pakistan microfinance review...

Pakistan MicrofinanceReview 2015

A n A n n u a l A s s e s s m e n t o f

t h e M i c r o f i n a n c e I n d u s t r y

A n A n n u a l A s s e s s m e n t o f

t h e M i c r o f i n a n c e I n d u s t r y

Launch Ed it ion

F i n a n c i a l s e r v i c e s f o r a l l

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Editorial Board Mr. Ghalib Nishtar Chairperson Editorial Board President, Khushhali Bank Limited (KBL) Syed Samar Husnain Executive Director, Development Finance Group State Bank of Pakistan (SBP) Mr. Blain Stephens COO and Director of Analysis Microfinance Information eXchange, Inc. (MIX) Ms. Gemma Stevenson Private Sector Development Advisor Finance, Markets and Jobs Team, Economic Growth Group Department for International Development (UK) Mr. Yasir Ashfaq Group Head, Financial Services Group, Pakistan Poverty Alleviation Fund (PPAF) Mr. Azfar Jamal Executive Vice President, Head Payment Services & E-Banking National Bank of Pakistan (NBP) Mr. Masood Safdar Gill Director Program, Urban Poverty Alleviation Program, National Rural Support Programme (NRSP)

PMN Team Mr. Ali Basharat Author and Managing Editor Mr. Ammar Arshad Co- Author and Data Collection Ms. Saba Abbas Co –Author and Data Collection Ms. Saquiba Aziz Data Collection

Highlights

Year 2011 2012 2013 2014 2015 Active Borrowers (in millions)

1.7 2. 0 2.4 2.8 3.6

Gross Loan Portfolio (PKR billions)

24.8 33.1 46.6 61.1 90.2

Active Women Borrowers (in millions)

0.9 1.3 1.4 1.6 2.0

Branches 1,550 1,460 1,606 1,747 2,754 Total Staff 14,202 14,648 17,456 19,881 25,560 Total Assets (PKR billions)

48.6 61.9 81.5 100.7 145.1

Deposits (PKR billions)

13.9 20.8 32.9 42.7 60.0

Total Debt (PKR billions)

38.3 24.9 26.9 31.1

44.5

Total Revenue (PKR billions)

10.1 12.5 17.3 24.3 32.8

OSS (percentage) 108.4 109.5 118.1 120.6 124.1 FSS (percentage) 100.5 107.5 116.5 119.6 121.0 PAR > 30 (percentage) 3.2 3.7 2.5 1.1 1.5 Year 2011 2012 2013 2014 2015

Acronyms and Abbreviations

AC &MFD Agriculture and Microfinance Division ADB Asian Development Bank AMRDO Al-Mehran Rural Development Organization AML Anti-Money Laundering BPS Basis Points CAR Capital Adequacy Ratio CIB Credit Information Bureau CDD Customer Due Diligence CGAP Consultative Group to Assist the Poor CGL Credit Guarantee Limits CNIC Computerized National Identity Card CPP Client Protection Principles CPI Consumer Price Index CPI Client Protection Initiative CPC Consumer Protection Code DFI Development Financial institute DFID Department for International Development, UK DPC Deposit Protection Corporation DPF Depositor’s Protection Fund ECA Eastern and Central Europe ESM Environment and Social Management EUR Euro FATF Financial Action Task Force FIP Financial Inclusion Program FINCA FINCA Microfinance Bank Ltd. FMFB The First Microfinance Bank Ltd. FSS Financial Self Sufficiency FY Financial Year G2P Government to Person GBP Great Britain Pound GDP Gross Domestic Product GLP Gross Loan Portfolio GNI Gross National Income GoP Government of Pakistan IAFSF Improving Access to Financial Services Support Fund IFAD International Fund for Agricultural Development IFC International Finance Corporation JWS Jinnah Welfare Society KBL Khushhali Bank Ltd. KF Kashf Foundation KIBOR Karachi Inter-Bank Offering Rate KP Khyber Pakhtunkhwa KYC Know Your Customer LCPS Low Cost Private Schools MIV Microfinance Investment Vehicle MIX Microfinance Information Exchange MCGF Microfinance Credit Guarantee Facility MCR Minimum Capital Requirement MENA Middle East and North Africa MFB Microfinance Bank MFCG Microfinance Consultative Group MF-CIB Microfinance Credit Information Bureau MFP Microfinance Providers

MFI Microfinance Institution MFT Microfinance Transparency MIS Management Information System MSME Micro, Small and Medium Enterprises MIV Microfinance Investment Vehicle MO Micro-Options NADRA National Database and Registration Authority NBMFI Non-Bank Microfinance Institutes NGO Non-Governmental Organization NFLP National Financial Literacy Program NFIS National Financial Inclusion Strategy NMFB Network Microfinance Bank Limited NPLs Non-Performing Loans NRDP National Rural Development Program NRSP National Rural Support Programme OPD Organization for Participatory Development OSS Operational Self Sufficiency P2P Person to Person P2G Person to government PAR Portfolio at Risk PBA Pakistan Banks Association PBS Pakistan Bureau of Statistics PKR Pakistan Rupee PMN Pakistan Microfinance Network PO Partner Organization PPAF Pakistan Poverty Alleviation Fund PPI Grameen Progress out of Poverty Index PRISM Program for Increasing Sustainable Microfinance PRSP Punjab Rural Support Program PTA Pakistan Telecom Authority ROA Return on Assets ROE Return on Equity RSP Rural Support Programme SBP State Bank of Pakistan SC The Smart Campaign SDS SAATH Development Society SECP Securities and Exchange Commission of Pakistan SPTF Social Performance Task Force SME Small and Medium Enterprise SRSO Sindh Rural Support Organization SRDO Shadab Rural Development Organization SVDP Soon Valley Development Program TMFB Tameer Microfinance Bank Ltd UBL United Bank Limited USD United State Dollar USSPM Universal Standards for Social Performance Management VDO Village Development Organization WPI Wholesale Price Index

Table of Contents

EditorialBoard 2

PMNTeam 3

Highlights 4

AcronymsandAbbreviations 5

TheYearinReview 9Macro-economyandMicrofinanceIndustry 9PolicyandRegulatoryEnvironment 10NationalFinancialInclusionStrategy(NFIS) 10Non-BankMicrofinanceCompanies(NBMFC)Regulations 11LimittoFinancingagainstGoldBackedLoans 12

MicrofinanceIndustryInitiatives 12BranchlessBanking 12MicrofinanceCreditInformationBureau(MF-CIB) 13EstimatingMicrofinanceMarketPotential 14Micro-EnterpriseLending 15PrimeMinisterInterestFreeLoanScheme 16CreditGuaranteeSchemeforSmall&MarginalizedFarmers 16ClientProtectionInitiative(CPI) 17

Conclusion 19

FinancialPerformanceReview 20SCALEANDOUTREACH 21ScaleandOutreach:Breadth 21ScaleandOutreach:Depth 26

FinancialStructure 29AssetBase 29AssetComposition 31FundingProfile 32

ProfitabilityandSustainability 33Productivity 36Risk 38CreditRisk 38

Conclusion 38

SocialPerformance 39Introduction 39

AnalysisoftheSector’sSPIndicators 39TargetMarket 40DevelopmentGoals 40PovertyTargeting 41PovertyMeasurementTools 42Governance&HR 43ProductsandServices:Financial 45

Credit 45Deposits 47Insurance 47OtherFinancialServices 49

ProductsandServices:Non-Financial 49TransparencyofCost 50ClientProtection 52EnvironmentalPolicies 53

ChallengesandOpportunities 55RoleofMicrofinanceinFinancialInclusioninPakistan 55MainstreamingNon-BankMicrofinancePlayers 55CreditScoring 56MobileWallets 57Exploringnewhorizons:Servingnewmarkets 57HealthandMicrofinance 58FinanceforLowCostPrivateSchools(LCPS) 59

DepositProtectionFund;movingtowardsasecurefinanciallandscape 60DepositsMobilization:UntyingGordian’sKnot 60Funding 61SettingupofPakistanMicrofinanceInvestmentCompanyLimited(PMICL) 62

Section 1 The Year in Review

Pakistan Microfinance Review 2015

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The Year in Review Microfinance industry witnessed continued growth and expansion in outreach in the year 2015. There were notable developments in the policy environment which can lead to stronger players and the sector can play a crucial role in furthering financial inclusion in the country. Major developments were witnessed on the policy and regulatory side like the launch of National Financial Inclusion Strategy (NFIS) and introduction of regulatory framework for Non-Bank Microfinance Institutes (NBMFI) by Securities & Exchange Commission of Pakistan (SECP). In addition, results of second Access to Finance Survey Results were shared. With the launch of NFIS, a roadmap for achievement of financial inclusion in the country has been laid out. A key challenge facing the microfinance industry has been the absence of regulatory framework for non-bank microfinance players. Now with the introduction of the rules and regulations for NBMFI a level playing field has been created in the industry and provides an opportunity for non-bank players to scale up their businesses. Improving security situation, low inflation and subsequent reduction in the policy rate by the central bank bode well for the industry. However, falling agriculture commodity prices can adversely affect the industry particularly those operating predominantly in the rural areas. A number of new initiatives were launched while existing ones were improved upon. One of the main initiatives last year was the re-estimation of microfinance market in the country. In addition, 2015 saw the completion of three years Client Protection Initiative (CPI), funded by State Bank of Pakistan (SBP) under the auspices of Financial Inclusion Program (FIP). Moreover, Microfinance Credit Information Bureau (MF-CIB) has become an essential component of credit approval process by practitioners and credit scoring models are being developed based on its data. Branchless banking continues to witness huge excel at all fronts simulated by an enabling environment. A number of microfinance banks (MFBs) have initiated lending to micro-enterprises. The Microfinance Growth Strategy 2020 launched by PMN during the year forecasts that the sector would require additional debt for on-lending of up to PKR 300 billion to reach up to 10 million borrowers. In order to meet the funding demands of the sector, PPAF, Department for International Development (DFID) through Karandaaz Pakistan and the German Development Bank KfW have joined hands to establish Pakistan Microfinance Investment Company Limited (PMICL), private-sector investment finance company. The major objective of the new entity is to attract commercial funding to serve increasing demand of those who are financially excluded and further improve the capability and capacity of the sector to absorb these funds. The NFIS also recognizes microfinance as an important instrument for increasing financial inclusion in the country and an important milestone of the strategy includes enhancing commercial funding for the microfinance sector through creation PMICL.

Macro-economy and Microfinance Industry Pakistan’s economy grew by 4.2 percent in the financial year 2015 which is the highest growth rate witnessed in the last seven years1. Despite improvement in the all the main macro-economic indicators like inflation, fiscal balance and current account balance and improvement in security situation persistent energy shortages and low investment rates remained a challenge for the economy and it could not meet the target of 5.1 percent growth for the year2. Despite the challenging external environment, the microfinance industry grew by nearly 20 percent in terms of outreach for the year 20153. Inflation measured by CPI continued to witness a downward trend in the year. The average inflation for the year stood at 4.5 percent as compared to 8.6 in the financial year 2014 at the back of falling oil and commodity prices. This created room for the central bank to cut the policy rate considerably4. Policy rate witness a decrease of 350 basis points in the year as

1 Annual Report 2014-15 (State of the Economy), SBP 2 Ibid 3 MicroWATCH, A quarterly outreach publication, PMN, Multiple Issues 4 Annual Report 2014-15 (State of the Economy), SBP



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shown in the Exhibit 1.1 below to a 42 year low5. This will lower financing cost of retail players resulting in higher profitability. This low rate environment can be a good opportunity for players to tap debt capital markets for raising funds.

Exhibit 1.1: Discount rate, KIBOR and CPI Trend

While falling commodity prices have resulted in lower inflation and reduction in policy rate, it can have adverse implication for the growers. In many cases farmers have not been able to recover the cost of production reducing their ability to invest further in upcoming crops. This situation can have serious implications for the microfinance sector as more than 55 percent of its borrowers belong to rural areas6. Implications can be in form of diversion of loan towards consumption purposes or in extreme cases lead to delinquencies for the practitioners. Despite the policy rate touching a historical low, expansion in the private sector credit remained low as compared to the previous year7. Commercial banks continued to invest in the government securities in order to generate riskless returns. With most of the existing private sector concentrated towards manufacturing sector areas like SMEs and agriculture continue to remain unserved. In this situation, MFPs will continue find it challenging to raise funds from the commercial banks.

Policy and Regulatory Environment Pakistan’s overall regulatory environment continues to be ranked among the best globally8. Key developments were witnessed in the industry on the policy and regulatory domain in 2015. Last year saw the launch of National Financial Inclusion Strategy (NFIS) and roll-out of regulations for non-bank MFPs which was among the key challenges being faced by the sector.

National Financial Inclusion Strategy (NFIS) The year 2015 saw to the launch of National Financial Inclusion Strategy (NFIS) which has outlined a roadmap for financial inclusion in the country. Developed by the State Bank of Pakistan with active assistance The World Bank the strategy aims to “build a dynamic and inclusive financial sector to support Pakistan’s growth in 21 century”. The strategy will direct efforts and initiatives to expand and deepen financial inclusion during the course of five years (2015-2020) and has set objectives to be achieved through a comprehensive and well-thought action plan. 5 Ibid 6 MicorWATCH, A quarterly outreach publication, PMN, Issue 38, 2016 7 Annual Report 2014-15 (State of the Economy), SBP 8TheGlobalMicroscope2015:Theenablingenvironmentforfinancialinclusion,EIU,2015

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2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

FY11 FY12 FY13 FY14 FY15

Percen

tage

DiscountRate ConsumerPriceInflation(Average) 6-MonthsKIBOR



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The state of financial inclusion in Pakistan depicts a dismal picture. Only 16 percent of the adult population can be categorized as banked and 23 percent of the population use formal financial services9. The situation worsens in rural areas where only 14 percent of the adult population is banked. In case of women only 11 percent are banked. The state of financial inclusion is no more evident when compared regionally as shown in the Table 1.1 below where Pakistan’s continues to lag behind. Despite sustained efforts by the policy makers, regulators and donors and enjoying an enviable enabling environment a lot more need to be done. In this regard, NFIS will play a crucial role in furthering financial inclusion in the country by coordinating the efforts of all the stakeholders by defining responsibilities among them and developing a comprehensive approach to promoting access and usage of formal financial services.

Table 1.1: Regional comparison of financial inclusion10 Countries Account Formalsavings FormalborrowingPakistan 13% 3% 2%India 53% 14% 6%Bangladesh 31% 7% 10%SriLanka 83% 31% 18%

The framework for action for the strategy identifies four targeted action or key drivers to achieve financial inclusion in the country. These four drivers are 1) promoting digital transactions and reaching scale through bulk payments; 2) expanding and diversifying access points; 3) improving capacity of financial services providers; and 4) increasing levels of financial capability. The success of these drivers is dependent upon the meeting four preconditions or key enablers which are

1. Public and private sector commitment to the NFIS 2. Enabling Legal and Regulatory Requirements 3. Adequate supervisory and judicial capacity 4. Financial payments, information and communication technology

Achievement of financial inclusion in the country requires efforts from a wide range of stakeholders and in order to direct their efforts a coordination mechanism has been developed which includes a NFIS Council to be chaired by the Finance Minister, a steering committee headed by Governor SBP and establishment of NFIS Secretariat.

Non-Bank Microfinance Companies (NBMFC) Regulations Over the last few years it has been felt the industry has reached a stage where regulatory cover needed to be extended to non-bank microfinance players. Based on lessons from regional countries particularly Post Andhra Pradesh Crisis in India, regulatory umbrella among other things protects the industry from external influences. In addition, the growth and increasing market share of microfinance banks (MFBs) had made evident the benefits of working as a regulated institute. Keeping this in view, PMN along with PPAF and other stakeholders had approached Securities & Exchange Commission of Pakistan (SECP) with aim of regulating the non-bank MFPs. Subsequently, a working group was formed which included representatives from PPAF, PMN, SBP and leading industry players with aim of developing rules and regulations. In the last quarter of 2015, Securities & Exchange Commission of Pakistan (SECP) issued regulations for non-bank microfinance companies by virtue of which non-bank microfinance players can now become regulated financial institutions. Necessary amendments were made in the Non-Bank Finance Company’s framework to allow for the establishment of Non-Bank Microfinance Institutes (NBMFIs). NBMFIs are recognized as a separate class in the NBMFC Rules 2003 as Investment Finance Services License for Microfinancing. In addition, comprehensive framework was issued by amending NBFC Regulations 2008. After this issuance of regulations only those entities that are licensed by SBP or SECP can conduct microfinance business. The regulations require all existing and new entities to become a company under the Companies Ordinance, 1984 and obtain a license for conducting microfinance business. Companies that are already registered as a company only need to obtain the license. In addition, the law requires non-bank MFPs to follow adhere to fit and proper criteria for top leadership and management, meet the minimum equity requirement of PKR 50 million and 70 percent of assets of the entity to be utilized for microfinance activities. Other salient features of the regulations are as follow:

9 www.a2f2015.com 10 The Global Findex Database 2014, The World Bank



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1. General provision of 0.5 percent of the net outstanding microfinance portfolio 2. Maximum loan size for individuals is PKR 200,000 for a general loan and PKR 500,000. For microenterprises the

loan limit has been set at PKR 500,000 while overall exposure cannot exceed PKR 700,000. 3. Uniform provisioning requirement from 30 days to 180 days. 4. For loans above PKR 5,000 CIB inquiry is required.

These regulations allow for setting up both non-profit entities and for-profit entities. Giving MFIs an option to convert to for-profit entity which was previously enables them to attract equity investors and scale up their business substantially. Furthermore, the exposure limits for borrowers are the same as set by SBP for MFBs. The same goes for provisioning requirement as well. Also, now with this framework in place MFIs with a capital of above PKR 1 billion can also issue Certificate of Deposits (CODs) to raise funds. This is a watershed moment for the microfinance industry as it would mainstream non-microfinance institutes. Earlier microfinance institutes had been registered in multiple legal jurisdictions and working under a legal framework that can be categorized as ambiguous at best. Lastly, it is hoped that SECP will play a similar role as played by SBP in nurturing MFBs and interact frequently with the players for the mutual benefit of the industry.

Limit to Financing against Gold Backed Loans Financing against gold backed loans by Microfinance Banks (MFBs) had gained widespread popularity in the last few years. It had allowed MFBs to move from traditional group lending to individual lending and also, increase their loan sizes. This mode of financing drew its strength from the fact that gold and gold ornaments has been a traditional mode of savings among the masses and in times of emergency has been liquidated often at a deep discount. Obtaining a loan against this gold without having to liquidate provided a better alternative to potential borrowers and saw to its massive popularity. This product effectively transformed gold from a non-liquid asset into a liquid and earning asset. Pioneered by Tameer Microfinance Bank (TMFB), it was soon adopted by other MFBs. At this time up to 5 MFBs are dealing in this product. Percentage of gross loan portfolio (GLP) financed against gold by MFBs ranges from 20 percent to 55 percent. However, concerns were raised about the practices especially whether the loan were being utilized for consumption purpose rather than productive. Also, were the loan amounts being determined based on the value of the gold or based on the repayment capacity of the client? These concerns led to strengthening of the belief that gold backed loans were against the spirit of microfinance which promotes lending without physical collateral. This coupled by falling gold prices leading reduced value of collateral available with MFBs led the central bank to place a limit on financing against gold. SBP by virtue of amendment in the prudential regulation R-5 dealing with maximum loan size and eligibility of borrowers for MFBs placed a limit that aggregate loan exposure of a MFB cannot exceed 35 percent of its GLP11. Existing MFBs having an exposure of more than 35 percent were given two years to bring their portfolios in compliance with the above regulation. In addition, SBP also stressed that MFB’s to develop a collateral handling policy duly approved by their Board for managing the security, procedures and contingency planning for the gold collateral.

Microfinance Industry Initiatives The year saw a number of new initiatives being undertaken. Importantly, the year saw the re-estimation of microfinance market potential and successful completion of Client Protection Initiative (CPI).

Branchless Banking With a firmly established regulatory environment and a supporting institutional framework, the branchless banking sector of Pakistan continued to excel on all fronts in the calendar year 2015. The mandatory biometric SIM verification for all new and existing mobile phone customers in the same year, as instructed by Pakistan Telecommunication Authority (PTA), also played a crucial role in stimulating branchless banking activity.

11 AC & MFD Circular 02 of 2015, June 18, 2015, SBP



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As of 30th September 2015, the value of branchless banking transactions stood at PKR 526 billion as compared to PKR 376 billion in the same period previous year12 – depicting an increase of 40 percent. Moreover, the number of branchless banking transactions, for the first time, crossed the 100 million mark resting at 101 million as of 30th September, 2015. It is important to note that approximately 5 percent of the 101 million transactions were carried out by agents for liquidity management, whereas, the remaining 95 percent were customer oriented transactions (which include transactions through over-the-counter and m-wallets). However, branchless banking agents had a significant share (of 40 percent) in the value of transactions – PKR 208 billion worth of transactions were conducted for liquidity management. In terms of customer oriented transactions, over-the-counter transactions amounted to 69 percent of the total number of transactions and 71 percent of the total value of transactions. Fund transfers through CNIC (sending and receiving) remained the top contributor in terms of volume and value of transactions with a share of 33 percent and 44 percent respectively. Bill payments (utility and internet) had the second largest share in terms of both, volume (29 percent) and value (18 percent) within customer oriented transactions12. The branchless banking platform is also proving to be an effective instrument in channelizing the government-to-person payments in salary disbursements, pension, and tax collection services. An amount of PKR 22 billion was disbursed to 4.5 million beneficiaries during the third quarter of 2015 as compared to PKR 16 billion disbursed to 5.5 million beneficiaries during the same quarter previous year. Majority of the G2P payment beneficiaries are associated with the Benazir Income Support Program (BISP), followed by internally displaced people. Lately, branchless banking operators have also introduced innovative Person-to-Government (P2G) payment products for collection of taxes, traffic penalties and other payments to government agencies. Mobile network operators are partnering with public entities to enhance the scope of digital financial services that can be accessed quickly and at the convenience of the users, thus facilitating both government and the individuals. Telenor’s EasyPaisa was the first service provider to set foot in this domain by offering the option to pay for traffic penalties through the branchless banking platform – including mobile wallets. Mobilink’s Mobicash has recently introduced a product where consumers can pay for their passport fees through any Mobicash agent or via their m-wallet account.

Microfinance Credit Information Bureau (MF-CIB) MF-CIB is a key part of the microfinance industry infrastructure in Pakistan. Established with the assistance of International Finance Corporation (IFC), Department for International Development (DFID) and Pakistan Poverty Alleviation Fund (PPAF), the credit registry is being increasingly used as an important tool of risk mitigation tool by the players. The bureau aims to curtail the practice of multiple borrowing leading to over-indebtedness, moral hazard and adverse selection in the sector. In addition, the bureaus ability to generate both positive and negative reports allows for utilizing credit histories Since its nationwide roll-out in 2012, the bureau is now an inseparable part of the ecosystem with eighty percent of the players making inquiries from the bureau. As seen in the Exhibit 1.2 below, there has been an obvious increase in inquiries being generated as compared to previous year with maximum number of inquiries being generated per month reaching 198 thousand in December 2015.

12 Branchless Banking Newsletter, Issue 17, 2015, State Bank of Pakistan (SBP)



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Exhibit 1.2: Month on Month Comparison of MF-CIB Inquiries13

With the advent of the regulations for non-bank microfinance players requiring an inquiry to be generated for loans over PKR 5000 and continued increase in outreach we are likely to see increase in the inquires being generated. The bureau has currently holds over 9.5 million records and efforts are afoot to develop a credit scoring model based on the data sourced from it. Credit scoring will assist lenders in determining who will get loan, how much loan amount they should get and also help in determining the risk in lending. Since the score is based on actual data its remains a reliable assessment of a client. Moreover, it will assist members in customer acquisition and retaining good client. In addition, bad debtors can be isolated and monitored closely. Lastly, credit scoring can also lead players to apply risk based pricing mechanism by rewarding good client by charging them less and charging a higher rate to risky borrowers. With MF-CIB taking an increasingly important role in the context of microfinance industry it is natural that the microfinance client’s need to be educated about the role and importance of bureau in the lending process. How will good credit history be rewarded? What will be the effect of taking loans from multiple lenders? How badly will be the impact of default or delayed payments on the credit worthiness of a client? In order to address issues like these a literacy program has been launched for the microfinance borrowers by PMN in collaboration with IFC. The program aims to develop know how of the borrowers about credit reports being generated by the MFPs and how they should manage their credit histories.

Estimating Microfinance Market Potential14 While there is reliable, up-to-date and periodic information available on industry benchmarks and indicators, there is an information gap related to the potential size of the market. The current figure of 27 million individual borrowers based on PMN’s old methodology was dated and hasn’t been revised since 2007. A revised and up-to-date estimation will provide invaluable information for the donors, policy makers and most importantly, practitioners. This old methodology lacked the relevance of the parameters and dataset to the present day outlook of the industry. PMN’s proposed/ current methodology uses a much robust and up-to-date framework to calculate the market potential for microcredit. A nationally representative dataset is used with supporting parameters or filters that are supported by rationale or underlying assumptions. This potential is further sliced into different segments such as occupation, labor market status and gender. Using an up-to-date nationally representative survey data (HIES-PSLM 11-12),PMN has built a pyramid model whose main parameters include willingness to demand a loan in the past or propensity to borrow in the future, income ranges and credit worthiness. There is anecdotal evidence which shows that willingness or propensity to take a loan could be a good starting point whilst calculating a market potential. The dataset contains information on socio-economic indicators that are periodically available, credible, and easily accessible and has the level of detail that would allow segmentation. The survey

13 Datacheck 14 Estimating Potential Market Size for Microcredit in Pakistan, MicroNOTE No. 27, Dec 2015

0

50,000

100,000

150,000

200,000

250,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

MF-CIBInqu

iries

2014 2015



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is carried out by the Pakistan Bureau of Statistics (PBS) every alternative year and contains information on socio-economic factors such as income, expenditure and employment status. The framework encompasses the following steps: Those individuals who have an outstanding loan from any source at the time of the survey or have borrowed in the year immediately before are selected, individuals in the age bracket of 18-65, an average loan range of PKR 20, 00 – 150,000 is selected (along with another loan range for a sensitivity analysis) and finally the total potential is divided into different segmentation. PMN has used statistical software using all these parameters and filters to calculate the total potential. The total potential market for microcredit has been calculated to be at 17 million individual borrowers. Furthermore, the old methodology did not have an estimate for ‘Micro-enterprises’. Using the same dataset(HIES 2011-12), our proposed framework for estimating microenterprises is built around a section of the survey that contains data on household heads who are either a proprietor or partner in a non-agricultural, non-financial establishment, business or shop(mobile or fixed) that employed less than 10 persons any given time during the year. The information in HIES is limited to certain enterprises that are related to manufacturing, mining, quarrying, transportation, wholesale/retail trade, hospitality, construction and other service related businesses. However, there are some enterprises that are not captured in HIES which includes agricultural, livestock and fisheries. The total market potential estimated for microenterprises has been estimated to be 6.5 million enterprises. Agriculture activities in Pakistan take mostly in the form of farming and livestock rearing. PMN uses a framework whereby it used land sizes defined by the Federal Land Commission throughout Pakistan. Since the activities carried out on the farm by household are indivisible and Pakistan hasn’t reached a level of mechanization that would enable specialization to take place at a scale, we proposed that the unit of measurement to be the farm size under any of three predominantly prevalent land tenure arrangements in Pakistan namely owner cultivated, share cropped and tenant farming types. As such, we use subsistence and economic land holdings across all provinces to be used as cut-off for small and micro agricultural farms. The total potential for farm microenterprises comes out to be 1 million enterprises.

Micro-Enterprise Lending Enterprise lending has been in vogue ever since State Bank of Pakistan (SBP) allowed MFBs to upscale their loan sizes from PKR 150 thousand to PKR 500 thousand through amendments in Prudential Regulations in 2012. Inability of commercial banks to scale down to serve the lower end of SME or very Small Enterprises (VSE) and similarity of dynamics with microfinance led to policy makers to rely on the microfinance industry to serve these markets. At present MFBs can lend up to 40 percent of the GLP in microenterprises. VSE or microenterprises make up nearly 99 percent of the SMEs in the country and play a crucial role in income and employment generation15. The segment is viewed as more stable as compared microfinance income having a higher degree of formalization, a designated business premises and possess some fixed assets. Lending to this particular segment allows, MFPs to retain graduating clients who have grown to size where micro-loans cannot meet their funding needs and diversify into a newer market segment. In addition, it provides an opportunity to increase profitability as enterprise loans have lower operational costs as compared to microloans and allows for risk based pricing of loans. Currently, eight out of ten MFBs have started lending into this segment. Out of these eight six are at pilot stage. Consolidated figures for the seven MFBs lending to this particular segment are shown in the Table 1.2.

Table 1.2: Trend of Micro-Enterprise Lending by MFBs16 Year 2013 2014 2015NumberofLoans 136 2,185 12,612GLP 33,902,858 530,587,461 3,061,824,879AverageLoanSize 249,286 242,832 242,771PAR>30Days 0% 1.0% 1.3%

According to a survey conducted by IFC regarding lending to microenterprises by MFBs, most players have built the capacity of their staff to serve this particular segment. In addition, separate risk assessment methodologies and IT system has been developed. Moreover, specialized staff has been dedicated for enterprise lending grouped in a separated division. Generally, 15 Federal Bureau of Statistics, Government of Pakistan, 2005 16 Figures obtained from 7 MFBs



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MFBs are not extending loans to microenterprises through all of their branches and tend to serve same sectors as microfinance clients. Most of the client belong to the transport sector and followed by services and retail. Potential clients are acquired in the same manner as microfinance client and traditional delivery channels are commonly used. However, there is a growing awareness among the players to utilize branchless banking channels for distribution. Key challenges include perceptions about ability of loan officers and concern over lack of capacity to analyze micro-enterprises.

Prime Minister Interest Free Loan Scheme The Government of Pakistan (GoP) launched an interest-free microloan scheme in 2014 to address the issues of poverty and rising unemployment in the country. Under the scheme, PKR 3.5 billion were allotted from the federal budget to facilitate the poor and destitute segments of the population in generating livelihood. However, in order to safeguard the interest of the MFPs it was decided that the funds under this scheme would be routed through the national apex, PPAF and would only be extended in Union Councils that have low or no penetration of conventional microfinance. As of December, 2015, PKR 2.25 billion have been disbursed under the scheme to approximately 110,000 beneficiaries – out of which 66,000 were female and 44,000 were male applicants17. These interest free loans are being made available to men and women from households with a score of up to 40 on the Poverty Score Card (PSC) and with little or no access to banks or microcredit institutions. Most of the loans have been utilized in the livestock sector, followed by business and trading, services and agriculture. Twenty-four MFPs have partnered with PPAF in extending interest free loans under the PM interest free loan scheme. It is hoped that the scheme would lead to over 1 million additional active borrowers over the next three years. Since this scheme is targeted toward those areas where conventional microfinance has little or no penetration, it provides MFPs an opportunity to expand outreach in newer geographic markets. Moreover, it has the potential to allow for borrowers of interest free loans to graduate to conventional microfinance. This is ensured as the interest free loan would be provided only once to an individual and after the completion of the first cycle he/she would be eligible only for a conventional microfinance loan.

Credit Guarantee Scheme for Small & Marginalized Farmers In 2015, the government of Pakistan launched a credit guarantee scheme for small and marginalized farmers to ensure greater access to bank loans for production purposes. The scheme will provide 50 percent risk coverage against the principal outstanding on loans to small and marginalized farmers by commercial, specialized and microfinance banks. The federal government has made an initial allocation of PKR 1 billion in the federal budget FY 2015-16, for the scheme which may be topped up annually. The allocated funds will be used to create a guarantee fund for farmers having up to 5 acres irrigated and 10 acres non-irrigated land holdings. The objective of the scheme is to encourage participating commercial, specialized and microfinance banks to lend collateral-free to small and marginalized farmers to meet their working capital requirements. Credit Guarantee Limits (CGLs) will be assigned to all financial institutions involved in agriculture financing based on their exposure and potential in agricultural credit disbursements. The scheme is also open to all those banks which are not currently involved in agriculture financing by expressing their willingness to participate in the said scheme. The scheme aims to benefit 300,000 farmer households with production loans up to PKR 100,000 and the loan tenor will be based on cropping cycle up to a maximum period of one year18. The scheme will exclusively apply to small and marginalized farmers across the country owning/cultivating irrespective of land ownership. According to SBP, as per Agriculture Census 2010, 5.35 million farm households (out of total 8.3 million) have land-holding up to five acres in Pakistan. These small farmers have a significant share in the national agricultural output. Despite their significance, the small and marginalized farmers face difficulties in accessing formal credit due to small landholding and lack of collateral. As a result, they are forced to borrow from informal sources on unfair terms. Therefore, the scheme has been designed to enhance access of small and marginalized farmers to formal credit.

17 http://www.pmifl.com.pk/ 18 Credit Guarantee for Small & Marginalized Farmers (CGSMF) Circular No.1, State Bank of Pakistan



17

Client Protection Initiative (CPI)

The microfinance sector in Pakistan has shown an increasing focus on balancing social performance and financial sustainability among microfinance providers (MFPs). There is an understanding of microfinance as a double-bottom line industry, where sustainability is not an end in itself; but rather a means to achieving social goals. These goals can differ; while some MFPs may have a vision of poverty alleviation or women and rural community empowerment, others focus on increasing access to formal finance for the poor and low-income strata of the population. In all cases, it has become important for MFPs to track their progress towards achieving their respective social goals, using social performance and client protection parameters in the same way that financial data is used to manage the financial bottom line. In tandem with its commitment to responsible finance principles, , PMN implemented the Client Protection Initiative (CPI), a 3-year project funded under State Bank of Pakistan (SBP) Financial Inclusion Program (FIP), which advocated client protection processes at industry level. The year in review saw the closing of the said project, culminating with a series of lessons for the industry, paving the road forward. The project consisted of two components: Pricing Transparency Promoting responsible and transparency pricing practices among microfinance practitioners (MFPs) in Pakistan. This component was carried out through partnership with Microfinance Transparency (MFT). In 2015, second round of transparency data collection was carried out. According to the 2014 data, while the pricing in Pakistan is low relative to loans of similar scale in other countries (Table 1.3), the loans with lower prices are advertised with more transparency than the others (Exhibit 1.3). This necessitates the need to effectively monitor and advocate for responsible pricing in the sector by all major stakeholders.

Table 1.3: A comparative analysis of loan prices

Pricing levels in Pakistan relative to other countries Country (Date from 2013) Range of FULL APR on Loan Sizes less than 40% of GNI of

the country Cambodia 35% India (2010) 25 – 50% India (2013, Post legislation on transparency) 30% Kenya 25 – 125% Pakistan 30 – 50% Philippines 50 – 200% Tanzania 100 – 125% Uganda 50 – 125%

Transparency levels in Pakistan relative to other countries

Country (Date from 2013) Percentage of clients in Highest Category of Pricing Transparency (76-100)

Ghana 2% India (2010) 19% India (2013, Post legislation on transparency) 98% Malawi 65% Mozambique 48% Pakistan 67% Rwanda 14% Tanzania 27% Uganda 1% Zambia 26%



18

Exhibit 1.3: Comparison of Annual Percentage Rates (APRs) and loan sizes

Client Protection Monitoring Conducting client protection monitoring through third-party assessments of PMN member MFPs to ensure that these MFPs are complying with global bench-marks for client protection, offering practitioners a client-focused lens with which to view their institutions and to adequately fill any gaps highlighted. This component was carried out through partnership with the Smart Campaign (SC). Overall, nineteen institutional assessments were completed till May, 2015, providing us with a unique opportunity to gauge the compliance levels vis-àvis client protection principles in Pakistan. Of the MFPs assessed six were microfinance banks, four rural support programs and nine microfinance institutions. In terms of the number of clients, these19 MFPs constitute approximately 70 percent of the market and gross loan portfolio. Findings of these 19 assessments offer further evidence of the client centric nature of microfinance in Pakistan, while at the same time highlighting the need for greater level of compliance for some of the principles (especially among MFIs). It reiterated that large-scale MFPs are going strong on the CPPs of (i) appropriate product design and delivery, (ii) prevention of over-indebtedness, (iii) transparency. However, partial compliance on indicators for these principles highlights the need for the majority of peer groups (particularly non-regulated MFIs) to improve practices. Although the wider data set has shown somewhat better results for fair and respectful treatment of clients, there is still significant scope for improvement in practices pertaining to pricing transparency. Lastly, the results relating to the principles of privacy of client data and mechanisms for complaints resolution reflect a distinct weakness in meeting minimum standards of practice (Exhibit 1.4).



19

Exhibit 1.4: Overall compliance to the CPPs by the Pakistan microfinance sector

Despite an overall positive trend of client-centric processes, further work needs to be done in each CPP, and in some more than others, to bring the compliance levels at par with the global standards of client protection.

Conclusion Microfinance industry in Pakistan has grown at a double digit rate over the last few years. We anticipate that trend will likely continue in the coming years. With NFIS in place, industry is geared up to play an important role in furthering the financial inclusion agenda in the country. In addition, with regulations in place for non-bank microfinance players a key impediment in the growth and development has been addressed. Current macroeconomic stability and positive indictors provide a supportive environment for the practitioners. While easing of the monetary policy will likely result in bringing down the borrowing costs and increase profitability. However, low uptake in private sector credit and continued interest of commercial bank in investing in government papers despite diminishing yields, will likely make it difficult to borrow for players to borrow from commercial banks. However, the prevailing low interest environment provides players a perfect opportunity to explore capital markets for both debt and equity. Overall, the sector is poised for growth backed by an enabling environment and strong industry infrastructure that includes MF-CIB and branchless banking operations. Government backed credit schemes like the PM Interest Free Loan Scheme and Credit Guarantee Scheme for Small and Marginalized farmers allow for expanding outreach in newer areas and segments while mitigating risks. Responsible finance initiatives ensure client protection continues to remain a priority for the sector. In addition, microfinance players are positioning themselves to tap the lower end of the SME segment. Moreover, the creation of PMICL is a key development in line with the Microfinance Growth Strategy 2020 and the NFIS. PMICL will provide the much-needed liquidity to the microfinance sector to reach out to 10 million clients by 2020, contributing towards the overall objective to increase financial inclusion in the country.

0%

20%

40%

60%

80%

100%

AppropriateProductDesign&DeliveryChannels

PreventionofOver-Indebtedness

Transparency

ResponsiblePricingFair&RespectfulTreatmentofclients

PrivacyofClientData

MechanismsforComplaintsResolution

Section 2 Financial Performance Review


20

Financial Performance Review This section provides a detailed analysis of the financial performance of Pakistan's microfinance industry in 2015. Performance has been assessed on three levels: industry wise, across peer groups and institution wise. The analysis is backed by 88 financial indicators, calculated from the audited financial statements of the reporting organizations. These indicators have been compared across time and regions to develop a reliable and fair assessment of sector. Detailed financial information is provided in the Annex A-I and A-II of the PMR. Aggregate data has been reproduced for five years, whereas, the peer group and institution specific data has been made available only for the year 2015. A total of 44 MFPs submitted their audited financial statements for PMR 2015. During the period, three new respondents provided their dataset for the first time. For a complete list of reporting organizations refer to Annex B. Industry players are categorized into three groups for benchmarking and comparison purposes: Microfinance Banks (MFBs), Microfinance Institutions (MFIs) and Rural Support Programmes (RSPs). See Box 2.1 for detailed definitions.

Box 2.1: Peer Groups

Microfinance Institution: A non-bank non-government organization (NGO) providing microfinance services. Organizations in this group are registered under a variety of regulations, including the Societies Act, Trust Act, and the Companies Ordinance. The MFI peer group includes local as well as multinational NGOs such as BRAC-Pakistan and ASA-Pakistan. As of now these organizations are in process of transformation into Non-Bank MFI under the new regulatory framework laid out for non-bank players by SECP.

Microfinance Bank: A commercial bank licensed and prudentially regulated by the SBP 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. Currently there are 11 MFBs operating in the country.

Rural Support Programme: An NGO registered as a non-profit 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 of now these organizations are in process of transformation into Non-Bank MFI under the new regulatory framework laid out for non-bank players by SECP.

The distribution of respondents (number of reporting organizations) by peer group is given in Exhibit 2.1. The MFI peer group is comprised of the largest number of respondents followed by MFBs and then RSPs.



21

Exhibit 2.1: Distribution of respondents by peer groups

SCALE AND OUTREACH This section focuses on outreach indicators to provide performance analysis of the industry in terms of credit growth and composition, deposit mobilization, depth of outreach and gender.

Scale and Outreach: Breadth Microfinance borrowers increased by 21 percent from 2.99 million in 2014 to 3.63 million by 2015 as shown by the Exhibit 2.2. The GLP increased by 43 percent from PKR 63.53 billion to PKR 90.10 billion in the same time period. Among the players, Akhuwat added 170 thousand new borrowers; NRSP added 97 thousand to its tally while NRSP Bank added another 63 thousand over last one year.

Exhibit 2.2: Growth in Number of Active Borrowers and GLP

The market continues to be dominated by 9 MFPs in term of outreach and account for 80 percent of the active borrowers. The largest provider of micro-credit is NRSP with 589 thousand active borrowers followed by KBL with 520 thousand borrowers while at third place is Akhuwat with 405 thousand as shown in the Exhibit 2.3.

29

10

5

MFI MFB RSP

0

20

40

60

80

100

0.000.501.001.502.002.503.003.504.00

2011 2012 2013 2014 2015

GLPinPKR

Billions

Activ

ebo

rrow

ersinmillions

Activeborrowers GLP



22

Exhibit 2.3: Active Borrowers of Largest MFPs

Among the peer groups MFBs continues to lead but their overall share declined from 42 percent in 2014 to 39 percent in 2015 as shown in Exhibit 2.4. In the same time period, the share of MFIs increased from 31 percent to 38 percent. This increase is mostly at the back of the growth in outreach witnessed by Akhuwat in the last one year. Despite strong performance the RSPs, there share also declined from 27 percent to 23 percent in the last one year.

Exhibit 2.4: Share in Active Borrowers by Peer Group

In terms of Gross Loan Portfolio (GLP), MFBs accounted for 61 percent of the share followed by MFIs with a 23 percent share and RSPs with a 16 percent as shown in Exhibit 2.5. Despite accounting for 39 percent of the outreach, MFBs account for 61 percent of the industry’s GLP because of larger loan size relative to other peer groups.

590

521

406

247

287

263

258

177

106

492

469

236

231

227

221

194

149

110

0 100 200 300 400 500 600 700

NRSP

KBL

Akhuwat

KF

TMFB

ASA-P

NRSPBank

FMFB

TRDP

ActiveBorrowersinThousands

2014 2015

44% 39% 40% 42% 39%

28% 34% 35% 31% 38%

28% 27% 25% 27% 23%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2011 2012 2013 2014 2015

MFB MFI RSP



23

Exhibit 2.5: Share of GLP by Peer Group

The total GLP for the industry stood at PKR 90.1 billion up from PKR 63 billion in the previous year. Out of the total GLP, MFBs share stood at PKR 55.4 billion whereas MFIs and RSPs accounted for PKR 21.0 billion and 13.7 billion, respectively (see Exhibit 2.6).

Exhibit 2.6: GLP by Peer Groups

In terms of GLP, KBL continues to remain the largest provider of credit with a GLP of 17.5 billion. It is followed by TMFB with a GLP of 12.2 billion as shown in the Exhibit 2.7. At third place is NRSP with a GLP of PKR 10.1 billion. The top ten MFPs combine to make up 82 percent of the industry’s GLP.

59% 57% 60% 58% 61%

20% 23% 22% 24% 23%

21% 20% 18% 18% 16%

0%10%20%30%40%50%60%70%80%90%100%

2011 2012 2013 2014 2015

MFB MFI RSP

14.6 18.728.1

36.855.4

5.07.6

10.2

15.3

21.0

5.36.7

8.4

11.4

13.7

-

10

20

30

40

50

60

70

80

90

100

2011 2012 2013 2014 2015

PKRinBillions

MFB MFI RSP



24

Exhibit 2.7: GLP by 10 Largest MFPs

Total deposits for the industry segment stood at PKR 60 billion in 2015 as compared to PKR 42.7 billion in 2014 showing an increase of 42 percent over the year as shown in the Exhibit 2.8. In the same time period the number of depositors increased to 10.6 million from 5.7 million witnessing a phenomenal growth of 88 percent. This increase can have attributed to growth in the number of m-wallet accounts. As a result of Government of Pakistan’s policy of biometric verification of all mobile sim card holders, now m-wallet accounts can now be opened by simple text message. This window has enabled branchless banking operators to open m-wallet accounts in convenient manner and the subsequent growth witnessed is a proof of this fact. TMFB has the largest number of deposit accounts with 4.95 million depositors. It is followed by WMFB with 3.1 million accounts and KBL at third with 1.1 million accounts. Both TMFB and WMFB have been allowed to open m-wallet accounts using USSD string and bulk of the deposit accounts are m-wallet accounts.

Exhibit 2.8: Growth in deposits and number of depositors

Overall, TMFB has the largest deposit base with PKR 15.6 billion among the MFBs up from 12.3 billion in the previous year; followed by KBL with PKR 12.2 billion and FMFB at third place with PKR 9.96 billion as shown in the Exhibit 2.9.

17.5

12.2

10.1

9.1

5.6

5.5

4.8

4.6

3.8

1.3

12.2

9.0

7.7

5.2

4.5

4.0

2.5

3.8

2.7

1.2

- 5 10 15 20

KBL

TMFB

NRSP

NRSPBank

FMFB

FINCA

Akhuwat

KF

ASA-P

BRAC-P

Billions

2014 2015

0

10

20

30

40

50

60

70

0

2,000

4,000

6,000

8,000

10,000

12,000

2011 2012 2013 2014 2015 Depo

sitso

utstandinginbillions

Depo

sitorsinthou

sand

s

Depositors DepositsOutstanding



25

Exhibit 2.9: Deposit Growth by MFB

Despite the impressive growth in the deposit size by MFBs the overall deposit to GLP ratio for the industry continued to exhibit a decreasing trend as show in the Exhibit 2.10. The deposit to GLP ratio for MFBs decreased to 108 percent from last year’s 116 percent. This point’s towards the fact that the credit growth has outpaced the growth in deposits and MFBs will have to rely on a combination of debt and deposits to meet their funding needs.

Exhibit 2.10: Deposit-To-GLP Relation for MFBs

Micro-insurance indicators including both the number of policy holder and sum insured continued to show an increasing trend. The number of policy holders grew to 4.5 million from 3.7 million in the previous year showing a growth of 22 percent (see Exhibit 2.11). In the same time period, the sum insured grew by 35 percent to close at PKR 81.3 billion as compared to PKR 60.4 billion in the previous year. The segment remains dominated by health insurance and credit life insurance. NRSP remains the largest provider of micro-insurance with 926 thousand policy holders; at second place is KBL with 577 thousand and is followed by KF with 498 thousand policy holders. In terms of sum insured, KBL is the largest provider of micro-insurance with PKR 19.2 billion of sum insured followed by NRSP with PKR 16.3 billion and at third place is TMFB with PKR 13.1 billion sum insured.

15.7

12.5

9.7

7.3

6.1

4.5

3.2

1.1

0.0

12.3

8.7

8.7

5.2

4.7

1.2

1.3

0.7

0.0

0 5 10 15 20

TMFB

KBL

FMFB

NRSP-B

FINCA

AMFB

WMFB

Ubank

POMFB

InPKRBillions

2014 2015

0%

20%

40%

60%

80%

100%

120%

140%

0

10

20

30

40

50

60

70

2011 2012 2013 2014 2015

Depo

sit-to

-GLPRatio

InPKR

Billions

Deposits GLP Deposit-to-GLP



26

Exhibit 2.11: Growth in Number of Policy Holders & Sum Insured

Scale and Outreach: Depth The depth of outreach in microcredit operations is measured by a proxy indicator: average loan balance per borrower in proportion to per capita Gross National Income (GNI). A value below 20 percent is assumed to mean that the MFP is poverty focused. Comparison across peer groups shows that the ratio of average loan balance to per capita GNI for MFBs has been on the rise since the past three years (see Exhibit 2.12). MFBs tend to target the upper end of the market through relatively larger loan sizes, and hence have a ratio of 25 percent compared to MFIs and RSPs which have a ratio of 10 percent and 11 percent, respectively.

Exhibit 2.12: Depth of Outreach by Peer Groups

Here it must be kept in mind that low account size does not guarantee a lower income clientele nor does a higher loan size means that the MFPs are moving out of their target markets. Since, many of the MFPs use a graduation model of loan sizes, overtime first time borrowers decline resulting in increasing of loan sizes19. This situation holds true for MFPs in Pakistan which have large number of returning clients among its active borrowers. This is particularly true for MFBs who are upscaling loan sizes to cater to funding needs of micro-enterprises. Another reason can be the realization among 19 Measuring Results of Microfinance Institutions, Richard Rosenberg, June 2009, CGAP

0

10

20

30

40

50

60

70

80

90

1.20

1.70

2.20

2.70

3.20

3.70

4.20

4.70

5.20

2011 2012 2013 2014 2015

SumInsuredinPKR

Billions

PolicyH

olde

rsinm

illions

PolicyHolders SumInsured

0%

5%

10%

15%

20%

25%

30%

2011 2012 2013 2014 2015

AverageLoanBalancePerGDP

MFB MFI RSP Cut- off Industry



27

practitioners that the loan sizes are unnecessarily conservative and increasing loan sizes is not related to catering for lower income segments20. This is also true for players in Pakistan as number of them have lately recalibrated their loan sizes to keep up with the requirements of their clients and inflation. Lending Methodology Overall, group lending methodology continues to dominate the industry; however, individual lending is gaining in popularity. This is evident from the increase in the share of individual borrowing which increased from 24 percent in 2014 to 27 percent in 2015. For higher loan sizes, players have shown a clear inclination towards individual lending. Among the peer groups, MFBs have shown a preference towards individual lending as compared to group lending. Moreover, for larger loan sizes players have shown a clear bias towards individual lending.

Exhibit 2.13: Lending Methodology Trend

Gender Distribution Women borrowers continue to account for the majority of microfinance borrowers in the country. Nearly 55 percent of the active borrowers are women as compared to 58 percent in 2014. The situation varies among the three peer groups with 75 percent of borrowers of the RSPs and MFIs are women whereas only 24 percent of borrowers of MFBs are women as shown in the Exhibit 2.14.

20 Ibid

10% 12% 22% 24%27%

90%88%

78%76%

73%

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2011 2012 2013 2014 2015

Activ

eBo

rrow

ersInThou

sand

s

IndividualBorrowing GroupBorrowing



28

Exhibit 2.14: Gender Distribution of Credit Outreach by Peer Group

Portfolio Distribution by Sector Credit portfolio distribution by sector exhibited little change over the last one year. Agriculture and livestock continued to account for the majority of the borrowers with 39 percent share, followed by service and trade making up 35 percent of the market share and manufacturing accounting for 8 percent of the industry’s borrowers.

Exhibit 2.15: Active Borrowers by Sector

76%

25% 25%

45%

24%

75% 75%

55%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

MFB MFI RSP Total

MaleBorrowers FemaleBorrowers

23% 22% 22% 23% 20%

15% 16% 16% 16% 19%

38% 35% 30% 29% 25%

7% 9%8% 8% 10%

9% 9%9% 9% 8%

0% 0%0% 0% 0%

8% 9% 15% 15% 18%

0%10%20%30%40%50%60%70%80%90%100%

2011 2012 2013 2014 2015

Agriculture Livestock/Poultry Trade Services Manufacturing/Production Housing Other



29

Rural Urban Lending The rural borrowers continue to dominate the sector as compared to urban borrowers despite the fact that rural borrowers witnessed a decrease from 57 percent in 2014 to 54 percent in 2015. Borrowers of two of the largest players NRSP, NRSP Bank and KBL remain predominantly focused on rural areas.

Exhibit 2.16:-Active Borrowers by Urban / Rural Areas

Financial Structure Asset Base The total asset base of the microfinance industry stood at PKR 145 billion in 2015. The asset base grew by 45 percent as compared to PKR 100 billion in 2014. MFBs accounted for 67 percent of the industry of the assets followed by MFIs and RSPs with 20 percent and 13 percent share, respectively (see Exhibit 2.17).

Exhibit 2.17: Share of Asset Base by Peer Group

54%44% 42% 43% 46%

46%56% 58% 57% 54%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2011 2012 2013 2014 2015

Urban Rural

67%

20%

13%

MFB MFI RSP



30

The asset base of MFB’s increased by 40 percent from PKR 69 billion in 2014 to 97 billion in 2015 as shown by the Exhibit 2.18. In the same time period the asset base of MFIs witnessed an increase of 81 percent which was largely due to inclusion of Akhuwat in the dataset. In addition, RSPs saw an increase of 27 percent in their assets.

Exhibit 2.18: Total Asset Base by Peer Group

10 of the larger MFPs accounted for 80 percent of the asset base of the industry (see Exhibit 2.19). This included 5 MFBs, 3 RSPs and 2 MFIs. The top three MFPs by asset size are all MFBs. The largest MFP by asset base is KBL with an asset base of PKR 26.6 billion. It is followed by TMFB with an asset base of PKR 21.0 billion. At third place is NRSP Bank with a balance sheet size of PKR 14.3 billion. Among the non-bank players NRSP has the largest asset base with PKR 12.9 billion.

Exhibit 2.19: Asset Base of Larger MFPs

3039

5569

97

6 10 13 1629

12 11 13 15 19

0

20

40

60

80

100

120

2011 2012 2013 2014 2015

PKRinbillions

0 5 10 15 20 25 30

KBLTMFB

NRSPBankNRSPFMFBFINCAKashf

AkhuwatASA-PPRSP

Billions

AssetBaseofLargerMFPs

2014 2015



31

Asset Composition On the whole asset utilization ratio continued to show an improving trend as seen in the Exhibit 2.20. Reliance on deposits for funding needs and longer grace period for loans being extended to the sector have reduced the need among players for keeping large cash balances resulting in a better asset utilization ratio. Also, improving ratio can also indicate towards better treasury management.

Exhibit 2.20: Asset Utilization Ratio

The ratio varies among the peer groups with RSPs having the highest with 73.5 percent closely followed by MFIs with 72.5 percent. MFBs have a value of 56.9 percent. The figure is lower for the MFB peer group as the number of newly acquired and established entities have smaller credit portfolios. Compared to the regional peers the asset utilization ratio is on the lower end and there remain sufficient room for improvement as shown in the Exhibit 2.21. Use of extended grace period and financing instruments with bullet repayments will lead to an improvement in the ratio.

Exhibit 2.21: Regional Comparison of Asset Utilization

51.2%54.7% 54.5%

61.5% 62.2%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

2011 2012 2013 2014 2015

AssetUtilizationRatio

61.36%

82.82%

72.32%78.85% 79.04%

88.43%

62.2%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

100.00%

Africa EastAsiaandthePacific

EasternEuropeandCentral

Asia

LatinAmericaandTheCaribbean

MiddleEastandNorthAfrica

SouthAsia Pakistan



32

Funding Profile Overall, the share of deposits in the industry’s capital structure continues increase over time. Currently, 45 percent of the industry’s funding needs are met by deposits as show in the Exhibit 2.22. The share of the debt among the capital structure currently stood at 33 percent in the previous year. The percentage of equity decreased by 1 percent as compared to last year to close at 22 percent in 2015.

Exhibit 2.22: Capital Structure of the Industry

However, the capital structure varies among the peer groups. MFBs are using a combination of debt and equity to meet their funding needs. Despite impressive growth in deposits, MFBs are borrowing from diverse set of lenders to meet their funding needs. 67 percent of the funding needs of the MFB peer group is met by deposits up from 64 percent in 2014 (See Exhibit 2.23). In the same period, debt by MFBs decreased marginally by 1 percent to close at 12 percent. In case of MFIs and RSPs, they are totally dependent on debt for on lending. For MFIs the percentage of debt funding decreased from 80 percent to 77 percent in 2015. This can be attributed to inability of most of the players in this peer group to raise additional debt. RSPs also, witnessed a modest increase of 1 percent in debt in the same time period. With funding lines from national apex fully funded these MFIs are finding it hard to obtain funds from commercial lenders.

Exhibit 2.23: Capital Structure by Peer Group

21% 20% 22% 23% 22%

50%44% 35% 33% 33%

29% 37%43% 44% 45%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2011 2012 2013 2014 2015

Equity Debt Deposits

22% 21% 20% 23%30% 29%

13% 12%

80% 77%70% 71%

64% 67%

0%10%20%30%40%50%60%70%80%90%

2014 2015 2014 2015 2014 2015

MFBs MFIs RSPs

Equity Debt Deposits



33

Profitability and Sustainability The total revenue for the industry stood at PKR 32.8 billion up from PKR 24.3 billion in 2014. The net income for the industry stood at PKR 5.1 billion up from PKR 3.5 billion in the previous year. The unadjusted ROE and ROA for the industry stood at 19.2 percent and 4.0 percent respectively in 2015. The industry continues to be sustainable with two main indicators of sustainability continue to show improving trend. The FSS for the industry stood at 121 percent in 2015 as against 120 percent in 2014 as shown in the Exhibit 24. In the same time period the OSS for the industry stood at 124 percent as against 121 percent in the previous year. Out of the 44 reporting organization, 39 have an OSS above 100 percent. The increase in revenue is due to increase in GLP which is due to a combination of rising loan sizes and increasing outreach.

Exhibit 2.24: OSS and FSS Trend

The year saw a decline in the total revenue ratio for the industry which fell from 29 percent in 2014 to 26 percent in 2015 (see Exhibit 2.25). This can be partially attributed to the decrease in the yield of gross portfolio which fell from 36 percent to 35 percent in the same time period.

Exhibit 2.25: Total Revenue Ratio & Yield on Portfolio

0%

20%

40%

60%

80%

100%

120%

140%

2011 2012 2013 2014 2015

Financialselfsufficiency(FSS) OperationalSelfSufficiency(OSS)

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

2011 2012 2013 2014 2015

Totalrevenueratio Yieldongrossportfolio(Nominal) Yieldongrossportfolio(Real)



34

Despite the decrease in the yield on loan portfolio, it remains on a higher end when compared to regional peers as shown in the Exhibit 2.26. As the industry matures and reaches scale the yield will decrease further. Moreover, rising loan sizes will also play a crucial role in decreasing operating costs leading to decrease in the yield.

Exhibit 2.26: Regional Comparison of Nominal Yield

With the total revenue for the industry standing at PKR 32.8 billion in the 2015, 79 percent of the revenue is made up by earnings from loan portfolio; revenue from investment in financial assets make up 12 percent while earnings from financial services account for remaining 9 percent as shown in the Exhibit 2.27. The total income from branchless banking stood at PKR 3.90 billion as compared to PKR 2.3 billion in 2014.

Exhibit 2.27: Revenue Streams

The expense to asset ratio witnessed a decrease as compared to last year. Total expense to assets ratio witnessed a decrease from 23.7 percent in 2014 to 21.5 percent in 2015 (see Exhibit 2.28). This decrease was largely due to decline in financial expense and operating expense ratios. The decrease in financial expense can be attributed to falling interest rates in the country. The decrease in operating expense is result of maturing of the industry and increasing loan sizes.

31.8%

21.2%19.1%

25.1%28.0%

23.2%

34.6%

0%

5%

10%

15%

20%

25%

30%

35%

40%



Asia



SouthAsia Pakistan

Yieldongrossportfolio(nominal)

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

2011 2012 2013 2014 2015

PKRinbillions

LoanPortfolio FinancialServices FinancialAssets



35

Exhibit 2.28: Expense Ratios Trend

Operating expense to GLP ratio continued to exhibit a declining trend after witnessing a small increase last year. The ratio declined to 21.7 percent from 22.8 percent in 2014 (see Exhibit 2.29). The decrease was on the back of declining administrative and personnel expense. Increasing loan sizes especially with the sector expands credit operations to cover microenterprises this ratio will witness further decline in coming years.

Exhibit 2.29: Operating Expense to GLP Trend

In comparison to regional peers, the unadjusted operating expense/asset for Pakistan lies close to the average (see Exhibit 2:30). However, it is on the higher end as compared to South Asia. There is a need for players to make concentrated efforts to work on reducing costs and improving efficiency

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

2008 2009 2010 2011 2012 2013 2014 2015

Adjustedtotalexpense/totalassets Adjustedfinancialexpense/totalassets

Adjustedloanlossprovisionexpense/totalassets Adjustedoperatingexpense/totalassets

0%

5%

10%

15%

20%

25%

30%

2010 2011 2012 2013 2014 2015

Operatingexpense/Grossloanportfolio Personnelexpense/Grossloanportfolio

Adminexpense/Grossloanportfolio



36

Exhibit 2.30: Regional Comparison of Operating Expense/Assets

Productivity The personnel allocation ratio witnessed a decline after seeing a modest improvement in the previous year. The ratio declined to 40.9 percent from 46 percent on 2014 as shown in the Exhibit 2.31. The ratio continues to vary among the peer groups with MFIs having the highest value at 46.5 percent; followed by RSPs with 44.9 percent and MFBs with 32.9 percent.

Exhibit 2.31: Personnel Allocation Ratio Trend

Compared with regional peers, the personnel allocation ratio for the microfinance industry in Pakistan remained at a lower end with the exception of Africa and East Europe as seen in the Exhibit 2:32.

11.91%

5.65%7.04%

15.40%14.25%

5.54%

10.9%

0%2%4%6%8%

10%12%14%16%18%



Asia



SouthAsia Pakistan

OperatingExpense/Assets

42.9%

50.5% 49.8%

44.0% 46%

30.9%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

2010 2011 2012 2013 2014 2015

Personnelallocationratio



37

Exhibit 2.32: Regional Comparison of Personnel Allocation Ratio

Productivity indicators exhibited a mixed trend in the year 2015 (see Exhibit 2.33). While loans per staff and loans per loan officer witnessed a decline the number of depositors per staff witnessed an increase. As the number of m-wallet accounts increase we are likely to see the continuation of this trend. Loans per staff and loans per loan officers may witness further dip as individual lending continues to increase. Moreover, as MFBs move into the microenterprise segment, more close scrutiny and monitoring by loan officers would mean further decrease in this ratio.

Exhibit 2.33: Productivity of MFPs

37.99%

47.43%

31.94%

44.76%

54.02%58.83%

39.2%

0%

10%

20%

30%

40%

50%

60%

70%



Asia



SouthAsia Pakistan

Personnelallocationratio

0

50

100

150

200

250

300

350

400

450

2011 2012 2013 2014 2015

Loansperstaff Depositorsperstaff LoansperLoanOfficers



38

Risk Credit Risk PAR > 30 days witnessed a slight increase from 1.1 percent in 2014 to 1.5 percent increase in 2015 as shown in the Exhibit 2.34. However, write offs declined from 2.3 percent to 1.2 percent in the same time period. Overall, the industry PAR> 30 days remained below the 5 percent benchmark reflecting positively on the portfolio quality of the industry. With MF-CIB fully operational and in the process of becoming part of the MFPs risk management process, we are likely to witness further mitigation in the credit risk.

Exhibit 2.34: PAR>30 days & Write off Trend

Conclusion The year 2015 witnessed microfinance industry in Pakistan continue its growth trend. Double digit growth was witnessed in all areas including credit, deposit and insurance. The ease of opening an m-wallet account led to a phenomenal growth in the saving accounts of MFBs. Women borrowers continued to dominate the industry. Moreover, rural areas and agriculture sector remained the main focus of the practitioners. The industry continued to improve its sustainability and also witnessed increase in profitability. On the funding side, while MFBs were able to successfully mobilize deposits but they were not able to meet their funding needs leading them to borrow from commercial lenders. However, the funding remained a big challenge for MFIs and RSPs. Many of them are actively looking to diversify their source of financing to address this challenge. Although yield on the portfolio witnessed a decrease, cost continued to remain comparatively high. In addition, the productivity indicators were not encouraging either. There is crucial need for microfinance players in the country to reduce costs as only this can reduce loan pricing.

4.1%2.9%

3.7%

2.5%

1.1% 1.5%

1.8%

2.6%

2.3%

1.5%

2.3% 1.2%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2010 2011 2012 2013 2014 2015

PortfolioatRisk>30days WriteOff Cutoff

Section 3 Social Performance


39

Social Performance

Introduction

The microfinance sector in Pakistan has shown an increasing focus on balancing social performance and financial sustainability among microfinance providers (MFPs). There is an understanding of microfinance as a double-bottom line industry, where sustainability is not an end in itself; but rather a means to achieving social goals. These goals can differ; while some MFPs may have a vision of poverty alleviation or women and rural community empowerment, others focus on increasing access to formal finance for the poor and low-income strata of the population. In all cases, it has become important for MFPs to track their progress towards achieving their respective social goals, using social performance indicators in the same way that financial data is used to manage the financial bottom line. The following section will outline key social performance indicators as monitored across the Pakistan microfinance landscape. We will attempt to analyze industry trends across various SP indicators, including social goals, poverty target, governance & HR, diversity in financial and non-financial service provision, client protection, pricing norms and environment.

Analysis of the Sector’s SP Indicators The Microfinance Information eXchange (MIX), in collaboration with the Social Performance Task Force (SPTF), has developed an annual social performance reporting framework for MFPs. This framework has recently been formatted to better suit the reporting needs of the industry, and includes a new comprehensive set of indicators on institutions’ social goals, target segments and other services. As self-reported data, the MIX framework allows MFPs to select multiple categories that are applicable to their respective institution. For example, within the ‘target population sub-section, an MFP may report to targeting all or none of the ‘women’, ‘clients living in the urban area’, ‘youth and adolescents’ and ‘clients living in the rural areas’ categories if those are applicable to their practices.

At the time of this publication, 32 PMN member MFPs21 reported on the new MIX Social Performance framework, including 9 MFBs (out of 10 MFB members), 19 MFIs (out of 36 MFI members) and 4 RSPs (out of 6 RSP members). The number of reporting MFPs is expected to increase by the end of June, as fiscal year draws to a close for 35 of our member MFPS; all responses will be published on the MIX market website for each successive reporting MFP.

Reporting to MIX SP framework 2014 Total PMN Membership MFB 09 10 MFI 19 36 RSP 4 6 Total 32 52

21 These include KBL, FINCA, TMBL, KF, NRSP, NRSP Bank, FMFB, Waseela, TRDP, PRSP, APMBL, U Bank, POMFB, OLP, OSDI, SVDP, SSF, Naymet, Agahe, Akhuwat, CSC, RCDS, BEDF, FFO, MO, Mojaz, JWS, BRAC, OCT, NRDP, OPD



40

Target Market Having a clear understanding of the population that an MFP aims to reach, helps to focus their efforts and optimize the limited resources available. Providing services that are relevant, client oriented and effective in serving an organization’s mission requires a thorough identification of the target market. MFPs target markets by peer group are highlighted in Exhibit 3.1. Out of 9 reporting MFBs, 8 cited multiple targets, including women and clients living in rural areas and clients living in urban areas, while two MFBs also reported targeting youth and adolescent segment of the society. Of the 19 reporting MFIs, the majority 18, target clients in rural areas. Women and clients in urban areas make the second largest target group with 15 MFIs catering to them, while 4 MFIs also reported targeting the youth. Overall, clients are targeted based on gender and location. While the focus on rural areas is relatively greater, there is also a growing emphasis on urban clients, particularly among MFPs providing individual loans.

Exhibit 3.1: MFPs’ Target Markets

Development Goals An analysis of the mission statements of MFPs yield that all MFPs have some social development goals built into their mission with common themes across the peer group spectrum and these rarely change on an annual basis. For example, mission statements of the microfinance banks tend more to focus on expanding access to quality financial service to low income population, employment generation and growth of existing businesses and as a result improve their quality of life, economically and socially. Themes of poverty alleviation, empowerment of the ‘marginalized’ and expanding economic opportunities emerged as more common amongst the non-bank MFPs. Support to start-up businesses, which is generally considered a risky initiative for microfinance, has also seen growing interest amongst some MFPs. A focus on women is quite common in the sector as well. Majority of MFPs have explicitly designed products, services, and procedures to accomplish these social goals. The most common objectives were found out to be increased access to financial services and poverty reduction, with 30 and 28 reporting MFPs respectively citing these are their objectives. The other mostly commonly cited development goals across all peer groups are growth of existing businesses, employment generation, and gender equality and women’s empowerment (Exhibit 3.2).

8 8 9

1518 15

4

34

3

0

5

10

15

20

25

30

35

Women Clientslivinginruralareas Clientslivinginurbanareas

Adolescentsandyouth

No.ofR

espo

nses

MFBs MFIs RSPs



41

Exhibit 3.2: Development Goals

Poverty Targeting In terms of poverty level of targeted clients, almost all of the reporting institutions target more than one segment of the poor. Overall, the most common target market for the sector in terms of income is low income clients, closely followed by poor clients. Only 4 reporting MFIs and 2 RSPs reported targeting very poor clients. MFIs and RSPs are largely targeting both poor and low income clients, while the MFBs tend to cater more to low income clients.

Exhibit 3.3: Poverty Targets

9 7 94

91 2 4 1 1

1717 11

11

16

3 68

14

16

44

2

2

1

11

4

1

0

5

10

15

20

25

30

35

No.ofR

espo

nses

MFBs MFIs RSPs

58

4

14

16

2

3

3

0

5

10

15

20

25

30

Verypoorclients Poorclients Lowincomeclients

No.ofM

FPre

spon

ses

MFBs MFIs RSPs



42

Poverty Measurement Tools Many MFPs in Pakistan microfinance sector have institutionalized poverty measuring processes in their operations. They collect economic, social, and/or other types of wellbeing indicators from clients for the express purpose of determining and/or tracking these clients' poverty levels. Assessing the poverty level of clients serve multiple purposes like guide client targeting and selection for MFPs, establish baselines of client poverty for subsequent impact evaluations, appraisal of financial services to better suit needs of clients and overall measurement of the program’s effectiveness.

Exhibit3.4:PovertyAssessmentToolsusedbyMFPs

While all 19 reporting MFPs cited using one or more poverty scoring methods, only 5 MFBs reported doing so. Some MFPs employ only one method to measure poverty levels, others use multiple assessment tools, as shown in Exhibit 3.4. MFPs report use of their own proxy poverty index, as well as Grameen Progress out of Poverty Index (PPI) and per capita household income and expenditure. While the MIX SP framework does not cover the poverty scorecard prescribed by the Pakistan Poverty Alleviation Fund (PPAF) designed by The World Bank, this is predominantly used by MFIs as partner organizations of PPAF.

1

3

2

1

4

4

4

2

1 1

7

1

0

1

2

3

4

5

6

7

8

9MFBs MFIs RSPs



43

Governance & HR Two of the Standards in the USSPM pertain to Governance and Human Resource (HR) management and how to design policies so as to further the social goals of MFPs. The rationale behind inculcating social performance indicators in governance and HR structures is to allow MFPs to gauge commitment to their social development goals at the institutional level. Sensitivity to social performance in governance structures entails Board members receiving orientation on the social mission of the MFP, the presence of a SP champion or committee at the Board level, and Board level experience in SPM. During orientation, Board members are provided with an explanation of (or training on) the institution’s social mission and goals. Social performance champions are members of the Board of Directors that are assigned to oversee integration of social performance management practices within an institution while SP committees are formal entities within the Board that meet on a regular basis to discuss topics related to institutional SP. SP-related work experience should be understood broadly as referring to any experience or training related to managing social performance at MFPs. Exhibit 3.5 shows 7 out of 9 reporting MFBs responded positively to Board members receiving SP orientation on a routine basis and one or more Board members having experience in SP management, while 4 of the 9 MFBs have an SP champion or committee at the Board level.

Exhibit3.5:SocialPerformanceManagementattheBoard

Majority of reporting MFIs show strong performance on Board orientation of social mission and experience in SPM (18 out of 19 and 16 out of 19 reporting MFIs respectively). This can be attributed to the commitment of Pakistan Poverty Alleviation Fund, apex lender for microfinance in the country, to strengthening SP management at its partner organizations. PPAF has conducted numerous institutional level trainings for its partner organizations (primarily MFIs) on social performance management, good governance and risk management for different levels of the institutions’ – including Board members, senior management and staff. Good governance workshops and corporate governance trainings for Board members, as well as trainings on effective risk management have been conducted to create greater responsibility within these institutions’ towards their social objectives. Staff incentives at MFPs relate to the number of clients entertained by the field staff, the quality of interaction with clients based on client feedback mechanisms, quality of social data collected and/or the portfolio quality maintained by field staff. Exhibit 3.6 shows that across the Pakistan microfinance industry, portfolio quality is the most cited factor for staff incentives, both for MFBs and non-Bank MFIs. This means that MFPs have incentives and/or bonus systems designed to reward staff based (in whole or in part) on whether staff members consistently collect loan payments on time. The second most prevalent factor is number of clients, which means MFPs have incentives and/or bonus systems designed to reward staff based (in whole or in part) on the number of clients in field officers' portfolios. These can be based on total number of clients, number of clients meeting specific criteria (e.g. new clients, returning clients, etc.), or both. Exhibit 3.7 shows that all MFPs use a combination of these measures for calculating staff incentives, with the most common being total number of clients, followed by number of new clients.

7

4

7

18

7

16

3

1

4

0 2 4 6 8 10 12 14 16 18 20

Boardorientationofsocialmission

SPMchampion/committeeatBoard

BoardexperienceinSPM

No.ofReportingMFPs

RSPs MFIs MFBs



44

Exhibit 3.6: Staff Incentives related to SPM

Exhibit3.7:Methodforincentivizingnumberofclients

The USSPM necessitates an MFP to treat its employees responsibly. Building upon that Human resource policies related to SP include the presence of social protection (medical insurance and/or pension contribution), safety policy (protecting staff members from external harm while in the field), anti-harassment policy, non-discrimination policy (explicit policy against discrimination based on sex or ethnicity in matters of hiring, firing, and payment of staff members) and a grievance resolution policy (a formal channel or channels for communicating and redressing problems staff may have on the job).Exhibit 3.8 shows that all reporting MFPs have strong reporting on having social protection, anti-harassment policy in place, a grievance resolution policy for staff, and non-discrimination policy. However, there appears a gap in policies pertaining to safety of the staff members while out in the field with only 15 out of 32 reporting MFPs having any safety mechanism in place.

22

75

24

Numberofclients Qualityofinteractionwithclientsbasedonclientfeedbackmechanism

Qualityofsocialdatacollected

Portfolioquality0

5

10

15

20

25

30

53

1

6

7

6

22

3

0

2

4

6

8

10

12

14

Incentiveon'totalnumberofclients'

Incentiveon'numberofnewclients'

Incentiveon'clientretention'

No.ofR

eportin

gMFPs

MFBs MFIs RSPs



45

Exhibit3.8:HRpoliciesrelatedtoSP

Products and Services: Financial Microfinance encompasses a range of financial services for the low income and poor households; including savings, insurance and money transfer services along with credit. This sub-section summarizes the range of financial products offered by MFPs in Pakistan, based on the assumption that microfinance clients are a heterogeneous group with varying financial needs.

Credit All reporting organizations offer microcredit services, for income generating purposes as well as for non-income generating purposes. According to Exhibit 3.9, all reporting MFPs offer income generating loans, while a few also offer non-income generating or consumption based loans.

85

79 8

16

8

18 1514

3

2

44

3

0

5

10

15

20

25

30

35

Socialprotection(medicalinsuranceand/orpensioncontribution)

Safetypolicy Anti-harassmentpolicy

Non-discriminationpolicy

Grievanceresolutionpolicy

No.ofR

espo

nses

MFBs MFIs RSPs



46

Exhibit3.9.:TypeofCreditProductsofferedbyMFPs

The diverse nature of microfinance clientele with multi-dimensional needs necessitates MFPs to go beyond generic product design and differentiate their products to serve different market segments and customer demands. Exhibit 3.10 shows the range of activities for which income-generating loans are available in Pakistan. Loans for microenterprises and agricultural and livestock microcredit are by far the most common, with 29 out of 32 reporting MFPs offering these. Other activities for which a growing number of MFPs offer credit products include SME loans and express loans. This suggests that product differentiation in credit is under way and MFPs are beginning to offer products beyond the typical microenterprise loan; with some MFPs moving up the market to target MSMEs as well as offer timely express loans.22

Exhibit 3.10: Credit Offerings

22 While express loans are generally considered short-term loans intended to help clients take advantage of unexpected business opportunities, there is a need to analyze the increasingly popularity of express loans, as well as their use in financing the MSME sector through microfinance

TypesofCreditProducts

Non-incomegeneratingloans Incomegeneratingloans

9 83

16

9

17

4 4

05101520253035

Microenterpriseloans SMEloans Agriculture/livestockloans Expressloans

No.ofM

FPre

spon

ses

Creditproductsoffered

MFBs MFIs RSPs



47

Deposits Only about 43 percent of the reporting MFPs offer savings products. This can be attributed to the fact that the ability to offer this service is largely determined by the legal status of an MFP: all MFBs, by virtue of being regulated banks, are allowed to intermediate client deposits, and thus all reporting MFBs take deposits. Non-bank MFPs can only mobilize deposits. All MFBs offer both demand deposit accounts and time deposit accounts, based on the needs of their clients; though further diversified savings products and access to these savings products would help boost uptake among small-holder savers. Exhibit 3.11: Savings Products Offered

Insurance The insurance indicator looks both at compulsory insurance, which is typically clubbed with credit products, and voluntary insurance offered to clients as a stand-alone product. A majority of reporting MFPs offer insurance products to meet clients’ needs and to protect them against risk of losses. Out of the reporting MFPs offering compulsory insurance products, the majority offer credit life insurance only, with limited MFPs offering other types of insurance such as life/accident and agriculture etc. (see Exhibit 3.12). Over the past few years, some MFIs have introduced voluntary insurance products through partnerships with insurance providers, offering life/accident, agriculture/livestock and health insurance products. . As sector developer of microfinance industry in Pakistan, PPAF has played a pivotal role towards development and implementation of sustainable, scalable, affordable and flexible insurance products. First of their kind in Pakistan, these products are driven by risk management needs of those at the bottom of the pyramid. Through strategic partnership with SECP, Microfinance Institutions, insurance companies, Metrological Department, National Agriculture Research Council (NARC), private sector entities and renowned experts in the fields of insurance and agriculture, PPAF has designed and launched two different types of crop insurance and multiple livestock insurance products. Crop and livestock micro-insurance products have been implemented for farmers across Sindh and Punjab, where a total of 70,409 animals have been insured in 10 districts while 38,239 acres of crop have been insured under crop yield and weather based micro- insurance products in 4 districts. Recent settlement of claims across communities wherein the micro-insurance products have been implemented has evidenced the role of micro-insurance as a risk mitigation tool to protect livelihoods of the vulnerable segments of the society. While a more diversified range of insurance products is welcome, there is also a need to create greater awareness around benefits of existing insurance products available to clients.

44%

56%

Savingsproductsoffered

Savingsaccounts Doesnotoffersavingsaccounts



48

Exhibit3.12:CompulsoryandVoluntaryInsuranceProvisionbyPeerGroups

Exhibit3.13:TypesofVoluntaryInsurancebyPeerGroups

73

5

10

11

2

2

02468101214161820

Creditlifeinsurance Life/accidentinsurance Agricultureinsurance

No.ofR

espo

nses

MFBs MFIs RSPs

1

3

1

1 1

4

0

1

2

3

4

5

6

7

8

9

CreditLifeInsurance Life/accidentinsurance Agricultureinsurance Healthinsurance

No.ofR

espo

nses

MFBs MFIs RSPs



49

Other Financial Services Other than traditional credit, savings and insurance products, MFBs tend to dominate other financial services provided by MFPs, offering one or more other financial services amongst the following categories: debit/credit card, mobile banking services, savings facilitation, remittances services/money transfer services, payment services and scholarship/educational grants (as shown in Exhibit 3.14). Some MFIs are now offering clients the facility to repay loan installments through branchless banking agents, while some have also supported clients’ families through educational grants/scholarships.

Exhibit3.14:Provisionofotherfinancialservices

Products and Services: Non-Financial Nonfinancialenterpriseservicesareanynonfinancialservicesaimedatimprovingeithertheentrepreneurialskillsofclientsortheperformanceoftheirenterprises.Thiscategory includeseducationrelatedtorunningabusinessbutnotfinancialliteracyassuch.Nonfinancialservicescanbeofferedbytheinstitutiondirectlyorthroughapartnership.Inmostcases,MFPsoffernon-financialservicesinadditiontofinancialproductsandservices;theseservicesvaryaccordingtothecapacityandvisionoftheinstitution,butthepurposeistodevelopclientskillsand/orprovidebasicservicesthattheyareunabletoattainduetofinanciallimitations.Thiscantaketheformofprovisionofbasicserviceslikehealthandeducationor business and/or technical skills training. For the purpose of this analysis, such services are grouped into four maincategories:enterprise,education,healthandwomen’sempowerment.

5 5 6 75

5

3

1

1

11

0

2

4

6

8

10

12

No.ofM

FPRespo

nses

MFBs MFIs RSPs



50

Exhibit3.15:Non-FinancialServices

Contrary to theMFBs having a lead in provision of other financial services, in this domain,MFIs and RSPs are activelyprovidingall typesofnon-financialservices in themarket;especially thosecommittedtoaparticularsocialmission (seeExhibit3.15).WhileMFIsandRSPsareofferingatleastone(insomecasesmultiple)non-financialservice,onlyoneMFBisofferingeducationservicestoitsclients.Educationserviceslikefinancialliteracyeducation,childandyoutheducationandbasichealth/nutritioneducationarethemostpopularnon-financialservicebeingofferedbyMFPs.Followedbyenterpriseservices,suchasenterpriseskillsdevelopmentandbusinessdevelopmentservicesandwomen’sempowerment includingwomen’srightseducation/genderissuestrainingandleadershiptraining.AhandfulofMFPsalsoofferhealthserviceslikebasicmedicalandspecialmedicalservicesforwomenandchildren.

Transparency of Cost Pricing transparency is a critical component of a successful double-bottom line microfinance industry. As an essential pre-requisite of consumer protection, social performance and responsible microfinance, pricing transparency is a topic under intense scrutiny by all industry stakeholders. The industry is making a concentrated effort to promote greater pricing transparency using a standardized pricing methodology for easier understanding and comparison across products and MFPs for decision-making. The Pricing Transparency Initiative conducted in Pakistan in collaboration with MFTransparency led to the publication of standardized APRs23 of loan products across MFPs in Pakistan. However, after the closure of the MFTranspraency this year, PMN is gearing up to take this work forward at sector-level on its own. While this indicates a positive step towards increased transparency in displaying costs, a majority of MFPs in Pakistan continue to use the flat methodology to communicate prices to clients – where interest rate is communicated on the basis of the stated initial principal amount of the loan irrespective of the payment plan. Around 62 percent of reporting MFPs are using the flat interest rate method; this is primarily due to the simplicity in calculation and marketing. 47 percent use the declining balance method – which means interest is communicated on the amount of the loan principal which the borrower has not yet repaid (as shown in Exhibit 3.16).

23 APRs for products of 31 MFPs in Pakistan can be accessed on the MFTransparency website at the following URL: http://www.mftransparency.org/microfinance-pricing/pakistan/

14 1417

8

3 3

3

3

0

5

10

15

20

25

Enterpriseservices Womensempowerment

Educationservices Healthservices

No.ofM

FPRespo

nses

MFBs MFIs RSPs

1



51

Exhibit 3.16: How Service Cost is communicated

Exhibit3.17:MethodsofStatingServiceCostbyPeerGroup

47%

62.5%

Decliningbalance Flatinterest

9

3

4 15

2

2

0

5

10

15

20

25

Decliningbalance Flatinterest N/A

No.ofM

FPs

MFBs MFIs RSPs



52

Client Protection One of the principles in USSPM is that of treating clients responsibly. This particular parameter has come to the fore due to a growing need for a commitment of ‘do no harm’ to microfinance clients as practitioner organizations go about operating and expanding their business. These principles help protect clients and help institutions practice good ethics and smart business – which is good for the industry as a whole. There are seven all-encompassing principles of client protection developed by the SMART Campaign, an international consortium of microfinance stakeholders, which coordinates with the work of MFTransparency in the area of pricing transparency. 24 The seven CP principles include:

• Appropriate product design and delivery • Prevention of over-indebtedness • Transparency • Responsible pricing • Fair and respectful treatment of clients • Privacy of client data • Mechanisms for complaint resolution

Exhibit3.18:ClientProtectionIndicators

For the purpose of self-reporting on social performance indicators, MFPs provided information regarding the presence of various institutional-level client protection indicators, including policies supporting good repayment capacity analysis, internal audit compliance, full pricing terms disclosure, APR disclosure, CP code of conduct, sanctions for code of conduct violations, clear reporting systems and data privacy clauses. Overall, the sector shows positive compliance to CP principles, particularly with all reporting MFPs having in place strong repayment capacity analysis, internal audit systems, full pricing terms disclosure, and defined code of conduct. However, as indicated in the sub-section above, not all pricing is disclosed in Annual percentage rates (APR) format, particularly by the non-Bank MFIs. Due to the regulatory framework under which MFBs fall, all reporting Banks show full compliance to the basic CP indicators. Now with the MFIs coming under the regulatory framework of SECP, any gaps in their compliance are likely to be plugged in near future.

24 See the Smart Campaign website for more details on the seven CP principles and how these are promoted and monitored through Smart Assessment tools: http://www.smartcampaign.org/

9 9 9 7 9 8 9 9

18 19 19 18 17 19 19 18

4 3 43 4 4 4 4

05101520253035

Policiessupportgoodrepaymentcapacityanalysis

Internalauditverifycompliancewithpolicies

Prices,installments,termsandconditions

fullydisclosedto

clients

Annualpercentagerates(APR)ofloanproductsdisclosed

Codeofconductclearlydefined

Violationsofcodeofconduct

sanctioned

Clearreportingsysteminplaceforcomplaintsfromclientsatbranches

Contractsincludea

dataprivacyclause

No.ofR

eportin

gMFPs



53

Environmental Policies For the past couple of years, SP reporting to MIX has included MFPs providing information regarding elements of their environmental policies, often considered to be the ‘triple bottom-line’ for microfinance. These environmental policies refer to MFPs promoting awareness on environmental impacts, having tools to evaluate environmental risks’ of client’s activities and including clauses in loan contracts to ensure mitigation of environmental risks through the clients’ businesses (see Exhibit 3.19).

Exhibit3.19:EnvironmentalPoliciesinPlace

In addition to this, a few MFPs reported on various types of environmentally friendly products and/or practices that they are currently piloting, including products related to renewable energy, for example solar panels, biogas digesters and so on. Some MFPs are also engaged in financing environmentally friendly businesses, for example organic farming, recycling and/or waste management (see Exhibit 3.20). The strong performance of the MFI peer group in this area reflects the efforts carried out by the PPAF, to ensure compliance of all its partner organizations to the ‘Environment and Social Management (ESM) Framework. As PPAF-funded institutions, these MFIs are trained on the ESM framework and required to provide quarterly progress update on ESM compliance. External environmental and/or social performance audits are commissioned by PPAF to monitor and physically verify PO compliance of the ESMF. Finally, MFIs are encouraged to incorporate ESM objectives into the Terms of Partnership that they sign with their respective community based institutions.

2 3 2 2

15 13

6 6

4

2

2 2

0

5

10

15

20

25

Awarenessraisingonenvironmentalimpacts

Clausesinloancontractsrequiringclientstoimrove

environmentalpractices/mitigateenvironmentalrisks

Toolstoevaluateenvironmentalrisksof

clients'activities

Specificloanslinkedtoenvironmentallyfriendlyproductsand/orpractices

No.ofR

eportin

gMFPs

MFBs MFIs RSPs



54

Exhibit3.20:EnvironmentallyfriendlyProducts/ServicesOffered:

While the reporting is relatively new in this respect, the industry is taking positive steps in moving towards supporting/financing more environmentally sustainable businesses. There is still a need for more comprehensive work in this area, specifically a natural disaster risk mitigation strategy not just to protect MFPs but also clients and their businesses.

2 1

5

2

7

2 3

0

2

4

6

8

10

12

Productsrelatedtorenewableenergy(e.g.solarpanels,biogas

digestersetc)

Productsrelatedtoenergyefficiency(e.g.insulation,improved

cookingstoveetc)

Productsrelatedtoenvironmentallyfriendlypractices(e.g.organicfarming,recycling,

wastemanagementetc)

No.ofM

FPre

spon

ses

MFBs MFIs RSPs

Section 4 Challenges and Opportunities


55

Challenges and Opportunities As the microfinance industry in Pakistan continues to grow and expand its footprint across the country, its faces a number of new challenges and opportunities. Some of these opportunities and challenges are discussed as follow.

Role of Microfinance in Financial Inclusion in Pakistan Financial inclusion aims to extend financial services to all irrespective of their income levels at affordable costs. With over half the world’s adult population unbanked, global leaders and policy makers have committed themselves to furthering the financial inclusion agenda. According to the World Bank, over 50 countries have publicly committed to financial inclusion strategies so far. According to empirical research, financial inclusion leads to economic growth and employment25. Moreover, it leads to effective and efficient transfer of government social safety net payments26. Also, financial innovation can not only lower transaction costs but also increase outreach resulting in development of new private sector business models such as low costs off-grid energy solutions for households27. Keeping in view the state of financial inclusion in the country as mentioned in Section 1, National Financial Inclusion Policy (NFIS) has been developed with the view of expanding access to finance in the country. The strategy aims to increase the number of adults having access to transaction or formal account from 10 percent at present to 50 percent by 2020. The proportion of women having access to formal accounts would be increased from current 2.9 percent to 25 percent in the same time period. In addition, percentage of adults living within 5 km will be increased and financials products tailored for the needs of SMEs will be encouraged. Microfinance industry can play a pivotal role in providing access to financial services to the unbanked. Using their synergies with the branchless banking platforms microfinance players can extend financial services to the unbanked by utilizing digital channels. Moreover with women clients accounting for bulk of the clientele, practitioners can play an important role in reaching the NFIS target of 25 percent of women having formal account. In addition, MFPs are upscaling their loan sizes and gearing up to tap the lower end of SMEs. In order to further the financial inclusion agenda in the country, PMN has developed a Microfinance Growth Strategy which highlights the role that the sector can play in meeting the NFIS targets. As per the growth strategy the sector aims to reach 10 million active borrowers by 2020 as well as 50 million depositors out of which 15 million will be m-wallet accounts. Out of the 10 million active borrowers, 4 million will be women borrowers. Insurance policy holders will increase to 11 million by 2020. It is hoped that the number of access points increase to 400,000 which will include branchless banking agents, ATMs, POS terminals and brick & mortar branches. The microfinance industry aims to achieve these ambitious targets by working on building a strong industry infrastructure, supportive regulatory environment and coopting government credit schemes.

Mainstreaming Non-Bank Microfinance Players As microfinance industry has evolved and grown over the years, a need has been felt to safeguard the sustainability of the MFPs, ensure growth, foster innovation and protect the rights of the clients at the base of the pyramid. With players having progressed from providing just credit products to a full set of financial services and new players entering in the market, the need for regulating microfinance activities has increased. In addition, growing focus on consumer protection and responsible

25 Financial Inclusion and Development: Recent Impact Evidence, Focus Note 92, CGAP, April 2014 26 Ibid 27 Ibid



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finance and global concerns regarding money laundering and terrorist financing have strengthened the case for regulation. Lastly, increasing interest of policy makers in the financial inclusion sphere and the crucial role microfinance industry can play in reaching out to the unbanked has led to development of regulatory frameworks globally. Recent launch of rules and regulations governing non-bank microfinance providers (MFPs) by SECP is a watershed moment. This will now enable the mainstreaming of non-bank MFPs and create a level playing field in the industry. Pakistani microfinance industry over the years has grown to a stage where it has been felt that some regulation is beneficial rather than restrictive. Organized and willful defaults in Punjab in the last decade have highlighted the importance of institutional protection from external interference. Moreover, as the industry grows, the need for funding sources and access to commercial finance is imperative. A regulatory umbrella can prove to be catalyst for non-bank MFPs to generate investor interest and attract capital. MFBs, regulated by SBP, have witnessed growth and saw their market share increase as compared to non-bank MFPs. The segment has been able to diversify their funding sources and have been able to successfully obtain loans from commercial sources, mobilize deposits and tap into capital markets. Moreover, a number of players intending to enter the industry either set up MFBs or acquired existing ones. The new rules and regulation will allow the non-bank MFPs to provide opportunity to grow and innovate. Non-bank players which are currently working under multiple legal jurisdictions and ambiguous regulatory environment, the new regulations issued by SECP will enable them to work under single and strong regulatory umbrella. In addition, they now have an option to also operate as a for-profit entity which was previously not available to them. In the short term, non-bank MFPs will be protected from external interference and will be able to effectively mitigate reputational risk. In the long run, it will lead to improved standards of corporate governance, increase transparency and disclosure in the sector. In addition, non-bank MFPs will be better able to raise capital and be able to diversify their sources of funding as investor unease regarding the ambiguous regulatory environment will be alleviated. New player intending to enter the industry will have option to set up an MFB or a Non-Bank Microfinance Institute (NBMFI). In addition, consumer protection will be emphasized. The roll-out of the rules and regulation regarding non-bank MFPs at a time when the NFIS has been launched will go a long away in reaching the policy maker’s goal in financial inclusion. With the necessary regulatory support and protection, non-bank MFPs will be able to expand and reach scale while at the same time further the financial inclusion agenda in the country.

Credit Scoring Over the past two decades, credit scoring has been transforming how financial institutions interact with their customers. In developed countries especially, financial institutions primarily rely on the predictive power of credit scoring models to make informed decisions about current and potential clients. In simple terms, credit scoring is a rating system that assigns weights to various characteristics of a borrower with the objective of forecasting future performance of the borrower. Credit scores can be developed based on either qualitative on quantitative information on customer behavior characteristics. For lenders in wealthy countries during the past decade, scoring has been one of the most important sources of increased efficiency. Such lenders, however, score potential borrowers on the basis of comprehensive credit histories from credit bureaus, as well as on the experience and salary of the borrower in formal wage employment28. In most instances, scoring focuses on the likelihood that the borrower will become delinquent, or be unable to make timely repayments. It is important to mention here that credit scores rely on a vast amount of data, and an effective scoring system can only be developed if an institution possesses a comprehensive database. Data is collected on a range of factors related to the customer – largely their past credit behavior, income sources and socio-economic characteristics. Credit bureaus play a vital role in aggregating data on client’s credit behavior and it has been globally observed that credit scoring systems are mostly prevalent in markets with strong credit bureaus. Like commercial financial institutions, microfinance providers can also benefit by scoring current and prospective clients. Micro-lending is a costly endeavor; labor intensive methods are used to assess loan applications and monitor defaulters. For

28 Credit Scoring for Microfinance; can it Work? by Mark Schreiner



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large MFIs that are well run and possess adequate databases, scoring can increase efficiency, outreach and sustainability by improving the time allocation of loan officers. Additionally, credit scoring can improve risk assessment and delinquency monitoring of bad clients, and can dramatically improve portfolio management for repeat customers.

Mobile Wallets The branchless banking sector in Pakistan has come a long way since its initial deployment in 2009. Originally launched as an over-the-counter service to effectively remit money and pay utility bills, the branchless banking sector, over the years, has been witnessing a gradual inclination towards mobile wallets. Evidence from around the globe identifies that success of mobile wallets rests in its capacity to dissolve the conventional brick and mortar branch model to handheld devices with minimal agent involvement. With the arrival of mobile money, the lower socio-economic segment of the society has been introduced to a new product and a channel that allows them to use text messages to store value in an account; convert cash in and out of the stored value account; and transfer value between users. The revisions in the branchless banking regulations by State Bank of Pakistan have made it increasingly easy to open and operate a mobile wallet account. More importantly, the recent national SIM verification drive under the supervision of PTA (Jan-April 2015) has ensured that every phone number is now linked to a biometrically verified National Identity Card Number; this rich data fulfills the know-your-customer (KYC) requirements for opening level 0 accounts and allows for remote account opening. In Pakistan, level 0 accounts are one of the three tiers of customer mobile wallet accounts: level 0, level 1 and level 2. Each level has progressively higher account and balance limits, and thus progressively more stringent KYC requirements. The biometric verification initiative from PTA served as a launching pad for the mobile money market; the large scale installation of biometric devices at retailer level served as a front-end tool for customers to open m-wallets through branchless banking agents. Over a period of twelve months, the number of branchless banking accounts has increased from 4.7 million in September 2014 to 13.2 million in September 2015. Among the retail branchless banking players, Easypaisa has been a dominant player in tapping mobile wallet account holders, whereas, Mobicash is also emerging as a key competitor with an aggressive account opening strategy to register the masses with its branchless banking platform. Moreover, majority of the growth has been at the initial level 0 accounts (89%) with minimum KYC requirements and transaction limits. This shows that the industry is headed in the right direction of extending financial services to the unbanked. Having said this, the significant growth cannot be attributed solely to one factor. The branchless banking industry has made noteworthy leaps in terms of diversification of product mix and provision of services. The sector cumulatively offers a diverse number of services from money transfer to bill payments to insurance products. Despite the recent growth in mobile wallets, over the counter transactions still compose a major chunk of the money in the branchless banking ecosystem. OTC transactions accounted for 69 percent of the total transactions in terms of volume and 71 percent in terms of value as of September 2015. This trend points towards the possibilities that either the customers do not see enough value in these accounts due to lack of awareness or there is a scarcity of products such as credit provision or tailored savings schemes.

Exploring new horizons: Serving new markets The Microfinance Institutions around the globe are constantly evolving, expanding their operations beyond the traditional microcredit services by inculcating a range of specialized financial and non-financial services. This evolution is propelled by the philosophy that poverty is a multidimensional problem and cannot be eradicated by only provision of micro-credit. J. Sachs (2005) explicates that ‘poverty is caused by lack of capital and it further depletes human and natural capital thereby expanding the trap of poverty’. 29Guided by this school of thought, MFIs are now turning their attention towards quality of life issues. Capitalizing on their already established relationship with the clients, MFIs are now working for improving their

29 Sachs. Jeffery. 2005. The End of Poverty: Economic Possibilities of Our Time. Penguin Press



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standards of living by providing access to better education, health and sociocultural amenities. In addition, many microfinance institutions are also extending risk management (insurance) services to their clients to protect both, the loan recipients and lenders against accidents or calamities.30 To reiterate the earlier point, poverty entails more than the lack of bare necessities of life like food and shelter. It affects a person’s access and affordability of necessities like health, education for the young and vocational and skill improvement training for adults, utility services including electricity, water sanitation and telecommunication. MFIs (Microfinance institutions) can use their existing client base that have discretionary income to provide them with additional financial services, which could be used to directly improve the client’s quality of life31. After the delinquency crisis of 2008, Pakistani microfinance sector realized that customer focus cannot be compromised, and in addition to extending traditional micro-credit in a client centric and transparent manner, over all consideration to the client wellbeing ought to be given. This subsection highlights innovative products in health and education sector from around the globe, initiatives which can be replicated in Pakistani context as well.

Health and Microfinance Of various lifecycle shocks that poor face, pushing them further down the poverty trap, ill health makes up for one of the direst factors. Quite often poor clients of microfinance default on their payments due to financial strain exerted by income loss and medical care expenditure after a serious health emergency. In a way, health is a poor man/woman’s first and foremost asset32. If microfinance sector intends to achieve financial security of the poor, it is crucial to look into the issue of health security for the two are intertwined. Hence there is a need to look into health financing including micro-insurance, flexible savings and emergency health loans for the microfinance clientele. Loans to access clean water and sanitations systems, or even mosquito nets considering the dengue epidemic in recent years, can lead to improvement in the life styles of the clients. However, in a developing country like Pakistan, health loans and insurance alone is not sufficient for the access itself is an issue due to insufficient medical infrastructure in rural and peri-urban areas. While microfinance sector cannot be a substitute for the health sector, microfinance institutions, across the globe and in Pakistan are taking up initiatives to plug the gaps in various ways. Some MFIs are educating the clients on a diverse array of health topics including preventable communicable diseases, maternal and child health. Some institutions carry out regular health camps or run health clinics while others are adopting more innovative models connection their clients with healthcare providers through telemedicine.

Box 3.1 Global Case Studies

Telemedicine Centers for Microfinance Clients Equitas, a Chennai based microfinance organization, has established “telemedicine centers” in three of its branch offices in partnership with Apollo Hospitals. Located in urban slums, the centers are staffed by nurses and stocked with medical testing equipment and a laptop with video-conferencing. Equitas’s microfinance clients (predominantly women and their families) can schedule an appointment at the center and consult with a doctor through videoconferencing about symptoms and care. Center-based nurses take vitals such as blood pressure and heartbeat rate through equipment that transmits readings directly to the doctor and into a patient’s computerized medical file. The per-visit cost to the patient is 50 INR (.96 USD).

30 Multidimensional Poverty and Expanding Role of Microfinance Institutions by Shabnam Lutafali and Faiza Khoja 31 Ibid 32 Integrated Health and Microfinance in India: Harnessing the Strengths of Two Sectors to Improve Health and Alleviate Poverty (2012) by Freedom from Hunger and Microcredit Summit Campaign



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Following the successful pilot, Equitas plans to scale the telemedicine centers to more of its 300 branches that provide financial services to over 1 million clients. Microcredit for Franchised Micro-clinics Another innovative model which brings microfinance and health sector together for the betterment of its clientele is HealthStore Foundation’s Child and Family Wellness (CfW) shops; franchised micro-clinics and micro-pharmacies in Kenya. CfW shops make use of franchising business model to solve the problem of last-mile distribution of health products and services. CfW shops are small health clinics, typically in rural areas, that provide basic medical care for common and preventable diseases. Run by formally trained providers like community health nurses and doctors who can provide high quality basic care, they're an important channel for bringing diagnoses and treatment to remote areas. Serious cases are transferred to nearby hospitals with secondary and tertiary care services through a referral system. Through Kiva Microfund, trained nurses and community health workers can avail small business loans to set up a micro-clinic in their localities (a typical CfW shops requires a start-up capital of USD 1700). All CfW shop owners are required to comply with CfW standards and procedures for which they receive an extensive training. Franchisees are charged a yearly fee to use the brand name and receive logistical support. So far, these systems have been successful in Kenya, India and across West Africa. Similar to CfW micro-clinics, CfW micro-pharmacies are small-scale pharmacies, typically located in rural, remote areas. They help to ensure that essential medicines are delivered to these underserved people. By being part of a franchise, the franchisors ensure that the medicines they supply are of high quality and they provide franchisees with training in essential medications and treatments relevant to their local communities. Franchising model for health provides an effective system for scaling quickly by placing the onus of expansion on outside entrepreneurial individuals. Franchisees are driven by the incentive of ownership, so they have an interest in making the pharmacies or clinics successful. Furthermore, the franchisor - the parent company has an interest in strictly enforcing compliance to franchise standards to protect their brand name. Many of these franchises operate under a hub and spoke model, where the micro-clinics and micro-pharmacies are connected to a regional office or hospital. This model ensures that the staff of the clinics is evaluated consistently according to standardized procedures, with a quality control mechanism and a direct referral system to a larger hospital in place. The hub and spoke model can be highly effective as long as the hubs are operating efficiently and ensuring that all of the spokes are getting the services they need.

Global Case Studie While quite a few of PMN’s member MFIs are extending health services to their clients in the form of basic health centers or specialized health camps, health education and insurance, there is much that can be done in this sector. Studying these health-microfinance models from across the border and around the world, similar partnerships can be established between public and private sector health infrastructure, retail microfinance providers and donors is possible to solve the issue of access to affordable health services for the poor in Pakistan while creating income generating ventures for entrepreneurial individuals.

Finance for Low Cost Private Schools (LCPS) Another sector that presents tremendous business opportunities for the microfinance sector all the while serving to further sustainable development goals is that of low cost private schools (LCPS), a niche which falls within the SME sector owing to its characteristics. The past decade has seen a mushroom growth of low cost private schools in the country, both in urban and rural areas. The financing of these schools has important implications not only for access to finance indicators, but also on the matter of access to education for the poor and low income.



60

A 2014 research study commissioned by the United Kingdom’s Department for International Development (DFID) estimated that the sector’s funding needs exceeds PKR 77 billion for over 70,000 low cost private schools currently operating in the country. The amount and sources of initial investment for these existing schools are typical of the SME sector, with a substantial number of low cost private schools having initial investments of less than PKR 300K sourced usually from personal savings and loans from family and friends. 33 LCPS market presents great potential for the MFPs to further their financial inclusion agendas as a specific sub-set of the MSME sector in the country. Several MFPs, especially the microfinance banks, have already begun taking steps that will enable them to reach out to the higher end of the microfinance market (the MSMEs) by creating enterprise loan products and employing the individual lending methodology for higher loan amounts. However, considering the size of the potential microfinance market within the LCPS sector, a sector-specific microcredit product or modify their existing microenterprise loans can be introduced, to effectively engage with the low cost private schools. With an enabling microfinance landscape and regulatory environment, and PMN’s willingness to work with its members, these untapped markets present a potential for MFPs to reach product scale and profitability though a sector-specific approach all the while furthering the national financial inclusion agenda and improving the quality of life of its clientele.

Deposit Protection Fund; moving towards a secure financial landscape On August 3, 2016, National Assembly passed the Deposit Protection Fund Act after a year and half of rigorous debates. Under the act, Deposit Protection Corporation (DPC), a subsidiary owned by the State Bank of Pakistan (SBP) will be created, with the objective of compensating the depositors for losses incurred by them to the extent of protected deposits in the event of failure of a member. All banks scheduled under Section 37 (2) of the State Bank of Pakistan Act, 1956, shall compulsorily be members of the Fund and liable to pay the prescribed premium, unless exempted or excluded by the board. Regardless of the number and size of various deposits, the DPF shall provide protection up to an amount determined by it from time to time. The protected amount shall be inclusive of any interest accrued or return due as on the notification date by the SBP to the effect that normal operation of a member has been closed or suspended as a result of its insolvency or any judicial or regulatory action. Introduction of the act is a welcomed initiative and will help improve the financial landscape in Pakistan by leaps and bounds. Particularly at time when all important stakeholders including Ministry of Finance, State Bank of Pakistan (SBP) and Securities & Exchange of Commission (SECP) have committed to the goals of NFIS, deposit protection fund will enhance the trust and confidence of consumers in the banking sector. They will be more open to place their savings with the banking sector. In addition, it will wean them away from informal sector and encourage them to use formal channels. However, there are a few considerations that need to be pondered upon as we move ahead. Although the act covers the operational aspects of the Fund in a thorough manner, missing in the broad parameters of the DPF is the definition of ‘protected deposit’ which needs to be included to make it more effective. Another caveat is potential disputes on matters such as the determination of deposit amount and the premium due on such deposits from the protected bank. There should

be a provision and forum for the resolution of such disputes.

Deposits Mobilization: Untying Gordian’s Knot For most of the time, microfinance has focused mostly on credit. Savings can be labelled as the forgotten half of microfinance. However, practitioners have realized the importance of savings and subsequently rolled out saving products. Savings serve as a major source of low cost funds for microfinance players. Moreover, it allows for expanding and deepening outreach as clients do not need credit service and prefer to save before availing credit. Microfinance players in Pakistan also took the same path and were initially focused solely on credit. However, over the last five years, deposit mobilization by Microfinance Banks (MFBs) in Pakistan has witnessed an upward trend. However, a closer look shows that this growth has come at the back of above market rates being offered by the banks and have attracted

33 'Access to Finance for Low Cost Private Schools in Pakistan', 2014.



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mostly high net worth clients and institutional deposits. According to a study conducted by PMN, less than 20 percent of the depositors of the MFBs can be categorized as Micro-savers. The rates offered by the MFBs have been at times more than twice that of the prevailing policy rate. However, this kind of deposit can be categorized as volatile and unlikely to be sustainable for the banks in the long-run. MFBs have not been able to successfully tap retail and small depositors so far despite being a cheaper and stable source of funds. One the reason for this is that the saving products being offered are similar to ones being offered by the commercial banks. There is a need to modify existing and develop new products that cater to the needs of the clients at the base of the pyramid. Identifying the needs of the clients and developing the right products can encourage to large chunk of population to move from informal methods of savings to formal channels. Moreover, using branchless banking channels, deposits can be mobilized in a cost effective and convenient manner particularly in far flung and sparsely populated areas. Simplification of account opening process recently will go a long way in promoting m-wallets as means of savings. However, despite the popularity of branchless banking in the country, m-wallets have yet to witness similar interest. There is a need to develop a supporting ecosystem and right incentive mechanism to enhance the usage of m-wallets.

Funding Funding continues to remain a key challenge being faced by the sector for a host of reasons. Being an emerging industry, commercial lenders continue to remain hesitant to place funds with the industry. Heavy investment in government papers by commercial banks and absence of regulatory framework of non-bank MFIs has further compounded the situation. In order to facilitate commercial lending to the sector two credit guarantee schemes were extended; one by the central bank SBP and other by the national apex, PPAF. As a result, bigger and more established players are now poised to avail clean credit lines based on their own financial strength. However, now with both facilities being utilized and with PPAF microfinance group being transformed into a Microfinance Investment Vehicle (MIV), MFPs are looking towards diversifying their funding sources particularly the mid-sized and smaller players. The PMN’s Growth Strategy launched last year with an aim to reach 10 million active borrowers by 2020 forecasts a funding gap of over PKR 300 billion out of which PKR 200 billion is debt. It is highly unlikely that this sum shall be met by single source. The industry will need to diversify its sources of funds in order to meet its increasing financing requirements. MFBs despite having witnessed substantial growth in their deposit base over the last few years have not been able to completely meet their funding needs from the savings and have felt the need to borrow. With loan sizes likely to increase as MFBs start lending to microenterprises, the funding needs of the banks are likely to go up. Keeping this in view, MFBs are not only borrowing from domestic commercial banks but also borrowing from international lenders and intend to tap debt capital markets for funds. Being regulated entities and with a stable track record of borrowing from commercial sources within the country, MFBs are better poised to avail credit lines without the support of credit guarantees. Non-Bank MFPs, which are dependent upon debt for on-lending, on the other hand have witnessed their growth plans being adversely affected by the full utilization of MCGF and PPAF funding lines especially the mid-sized and small players. Since only a handful had raised funds from commercial sources that too by using credit guarantees, many of the these entities are finding it hard to diversify their funding sources. Lack of regulatory umbrella has further aggravated the situation. One option that is being actively explored by a number of entities is to borrow from international players. Although, pricing remains a stumbling block but in the absence of collateral requirements like cash deposit, makes it an attractive option. But practitioners are ready to pay a premium to get additional funds to meet their financing needs. It is hoped that now with regulatory regime in place for non-bank MFPs and formation of PMIC will lead to better availability of funds for the industry.



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Setting up of Pakistan Microfinance Investment Company Limited (PMICL) Recognized globally for its regulatory and business environment, the microfinance sector in Pakistan has set its sight to reaching 10 million clients by year 2020 which would require an injection of USD 3 billion through debt, equity and deposits. Since inception, PPAF has played a critical role both as a sector developer and as an apex wholesale lender. PPAF catalyzed financial deepening and expansion of microfinance services in the underserved areas of the country. It also encouraged innovation and testing of different lending methodologies and delivery mechanisms. PPAF has been the largest source of wholesale funds for the sector and has disbursed more than USD 1.4 billion over the last 16 years and has fully deployed its funds through 40 partner organization. In order to fuel the next phase of growth in the sector and meet the funding demands of the sector, PPAF, Department for International Development (DFID) through Karandaaz Pakistan and the German Development Bank KfW have joined hands to establish Pakistan Microfinance Investment Company (PMICL).The new company is envisioned to have a commercial (for-profit) structure registered as an Investment Finance Company under SECP by being the first of its kind national level Microfinance Investment Vehicle (MIV) in the world. Moreover, PMICL is expected to attract sufficient funds from private and commercial sources to help the microfinance sector reach 8 million clients by 2018 and create employment opportunities for around half a million individuals.

F i n a n c i a l s e r v i c e s f o r a l l

Pakistan Micro�nance Network

Third Floor, Plot No. 12-3/2, Mandir Square, G-8/1 Markaz, IslamabadTel: +92 51 2266214-17, Fax: +92 51 2266218

www.pmn.org.pk

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