micro finance institutions overview

8/10/2019 Micro Finance Institutions Overview

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Microfinance in

Pakistan


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Role of Commercial Banks in Micro FinanceSector


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Micro Finance

Micro finance is the provision offinancial services including Credit,Savings, Insurance etc, to those

sectors of economy, which are notserviced by traditional formalfinancial institutions viz. commercialbanks and non-banking financialinstitutions.


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Microfinance caters to the financial

services needs of the poor andmicro enterprises and is normallycollateral-free short term facility

whereas the commercial banksgenerally deal with corporateclients, SMEs and individuals with

larger income levels and extendfinancing facilities primarily basedon collaterals and borrowers

ca acit to re a .


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Microfinance Providers

Broadly there are two types ofinstitutions in Pakistan providingmicro credit/microfinance services

to the poor households/microenterprises the Non Government-Micro finance Institutions (NGO-

MFIs) /Rural Support Programs(RSPs) extending micro credit tothe poor through sources other thanpublic savings and


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While the Microfinance Banks areeligible to mobilize public savings tofinance their operations, the

Government has established awholesale window, the PakistanPoverty Alleviation Fund (PPAF),


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to provide wholesale funds/creditlines and grants to NGOs for onlending to the poor and capacity

and infrastructure building.


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Law Implications

The formal microfinance banks arerequired to take license from StateBank of Pakistan under MFIsOrdinance 2001 to operate asmicrofinance bank and are under

the regulatory ambit of the StateBank,


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whereas the NGO-MFIs/RSPs are

registered with RegistrarNGOs/Provincial CooperativeDepartments and are not under the

regulatoryambit of State Bank.


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Suppliers of Microfinance

Category 1: Informal Sources

Category 2: Semiformal Sources

Category 3: Formal Sources


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Informal SourcesInformal Reciprocal Arrangements

Account for 83% of credit supply,Commercial creditors that liaison

with marketing intermediaries, Landbased credit arrangements extendedby landlords to farmers, Socially

based arrangements of friends andfamily


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Semiformal Sources

Pakistan Poverty Alleviation Fund(PPAF)

NGOsMulti- sectorial NGOsoffers

composite services:

education

Health


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Infrastructure and community

developmentOffers Micro credit as a minorprogram

Few NGOs with microfinance as acore activity

Government sponsored programs


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NGOs in Microfinance

A number of NGOs are working inPakistan, a few NGOs are doingtheir job with the contribution of

international financial institutions.


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Formal

Commercial banks and licensedMFIs, by State Bank of Pakistan,


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Role of Commercial

Banks in

Microfinance Sector


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Microfinance in its broadest terms

can be defined as provision of arange of financial services such asdeposits, loans, payment services,

money transfers and insurance topoor and low income households,and their micro enterprises.


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While a commercial bank is a

financial institution that offers abroad range of deposit accounts,including checking, savings, and

time deposits, and extends loans toindividuals and businesses.


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Primarily, the microfinance

customers are large in number,scattered in far-flung areas withvery minute transaction sizes. Only

government or state bank alonecannot reach out to millions ofpotential Microfinance beneficiaries;


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In Pakistan it is estimated that as

many as 5.6 million householdsneed microfinance services butthese services reach only to less

than 1 percent, most probablybecause of the absence ofcommercial banks from the

microfinance sector.


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This way a poor person just need to

visit his local commercial bank toget access to microfinance benefits,which will help reduce many

economic problems.


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One criticism over involving the

commercial banks in microfinanceis that commercial banks willcharge higher interest rates, further

lower the standard of living and willexploit the public.


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The ground realities are totallydifferent; empirical evidence hasdemonstrated that participants inmicrofinance programs have

improved their living standards atboth the individual and householdlevel, and that this has provided

increased educational opportunitiesfor children.


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almost all girls in Grameen Bank (A

commercial bank!) clienthouseholds had some schooling,compared with the rate of 60% in

non-client households.


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No doubt on the other hand theloans provided by the commercialbanks to the microfinancebeneficiaries are a bit expensive, its

not to discourage the poor but thereis a sound reason behind it;


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Providing financial services to poor

people is quite expensive,especially in relation to the size ofthe transactions involved. A $100

dollar loan, for example, requiresthe same personnel and resourcesas a $2,000 one thus increasing per

unit transaction costs.


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Loan officers must visit the client's

home or place of work, evaluatecreditworthiness on the basis ofinterviews with the client's family

and references, and in many cases,follow through with visits toreinforce the repayment culture.


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It can easily cost US$25 to make a

micro loan. While that might notseem unreasonable in absoluteterms, it might represent 25% of the

value of the loan amount, and forcethe institution to charge a highrate of interest to cover its cost of

loan administration.


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If commercial banks are to be

involved in the micro finance by nomeans it would be a wrong decisionfor them as regard to their primary

aim, profitability.


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Yes it can. Data from the MicroBanking Bulletin reports that 63 ofthe world's top MFIs had anaverage rate of return, after

adjusting for inflation and aftertaking out subsidies programsmight have received, of about 2.5%

of total assets.


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This compares favorably with

returns in the commercial bankingsector and gives credence to thehope of many that microfinance can

be sufficiently attractive tomainstream into the retail bankingsector.


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Many feel that once microfinancebecomes mainstreamed, massivegrowth in the numbers of clientscan be achieved. According to a

recent analysis conducted by theConsultative Group to Assist thePoor (CGAP),


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the compound annual growth

rate of the worlds leadingmicrofinance providers over the

last five years has been awhopping 15%.


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Micro-insurance

Micro insurance is the provision ofinsurance to low-incomehouseholds.

Poor households are especiallyvulnerable to risk, both in the formof natural calamities as well asmore regular occurrences of illnessand accidents.


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Micro-insurance

Microfinance Institutions (MFIs) haveplayed an active role in reducing orprotecting against this vulnerability

through providing credit forincreasing income earningopportunities and through providingsavings services to build upresources that can be drawn down in

cases of emergencies.


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However, some events stilltranslate into crisis for many poorhouseholds and erode the

economic gains they have made asclients of microfinance programs.


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Micro-insurance

Credit and savings services areinadequate when households areexposed to risks which cause losses

that are beyond their means. Insurance can serve as a promising

response to such client needs.


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Today micro insurers are providing

different forms of insurance for life,health, property, disability,agriculture (crop), etc.

Poor households pay a smallpremium for limited coverage in theevent of losses.


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Basic Insurance principles

Basic principles that should beobserved by micro insuranceproviders are universal to

insurance and risk management.They include:


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Basic Insurance principles

1) Similar units exposed to risk.2) Limited policy holder control over

the insured event.

3) Existence of insurable interest.

4) Losses are determinable and

measurable.


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5) Losses should not be catastrophic.

6) Chance of loss is calculable.

7) Premiums are economically

affordable.


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State Bank of Pakistan

& Micro Financing The State Bank of Pakistan

mission is to promote monetaryand financial stability

Foster a sound and dynamic

financial system


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Its primary functions include: issue of notes,

regulation of the financialsystem,

lender of the last resort,And conduct of monetary policy

S f


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SBP secondary functions include:

The management of public debt,

Management of foreign exchange,Advising the Government on policy

matters,

Anchoring payments system, andmaintaining close relationships withinternational financial institutions.


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Responsibilities of the State Bank ofPakistan go well beyond the

conventional functions of a CentralBank, by including the economicgrowth objective in its statute and

supporting the development ofnew financial institutions topromote financial intermediation.


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SBP has also directed the use ofcredit according to developmentpriorities, providing subsidizedcredit.

St t B k P ki t t t


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State Bank Pakistan support tomicrofinance commercialisation

The State Bank of Pakistan hasencouraged the entry of privatesector institutions into microfinance

through an enabling environment.

A P ki t ' fi i l l t


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As Pakistan's financial regulator,SBP has been entrusted by the MFIs

ordinance 2001 with the licensing,regulation and supervision ofMicrofinance Banks (MFBs).


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SBP is the implementing agency for

strengthening supervision andregulation under the Rural FinanceSector Development Program

(RFDP).


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SBP is also incharge of specialfunds of more than US$70 millionto lend support to the microfinancesector and provide risk mitigation

mechanisms to poor depositors andborrowers of microfinance banks.

R l t f k


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Regulatory framework The framework (MFIs Ordinance

2001) allows the establishment ofthree categories of formalmicrofinance banks, with minimum

paid-up capital required:


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Nation wide MFBs: Rs. 500 millionProvince wide MFBs: Rs.250

million

District wide MFBs: Rs.100 million


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NGOs and other microfinanceproviders can bring their loanportfolio to contribute to up to 50%

to the capital requirements.

micro finance institutions overview

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