a. The identified accounts for credit and non-credit functions were directly transferred to the respective programs

b. All other accounts that were common to the institution were transferred in the ratio of 60% to credit and 40% to non-credit functions

c. 60% of PRSP’s investment income was credited to its credit operations


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• All necessary adjustments to PRSP data have been made in order to remove subsidies. This also includes writing of all the GLP 360 days past due.

• PRSP prepares its financial statements under the historical cost convention, in conformity with accepted accounting practices.

• Data on distribution of clients in terms of the urban-rural mix is not provided in the disclosures. However, given that PRSP only works in rural Punjab the information can be accurately deduced. The data on gender segregation was taken from the MIS and is not available in notes to the accounts.

• The ageing of portfolio in rupee value is not verifiable from audited accounts. Both ageing on the number of loans and value of portfolio was obtained from the MIS. There is proper disclosure on movement in portfolio, loan loss provisioning and write-offs.

• Data on number of staff for PRSP as a whole is available. These numbers have been allocated between credit and non-credit functions of PRSP on the basis mentioned above. Data for credit officers has been obtained from the organization’s MIS.

• Grant income has been properly disclosed in financial statements; there is also proper disclosure on grants in notes to the financial statements.



Sarhad Rural Support Programme (SRSP)

• SRSP is a multi-dimensional development organization. It has provided its integrated audited accounts for the reporting period to PMN and has also extracted accounts for its microfinance operations from the consolidated audited statements.

• KPMG (Taseer Hadi and Co.) audited SRSP’s consolidated accounts.

• All necessary adjustments to SRSP data have been made in order to remove subsidies. Adjustments have also been made for financial cost, and inflation on equity. There is no adjustment on loan loss provisioning expense since SRSP is aggressive in its policies and all loans > 90 days past due are 100% provisioned for.

• SRSP prepares its financial statements under the historical cost convention in conformity with accepted accounting practices.

• The ageing of portfolio in rupee value is not verifiable from audited accounts. Both ageing on number of loans and value of portfolio was obtained from the MIS. However, there is proper disclosure on movement in portfolio and write-offs. It will be valuable if SRSP could provide separate disclosure on movement in provisioning of portfolio as suggested previously.

• Data on the number of total staff, loan officers and branches has been drawn from audited accounts.








Thardeep Rural Development Programme (TRDP)

• TRDP is a multi-dimensional development organization. It provided its audited accounts for its consolidated program (inclusive of credit and non-credit functions).

• TRDP’s consolidated accounts were audited by Grant Thornton.

• Since TRDP is an integrated programme; the following resource allocation process was followed:

a. From consolidated accounts for TRDP allocations for the organization’s microfinance function were made based upon assumptions provided by the management.

b. Income, expense and liability items only relevant to microfinance operations were separately identified. All other accounts that were common to the institution were transferred in the ratio of 55% to credit and 45% to non-credit functions.

c. Except for loan portfolio which was directly identifiable, other assets were also separated on the basis of 55% for microfinance and 45% for other functions.

• All necessary adjustments to TRDP data have been made in order to remove subsidies.

• TRDP prepares its financial statements under the historical cost convention in conformity with accepted accounting practices.

• The following numbers have been taken from the organization’s MIS: i). rural-urban clients; ii). Male-female clients; iii). Number of Staff; and iv). Number of credit officers.

• The ageing of portfolio (in rupee value and number of loans) is taken from audited accounts.


79

Annex D: Adjustments to Financial Data







Rationale

Adjustments to financial statements are made when doing benchmark analysis. Adjustments are made for two primary reasons:

• To give an institution a more accurate picture of its financial position, by accounting for factors unique to an MFP including the predominance of below-market-rate funding sources. Such factors distort an MFP’s on-going performance.

• To make the data of various MFPs comparable. Thus, adjustments are made in order to bring organizations operating under varying conditions and with varying levels of subsidy onto a level playing field.

The following adjustments are made to data used for the PMR:

A. Inflation Adjustment

Adjusts for the effect of inflation on an MFP’s equity and non-monetary assets i.e., fixed assets. Inflation decreases the real value of an MFP’s equity. Fixed assets are capable of tracking the increase in price levels; their monetary value is increased. The net loss (or gain) is considered to be a cost of funds, and results in a decrease (or increase) in net operating income.

Inflation Adjustment Revenue

Multiply the prior year’s Net Fixed Assets by the current year’s average annual inflation rate (Average Core CPI for current financial year)

NET FIXED ASSETS (PRIOR YEAR) X AVERAGE ANNUAL INFLATION RATE (CURRENT FINANCIAL YEAR)


Multiply the prior year’s Equity by the current year’s average annual inflation rate, (Average Core CPI for current year)

EQUITY (PRIOR YEAR) X AVERAGE ANNUAL INFLATION RATE (CURRENT YEAR)

Net Inflation Adjustment Expense

Subtract the Inflation Adjustment Revenue from the Inflation Adjustment Expense

INFLATION ADJUSTED REVENUE – INFLATION ADJUSTED EXPENSE

CALCULATION








B. Subsidies Adjustment

Adjustments for three types of subsidies are made:

• A cost-of-funds subsidy from loans at below-market rates

• Current year cash donations to fund portfolio and cover expenses

• In-kind subsidies, such as rent-free office space or the services of personnel not paid by the MFP and thus not reflected on its income statement.

Additionally, for multipurpose MFPs, an attempt to isolate the performance of the financial services program is made by removing the effect of any cross-subsidization. Cash donations flowing through the income statement are accounted for by reclassifying them below net operating income on the income statement. Thus, adjustments for cash donations are not made since these are handled through a direct reclassification on the income statement. This year no MFP has disclosed receipt of in-kind subsidy.

B.1 Cost-of-Funds Subsidy

The cost-of-funds adjustment reflects the impact of soft loans on the financial performance of an MFP. The analyst needs to calculate the difference between what an MFP actually paid in interest on its subsidized liabilities and a shadow market rate for each country. This difference represents the value of the subsidy, considered an additional financial expense. Only funds received as loans need to be adjusted. Client deposits are not adjusted. Only loans that have a finite (1-5 years) term length are adjusted. Subordinated debt and other quasi-equity accounts are reclassified as ‘other equity’ on the balance sheet.

The analyst must be careful in the choice of an appropriate shadow rate. The PMN has used an average lending rate on outstanding loans as reported by the State Bank of Pakistan on its website (8.94%) to make this adjustment.

B.2 Cash Donations

Funds donated to cover operational costs constitute a direct subsidy to an MFP. The value of the subsidy is therefore, equal to the amount donated to cover expenses incurred in the period reported. Some donations are provided to cover operating shortfall over a period greater than one year. Only the amount spent in the year is recorded on the income statement as revenue. Any amount still to be used in subsequent years appears as a liability on the balance sheet (deferred revenue). This occurs because theoretically if an MFP stopped operations in the middle of a multi-year operating grant, it would have to return the unused portion of the grant to the donor. The unused amount is therefore, considered as a liability.

Funds donated to pay for operations should be reported on the income statement separately from the revenue

1) Calculate average balance for all borrowings. Borrowings do not include deposits or “other liabilities”. If MFI has given an average balance, see if this is more appropriate to use; if not, calculate average from last year’s ending balance.

2) Multiply the average balance by the shadow market rate

3) Compare with the amount actually paid in interest and fees. If less “market” rate, impute the difference (market price minus Financial Expense paid on Borrowings) to the Subsidized Cost of Funds Adjustment Expense

CALCULATION


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generated by lending and investment activities. This practice is meant for accurately reporting the earned revenue of an MFP. Donated funds are deducted from revenue or net income prior to any financial performance analysis because they do not represent revenue earned from operations.

Note: Costs incurred to obtain donor funds (fundraising costs) should also be separated from operating expenses, because the benefit of receiving the funds is not included.

B.3 In-kind Subsidy

Imputed cost (book value) of donated/loaned-out vehicles, machinery and buildings need to be included in operating expenses. Expatriate staff salaries paid by donor or parent company, or other technical assistance, need to be accounted for. Here, imputed salaries are used instead of salaries actually received by them i.e., the salary range that a local hire would get for the same level of work-load/position is used.

Note: The analyst must use his/her judgment in deciding whether or not the in-kind donation represents a key input to the on-going operations of the MFP. An appropriate basis for valuation is important. This could include selecting a percentage of the total cost and attributing it to program expense. The percentage may be selected on the basis of sales proportion, management input, etc.

C. Loan Loss Provisioning

The PMN standardizes loan loss provisioning for MFPs to a minimum threshold or risk. MFPs vary tremendously in accounting for loan delinquency. Some count the entire loan balance as overdue the day a payment is missed. Others do not consider a loan delinquent until its full term has expired. Some MFPs write off bad debt within one year of the initial delinquency, while others never write off bad loans, thus carrying forward a default that they have little chance of ever recovering.

The analyst applies a standard loan loss provisioning to all MFPs and adjusts, where necessary, to bring them to the minimum threshold. In some cases, these adjustments may not be precise. Portfolio aging information may only be available on different aging scales.

Sum of in-kind subsidies by operating expense account, added to unadjusted numbers for each account

CALCULATION

Step 1: Multiply the PAR age categories by the following reserve factors: PAR up to 89 days no provisioning PAR 91 – 180 x 0.50 PAR 181 – 360 x 1.00 Renegotiated loans x 0.50

Step 2: Sum above reserve calculations. If sum is more than current reserves make calculated reserve new Loan Loss Reserve. If not, keep current reserves.

Step 3: Add the Unadjusted Loan Loss Provision Expense to the difference between the Adjusted Net Loan Portfolio and the Unadjusted Net Loan Portfolio. This is the Adjusted Loan Loss Provision Expense.

CALCULATION

AgeNumber of years an organization has been functioning as a microfinance provider (MFP).

Active Saving Account BalanceAverage balance of savings per account (not per depositor).

Adjustment ExpenseTotal adjustment cost related to inflation, subsidized cost of borrowing, loan loss provisioning and in-kind subsidies.

Adjusted Financial Expense RatioCalculated by using standardized ageing-of-portfolio technique. The principle of conservatism is used which is why loan loss provision in audited accounts is greater than the amount computed by the analyst.

Adjusted Loan Loss ReserveFormula: Adjusted Financial Expense Adjusted Average Total Assets

Adjusted Operating ExpenseAlso included in operating expense:

• Imputed cost (book value) of donated/loaned vehicles, machinery and buildings • Expatriate staff salaries paid by donor or parent company

• Other technical assistance paid for with donations

NOTE: imputed salaries should be used instead of salaries actually received by such persons. For imputation, the salary range that a local hire would get for the same level of work-load/position should be used. Judgment is used to decide whether or not the in-kind donation represents a key input to the on-going operations of the MFP

Formula: Personnel Expense + Administrative Expense

Adjusted Operating Expense RatioFormula: Adjusted Operating Expense Adjusted Average Total Assets

Adjusted Portfolio at Risk> (30, 60, 90 Days)Indicates the credit risk of a borrower above the specified number of days (30, 60, 90) past his/her due date for installment payment.

Formula: Outstanding balance, loans overdue> (30 or 90) Days Adjusted Gross Loan Portfolio








Annex E: Definitions of Terms and Indicators


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Adjusted Cost per Borrower In case of loan size differentials, generally operating expense ratio is lower (more efficient) for institutions with higher loan sizes, ceteris paribus. This indicator discounts the affect of loan size on efficient management of loan portfolio.

Formula: Adjusted Operating Expense Average Number of Active Borrowers

Adjusted Cost per Loan Formula: Adjusted Operating Expense Average Number of Active Loans

Adjustment Expense Ratio Formula: Net inflation, in kind, loan loss provision and subsidized cost-of-funds adjustment expense Adjusted Average Total Assets

Adjusted Financial Expense Includes actual cost of borrowing and shadow cost of subsidized funding.

Adjusted Financial Expense on Borrowing The cost-of-funds adjustment reflects the impact of soft loans on the financial performance of the institution. The analyst calculates the difference between what the MFP actually paid in interest on its subsidized liabilities and what it would have paid at a shadow market rate for each country. This difference represents the value of the subsidy, considered an additional financial expense.

Adjusted Loan Loss Provision Expense Ratio Formula: Adjusted Net Loan Loss Provision Expense Adjusted Average Total Assets

Adjusted Loan Loss Provision Expense Loan loss provision expense calculated with standardized ageing-of-portfolio technique. It is however ensured that if the actual loan loss provision expense is higher than the adjusted then the conservatism principle is followed.

Adjusted Operating Expense Includes actual operational expenses and in-kind subsidy adjustments.

Adjusted Operating Expense Ratio Indicates efficiency of an MFP’s loan portfolio.

Formula: Adjusted Operating Expense Average Gross Loan Portfolio

Adjusted Personnel Expense Includes actual personnel expenses (salaries and benefits), and in-kind subsidy adjustments.








Adjusted Personnel Expense RatioFormula: Adjusted Personnel Expense Average Gross Loan Portfolio

Adjusted Profit Margin Formula: Adjusted Net Operating Income Adjusted Financial Revenue

Adjusted Return on Assets Formula: Adjusted Net Operating Income, net of taxes Average Total Assets

Adjusted Return on EquityFormula: Adjusted Net Operating Income, net of taxes Average Total Equity

Adjusted Total ExpenseIncludes all actual and adjusted expenses related to operations, cost of borrowings, loan losses and inflation adjustment.

Adjusted Total Expense Ratio Formula: Adjusted (Financial Expense + Net Loan Loss Provision Expense + Operating Expense)Cost/Average Total Assets

Average Gross Loan Portfolio Average of opening and closing balance of Gross Loan Portfolio (GLP).

Average Loan Balance per Active Borrower Indicates average loan balance outstanding.

Average Loan Balance per Active Borrower to Per Capita Income Used to measure depth of outreach. The lower the ratio the more poverty-focused the MFP.

Average Number of Active Borrowers Average of opening and closing balance of active borrowers.

Formula: [Active Borrowers (Opening Balance) + Active Borrowers (Closing Balance)] 2

Average Number of Active Loans Average of opening and closing balance of active loans


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Average Outstanding BalanceIndicates the average balance of loans outstanding.

Formula: Adjusted Gross Loan Portfolio Adjusted Number of Loans Outstanding

Average Outstanding Balance to Per Capita IncomeMeasure of depth of outreach. The lower the ratio the more poverty-focused the MFP.

Formula: Average Outstanding Balance Per Capita Income

Average Saving Balance per SaverIndicates average amount of saving balance per saver.

Average Total AssetsAverage of opening and closing balance of total assets.

Average Total EquityAverage of opening and closing balance of total equity.

Borrowers per Loan OfficerA measure of loan officer productivity. Indicates the number of borrowers managed by a loan officer. Formula: Number of Active Borrowers Number of Loan Officers

Borrowers per Staff A measure of staff productivity. Indicates the number of borrowers managed by the staff on average.

Formula: Number of Active Borrowers Number of Total Personnel

Commercial Liabilities Principal balance of all borrowings, including overdraft accounts, for which the organization pays a nominal rate of interest that may be greater than or equal to the local commercial interest rate.

Commercial Liabilities-to-Gross Loan Portfolio RatioIndicates efficiency of an MFP’s loan portfolio.

Formula: All liabilities with "market" price Gross Loan Portfolio








Deposits (Voluntary Savings)Demand deposits from the general public and members (clients) held with the institution. These deposits are not conditional to accessing a current or future loan from the MFP and include certificates of deposit or other fixed term deposits.

Deposit-to-Gross Loan Portfolio RatioInverse of the advance-to-deposit ratio.

Formula: Voluntary Savings Gross Loan Portfolio

Deposit-to-Total Asset RatioIndicates the percentage of assets financed through deposits.

Formula: Voluntary Savings Total Assets

Equity-to-Asset RatioThis is a simple version of the capital adequacy ratio as it does not take in to account risk weighted assets. This ratio indicates the proportion of a company’s equity that is accounted for by assets.

Formula: Equity to Asset Ratio =

Total Equity Total Assets

Financial ExpenseTotal of financial expense on liabilities and deposits.

Financial RevenueTotal of revenue from loan portfolio and other financial assets, as well as other financial revenue from financial services.

Financial Revenue from Other Financial AssetsNet gains on other financial assets.

Financial Revenue from Loan PortfolioTotal interest, fees and commission on loan portfolio.

Financial Revenue Ratio Indicates the efficiency with which an MFP is utilizing its assets to earn income from them.

Formula: Financial Revenue Average Total Assets

Financial Self-SufficiencyFormula: Financial Revenue Adjusted (Financial Expense + Net Loan Loss Provision Expense + Operating Expense + Inflation Adjustment)


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Gross Loan PortfolioAll outstanding principal for all outstanding client loans, including current, delinquent and restructured loans. It does not include: 1). Loans that have been written-off, 2). Interest receivable, and 3). Employee loans. For accounting purposes GLP is categorized as an asset.

Gross Loan Portfolio-to-Total Asset RatioIndicates the efficiency of assets deployed in high yield instruments/core business of an MFP.

Formula: Gross Loan Portfolio Total Assets

Inflation Adjustment ExpensePMN adjusts for the effect of inflation on an MFP’s equity and its non-monetary assets - essentially fixed assets - on its balance sheet. Inflation decreases the real value of an MFP’s equity. Fixed assets are considered to track the increase in price levels, and their value is considered increased. The net loss (or gain) is treated as a cost of funds, is disclosed on the income statement, and decreases net operating income.

Inflation Rate Latest annualized consumer price index (CPI) as reported by the State Bank of Pakistan.

Liabilities-to-Equity Ratio (debt-equity ratio)Formula: Liabilities-to-Equity Ratio =

Total Liabilities Total Equity

Loan Loss Provision ExpenseSum of loan loss provision expense and recovery on loan loss provision.

Loans per Loan OfficerFormula: Number of Active Loans Number of Loan Officers

Loans per Staff Formula: Number of Active Loans Number of Personnel

Net Adjusted Loan Loss Provision ExpenseSum of loan loss provision expense and recovery on loan loss provision. MFPs vary tremendously in accounting for loan delinquency. Some count the entire loan balance as overdue the day a payment is missed. Others do not consider a loan delinquent until its full term has expired. Some MFPs write off bad debt within one year of the initial delinquency, while others never write off bad loans, thus carrying forward a defaulting loan that they have little chance of ever recovering. The PMN applies a standard write-off and loan loss provisioning to all MFPs, and adjusts, where necessary, to bring them to the minimum threshold.

Number of Active BorrowersNumber of borrowers with loan amount outstanding.








Number of Active LoansThe number of loans that have been neither fully repaid nor written off, and thus that are part of the MFP’s gross loan portfolio.

Number of Active Women BorrowersNumber of women borrowers with loan amount outstanding.

Number of Active Women Borrowers to total Active BorrowersIndicates percentage of women borrower to total active borrowers.

Number of Loans OutstandingNumber of loans outstanding at the end of the reporting period. Depending upon the policy of an MFP one borrower can have two loans outstanding; hence, the number of loans could be more than the number of borrowers.

Number of SaversNumber of depositors maintaining voluntary demand deposit and time deposit accounts with an MFP.

Number of Saving AccountsOne depositor can have more than two deposit accounts. Hence, the number of deposit accounts could be more than the number of depositors.

Number of Women SaversNumber of women savers with voluntary demand deposit and time deposit accounts.

OfficesThe total number of staffed points of service (POS) and administrative sites (including head office) used to deliver or support the delivery of financial services to microfinance clients.

Operating Expense Total of Personnel Expense and Administrative Expense.

Operational Self-SufficiencyFormula: Financial Revenue (Financial Expense + Net Loan Loss Provision Expense + Operating Expense)

Per Capita Income Average income per person.

Percentage of Women Savers to Total Savers Indicates the percentage of women in the total saving portfolio.

PersonnelThe number of individuals actively employed by an MFP. This number includes contract employees and advisors who dedicate the majority of their time to the organization, even if they are not on the MFP’s roster of employees. This number is expressed as a full-time equivalent, such that an advisor who spends 2/3 of his/her time with the MFP is accounted for as 2/3 of a full-time employee.


89







Personnel Allocation RatioThe higher the indicator the more lean the head office structure of the organization. This indictor is used to measure organizational efficiency.

Formula: Loan Officers Total Staff

Risk Coverage RatioIndicates the provision created by an MFP against its credit risk.

Formula: Adjusted Loan Loss Reserve PAR > 30 Days

Saving OutstandingTotal value of voluntary demand deposit and time deposit accounts.

Savers per StaffFormula: Number of Savers Number of Personnel

Loan Loss Provision ExpenseSum of loan loss provision expense and recovery on loan loss provision.

Loans per Loan OfficerFormula: Adjusted Loan Loss Reserve PAR > 30 Days

Total AssetsTotal net asset accounts i.e., all asset accounts net of any allowance. The one exception to this is the separate disclosure of the gross loan portfolio and loan loss reserve.

Total EquityEquity represents the worth of an organization net of what it owes (liabilities). Equity accounts are presented net of distributions, such as dividends.

Formula: Total Equity = Total Assets – Total Liabilities

Total LiabilitiesLiabilities represent the borrowings of an organization i.e., the amount owed. Examples of liabilities include loans, and deposits. This number includes both interest and non-interest bearing liabilities of an MFP.








Total Number of Loan OfficersThe number of staff members who dedicate the majority of their time to direct client contact. Front office staff include more than those typically qualified as credit or loan officers. They may also include tellers, personnel who open and maintain accounts—such as savings accounts—for clients, delinquent loan recovery officers, and others whose primary responsibilities bring them in direct contact with microfinance clients.

Loan Written Off during YearValue of loans written off during the year.

Write-Off RateFormula: Loans written off during the year Average Gross Loan Portfolio

Yield on Gross Portfolio (Nominal)Indicates the yield on an MFPs loan portfolio and is usually used as a proxy to look at MFPs (realized) effective interest rate.

Formula: Financial Revenue from Loan Portfolio Average Gross Loan Portfolio

Yield on Gross Portfolio (Real)Number of depositors maintaining voluntary demand deposit and time deposit accounts with an MFP.

Formula: (Yield on Gross Portfolio (nominal) - Inflation Rate) (1 + Inflation Rate)

Pakistan Microfinance ReviewThe Pakistan Microfinance Review (PMR), formerly tled the Performance Indicators Report (PIR), is an annual publica on of the Pakistan Microfinance Network (PMN). The report tracks the financial performance of Pakistan’s microfinance industry. A total of 88 financial indicators are compiled annually to track industry performance and iden fy upcoming trends and challenges. The indicators have been adopted under the guidance of the Microfinance Informa on eXchange (The MIX), the leading business informa on provider for the global microfinance industry. Baseline informa on for the PMR is collected from the audited financial statements of repor ng organiza ons. The aim of publishing the PMR is to provide a reliable informa on gateway to Pakistan’s microfinance industry. By promo ng financial transparency and providing detailed analysis based on sector-wide as well as ins tu on-level financial data, the PMN aims to posi vely influence the landscape of the microfinance sector by facilita ng greater compe veness, and the establishment of stronger retail ins tu ons.

Pakistan Microfinance Network The Pakistan Microfinance Network (PMN) is an associa on of retail microfinance providers in Pakistan. As a network its mission is to provide support to the sector to enhance scale, quality, diversity and sustainability in order to build an inclusive financial services sector in Pakistan.

The PMN prepares industry sta s cs, analysis, and several research reports and discussion notes on the microfinance industry of Pakistan. For more informa on on the PMN and its publica ons, please visit: www.microfinanceconnect.info

Performance Reports Published by PMNPerformance Indicators Report [Jan – Dec 1999]

Performance Indicators Report [Jan – Dec 2000]

Performance Indicators Report [Jan – Jun 2001]


Performance Indicators Report [Jan – Jun 2002]


Performance Indicators Report [FY 2003]



Pakistan Microfinance Review [FY 2006]



These reports are available at:

h p://www.microfinanceconnect.info/user_ar cles_main2.php

pakistan microfinance review 2009: annual assessment of ......kbl khushhali bank ltd. kf kashf...

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