fMicro Finance in Pakistan

The Microfinance Sector in Pakistan:

The Microfinance Sector in Pakistan M. Irfan Arshad Credit & VO Help Officer Crop Maximization Project-II Government of Punjab, Agriculture Department Rahim yar Khan

Presentation Outline:

Presentation Outline Pakistan and its Macro Economy The Microfinance Landscape Performance Trends Challenges

Macro Economy:

Macro Economy 158.2 million population 7.5% GDP 4.2% Fiscal Deficit 7.9% Inflation Tax-GDP ratio:10.5% Saving: 18% Public debt 53.4% External Liab. 27.1% Trade deficit: 9% Current account: 5% Banking spread:6.4-7.8% Per Capita Income US$ 925. Economic Survey of Pakistan 2005-06 Investments: 23% Trade gone up from $20 to $ 46b Stable exchange rate:.7% dep. last year Forex covers almost 6 months of imports 20 million banking clients with less then 6m borrowers Low level of investments in the social sector Raising capital both debt and equity from international markets Ultimate Objective: 1) Create jobs, 2) Raise incomes and 3) Reduce poverty

Macro Economy:

Macro Economy 23.9% live below the poverty line 28.1% Rural 14.9% Urban Poverty 54% adult literacy 2.4% & 0.6% of GDP on education and health Bigger challenge – equitable distribution of resources Passing on benefits to the poor

The Sector Landscape:

The Sector Landscape

Microfinance in Pakistan:

Microfinance in Pakistan 1990 2000 1995 2005 SAFWCO OPP SRSP NRSP DAMEN SUNGI TF PRSP TRDP Kashf KB First MFB Akhuwat Asasah Network MFB Rozgar MFB P-O MFB Tameer MFB MULTI-DIMENSIONAL SPECIALIZED

Outreach:

Outreach

The Microfinance Potential:

The Microfinance Potential 2004-5 HIES Households (Millions) Estimated Adult Population (Millions) Non-Poor 6.4 21.7 Transitory Non-Poor 9.0 32.2 Transitory Vulnerable 4.8 17.1 Transitory Poor 3.5 12.4 Chronic Poor 1.2 4.6 Extremely Poor 0.2 0.8 29.5 Million Adults Poverty Line

Market for Microfinance:

Market for Microfinance

Market Penetration by Province:

Market Penetration by Province

Slide 11:

Policy Regulatory Institutional 1 2 3 Exponential Growth to 3M Microfinance is a sustainable commercial activity to be run by private sector Government to Provide an enabling environment with a level playing field SBP to play a stewardship role Tax incentives Branchless Banking policy Product innovation Using technology and other innovative avenues as delivery channels Reforms in the Microfinance Industry 5 2.5 2000 2010 3M – Capacity of Existing Providers 2006 3 Microfinance Banks 6 Specialized NGOs 1 Rural Support Programme 1 Leasing Company

Slide 12:

Policy Regulatory Institutional 1 2 3 Viability of MFPs is essential SBP role as a supervisor strengthened MFBs are allowed to invest surplus funds in debt instruments other that government securities Recognition of the need for a diverse microfinance sector A continuum that allows transformation of MFIs to become MFBs and commercial banks entry in to microfinance 4 tiers of setting up MFBs with varied capital requirements Facilitator to attract private risk capital Reforms in the Microfinance Industry Equity (4) Debt (9) Savings (1) Equity (17) Debt (47) Savings (22) Rs. 86 Billion 5% 65% 30% 25% 55% 20% Rs. 14 Billion

Slide 13:

Policy Regulatory Institutional 1 2 3 Privatization of KHB strategic ownership Transformation of NRSP as a national level MFB PPAF to encourage linkage with banks and capital markets to draw in private sector investment 6 MFBs 7 MFIs 4 RSPs and 1 leasing Company Definite move towards product diversification (insurance and deposits) Focus on client satisfaction: (SPM, Consumer protection and education, Credit Bureau etc) Reforms in the Microfinance Industry

Performance Trends:

Performance Trends

40% growth puts Pakistan in the top quartile globally:

40% growth puts Pakistan in the top quartile globally Above 40% annual growth rate

Growth is evenly spread across peer groups :

Growth is evenly spread across peer groups

MFB’s and RSP’s lead the sector:

MFB’s and RSP’s lead the sector

Growth is spread across Pakistan:

Growth is spread across Pakistan 1,130,000

Except for Balochistan………:

Except for Balochistan………

Portfolio Yield inches up:

Portfolio Yield inches up Entry of new players with higher yields Improved pricing by existing institutions Change in accounting policy to effective yield method

Yields however are below global benchmarks:

Yields however are below global benchmarks Figure 6: Global Benchmarks for yield on Gross Loan Portfolio Portfolio Yields Pakistan Africa Asia ECA LAC MENA Nominal 21.3 32.8 30.7 30.5 33.6 31.8 Real 11.4 19.8 21.9 23.2 26.6 19.8

Sustainability remains flat:

Sustainability remains flat Regional Benchmarks-FSS (2005) Africa : 91% Asia: 116% Middle East and North Africa:125% Latin America and Caribbean: 111% East Europe and Central Asia: 117% Low Portfolio Yields Asset Utilization Growth phase, high upfront costs

Portfolio at risk remains low:

Portfolio at risk remains low Regional benchmarks (2005) Asia: 2.4% Africa : 4.7% Middle East & North Africa: .5% Latin America & Caribbean: 2.1% East Europe & Central Asia: 1.1% Benchmark 5% Clearer vision of mf Improved systems and internal controls Training of staff, especially loan officers High growth rate Newer players High write offs

MFB adds capital but Debt continues to finance growth:

MFB adds capital but Debt continues to finance growth

Sector however is over capitalized…except for RSP’s:

Sector however is over capitalized…except for RSP’s

Delivery Costs continues to grow:

Delivery Costs continues to grow 6 new institutions over the last 2 years,4 MFBs High upfront investments in developing branch infrastructure and hiring and training human resources

Costs are however globally competitive:

Costs are however globally competitive

Industry continues to targets the lower end of market:

Industry continues to targets the lower end of market

Industry continues to target rural poor:

Industry continues to target rural poor

….and percentage of women borrowers have increased:

….and percentage of women borrowers have increased

Challenges:

Challenges

Scale:

Scale 5 2.5 2000 2010 3M – Capacity of Existing Providers 2006 3 Microfinance Banks 6 Specialized NGOs 1 Rural Support Programme 1 Leasing Company

Financing:

Financing Equity (4) Debt (9) Savings (1) Equity (17) Debt (47) Savings (22) Rs. 86 Billion 5% 65% 30% 25% 55% 20% Average Loan: Rs. 20,000 Rs. 14 Billion

Slide 34:

1% 15% 84% Senior Management 200 Total Staff 20,000 Middle Management 3,000 Field Staff 16,800 Human Resources

Policy and Regulation:

Policy and Regulation Public disclosure of social performance (e.g. outreach to women, rural areas) Provisioning requirement for MFB’s Limit on loan sizes Pursue Truth in Lending and Consumer protection steps Capital Adequacy issues will soon crop up Set performance criteria for Microfinance Banks to gain access to clearing house or schedule bank status Clarity on forex rules for MFP’s

Credit Information System:

Credit Information System Credit information on borrowers will greatly reduce risks and transaction costs as market expands. Advantages: reduces risks as competition increases in unsecured lending, can bring entry of commercial players Ensure that NGOs and Banks are part of the system SBP to take initiative for establishment Ownership and management Pricing should be subsidized in early years

Technology:

Technology Importance of back office technology Expansion of mobile phone network presents enormous opportunity for exponential expansion of lower cost finance services Roughly 35 million users; many are urban poor Explore models in branchless banking: G-Cash Philippines Wizzit Bank South Africa Clarity on policy and regulatory issues

Thank You:

Thank You

Asset Utilization:

Asset Utilization Regional Benchmarks (2004) East Europe & Central Asia: 83% Latin America & Caribbean: 80% South & East Asia: 71% Middle East & North Africa: 69% Sub-Sahara Africa: 68%