Microfinance

Grass Root Level Training Program

Microfinance Policy & Development Division

Agricultural Credit & Microfinance Department

July 18, 2016

Mainstreaming of MF into Banking (2001-
todate)

2015

2008 94K Retail

11 MFBs
2010 3 largest
Agents MFIs
KB Agents transformed
Ordinance FIP network in into MFBs
Expandin
MFI Pakistan 89% of MF CIB
g total
Ordinance Post-FMFB Easypai 3 largest
Microfina Districts
Licensing Partnershi sa nce 2012 MNOs have
of MFBs p Outreach their own
Branchles 2009 Strategy MFBs
2000-02 s Banking (2007-10) 9 of 11
Regulatio UBL Omni MFBs
ns operate
Nationwide
Meezan
Upaisa
SBP LEADERSHIP

Innovation and Growth Institutional Sustainability

Expanding MF Outreach (2007-10) Strategic Framework (2011-15)

National Financial Inclusion Strategy

(2015)
 Government:
Industry Stakeholders SBP, M/o Finance, SECP,
etc.
Donors/Funders & IFIs:
SBP / DFID, Gates/Citi
Gov. Foundation etc., ADB, IFC
Dono (WB), PPAF, Commercial
Bank.
ns
MFBs Law rs &
No IFIs Microfinance Banks
atio

r m (MFBs):
gul

MF s
es
KBL, Tameer, First Micro,
Re

Indust ctic etc.

ry Rural Support
Pra

RSPs MFIs
Programs (RSPs):
Industry Code NRSP, PRSP, Sarhad RSP,
etc.
Others Specialized
Cliente
NGO le Microfinance
s Institutions (MFIs):
ASA, Damen, Kashf Found.
etc. 3
3
Other NGOs:
 Governments Role
Governments across the globe are moving
away from subsidized provision of financial
services

Public-Private
Client Enabling
Development
protection environment Partnership

Transparency & Microfinance

Industry Code (Private)
Formulation of Social and
Policy & Development
Financial Regulation Programs
literacy (Public)

4
4
 Financial Inclusion Initiatives

Creation of Enabling Environment

Creation of a regulatory framework for Microfinance Banks (2001,
amended in 2007)
Development of Strategic Framework for sustainable microfinance to
structurally strengthen microfinance sector for long-term sustainable
growth (2011)
Adoption of National Financial Inclusion Strategy (NFIS) setting a
vision and action plan for universal financial inclusion (2015)
Access to and Usage of Accounts
Issuance of branch licensing policy to mandating banks to open 20%
of branches in rural areas (2005)
Establishment of the Pakistan Interbank Settlement System (PRISM)
(2008)
Adoption of Branchless Banking Regulations (2008, amended in 2011)
Signing of MoU with NADRA for reducing the per customer biometric
verification cost to Rs. 10 for each m-wallet account opening at
industry level (2014)
Installation of biometric devices at agent level to aid real-time
account opening at discounted price structure (2015).
55
 Financial Inclusion Initiatives

Access to and usage of Accounts

Development of inter-operable inter-bank card payments
platforms
Issuance of instructions to all banks to promote and open ASAAN
(Easy) Accounts to facilitate low income segments (2015)
Access to Credit

Launching of Prime Minister Youth Business Loans (PMYBL)

Scheme for promoting youth entrepreneurship in the country
(2013)
A number of credit enhancements facilities aimed at encouraging
financing to the underserved sectors
Microcredit Guarantee Facility (2008)
Credit Guarantee Scheme (CGS) for small rural enterprises
(2010)
Credit Guarantee Scheme for small farmers (2015)

66
 Performance of Microfinance
Industry (As of 31-03-2016)
Indicators 31-Mar-15 31-Mar-16
MFBs MFIs Total MFBs MFIs Total
Number of MFPs 10 . 35 . 45. 10 43. 53.
1,249,857 1,892,732 1,597,130 2,405,294,002,420
Total No. of Borrowers 3,142,589.
. . . 0. .
% Share of MFBs & MFIs 40% . 60% . . 40% . 60%.
Gross loan portfolio (Rs.
41,209 . 25,552 . 66,761. 64,098 . 40,631. 104,729.
In millions)
% Share of MFBs & MFIs 62% . 38% . . 61%. 39%.
Average Loan Balance
32,971 . 13,500 . 21,244. 40,133. 26,166.
(Rs.)
7,828,113 10,819,78 10,819,78
Total No. of Depositors - . 7,828,113.
. 8. 8.
Deposits (Rs. In millions) 42,488 . -. 42,488. 66,314. 66,314.

7
 Micro Finance Banking Statistics
(As of 31-03-2016) (Amt. in Rs. 000)

Gross
Borrowin
MFBs Borrow Loan Deposits Depositor Equity Assets NPLs
gs
ers Portfolio
18,289,7 27,806,25
KB 537,140 16,952,01 4,113,62 2.27%
05 1,128,901 0 5,507,897
7 2
6,287,24 11,974,60
FMFB 196,161 1,587,80 1.18%
6 9,675,096 328,405 6 340,123
6
13,129,7 20,928,70
TMFB 14,219,00 3,959,72 0.73%
312,896 56 4,062,558 2 547,613
3 5
11,157,7 14,284,26
NRSP 317,654 2,723,87 0.22%
85 6,539,796 586,280 8 4,538,641
4
6,248,68
FINCA 97,066 2,011,35 9,109,248 1.79%
6 6,320,517 401,601 314,001
3

POMFB 18,083 416,787 26,063 1,077,53 1,162,343 6.26%

17,192 -
7
4,635,08
APNA 34,465 1,048,01 7,453,957 0.00%
0 6,273,683 101,218 -
3
8
1,606,21
Financial Inclusion A Key Strategic
Objective of SBP

MICROFINANCE IS A
VICTIM OF
EXAGGERATED
EXPECTATIONS
A cure for poverty eradication
A tool for economic empowerment
Share your opinion
9
National Financial Inclusion
Strategy
 NFIS Focus Areas and Indicators
1. Access to Account - (absolute and % adult population)
I. Conventional Bank accounts - bank and non bank
II. Digital Transactional Accounts digitization; more access
points to achieve scale / viability
2. No of Access points of formal financial institutions (absolute
and per square kilometer)
I. Conventional Branches- bank and non bank Branches-
II. BB agents digitization; more access points to achieve
scale / viability
III. POS, ATMs, Pak Post etc.- digitization; more access points
to achieve scale / viability
3. Access to credit - (to all segments)
I. Microfinance Gross Portfolio and No. of Borrowers
II. SME Finance Outstanding SME Finance and No. of SME
borrowers
III. Agricultural Finance Agricultural credit disbursement and
No. of Agri-borrowers
IV. Housing Finance Outstanding Housing Finance and No. of
borrowers
V. Islamic Finance Assets and Deposits 11
11
 State of Financial Inclusion and NFIS Targets
NFIS Sub-indicators/Targets for Microfinance.
Target
Sr. Baseline
Indicators Source (5
No. (Year)
years)
1 % of MSME with either digital Findex, Forward 50%
Transactional account or bank A2F looking
accounts
2 % MSME loans to total bank credit to SBP 7% 15%
the private sector
3 % MSME loans to GDP SBP 1.2%
A2FS 2015 results have shown that
23% of the adult population now has access to formal
financial services (including providers of mobile
money services).
11% of women are utilizing banking services in 2015.

12
Innovative Delivery Channels

Grass Root Level Training Program on microfinance

INNOVATIVE DELIVERY
CHANNELS
1. Permanent /Temporary Booths

2. Service Centers

3. Kiosks at partners premises

4. PoS

5. Branchless Banking, Tameer, 2009

6. Mobile Vans, Pak Oman, 2007

7. ATMs
8. Internet Banking
 Innovative Partnerships
Branchless Banking
Unique service geared towards a
Pakistani target market. Key benefits:
Reduced costs (low financial overhead)
Increased outreach
Access to remote areas
Mobile financial service providers use
their franchises and retailers as
banking service agents
Basic banking services offered are:
Utility Bill Payment
Receiving Intl. Remittances
Receiving/Sending local current
remittances
Pakistan Post &
First Microfinance
Bank
Pilot conducted between Pakistan Post
and First Microfinance Bank, resulting
in 35,000 microfinance loans
disbursed through 62 post offices in
one year
Growth has been fast and cost-
effective
Cost per borrower at the post office is
37% of the total cost per borrower at a
regular MF bank branch in the same
area
15
Microfinance Institutions Ordinance
2001 & Licensing of MFBs

Microfinance Department
Components of Microfinance Ordinance 2001

Definition
s

Regulation Licensing
and &
Supervisio Establish
n ment
MFIs
Ordinanc
es 2001

Financial
and
Functions
Operation
& Powers
Requireme
nts

17
 Components of Microfinance Ordinance 2001
Definitions
Microfinance Institution means an institution which
extends micro credit and allied services to the poor
through sources other than public savings and
deposits;

Microfinance Bank means an institution licensed by

State Bank under this Ordinance to establish and
operate as microfinance bank;

Poor /low income Persons means persons who have

meager means of subsistence and whose total
income during a year is less than such minimum limit
as the State Bank may, from time to time, prescribe

18
 Components of Microfinance Ordinance 2001

Licensing & Establishment

Multi-institutional Approach
Only Deposit taking institutions are
required to take License from SBP.
Application Procedures & Licensing Criteria
The Right of Appeal for Aggrieved party
Cancellation of License in case of violation
of Ordinance, Misreporting, Liquidation, &
Discontinuity of Operations.
Modus Operandi for Cancellation of
Licensing

19
 Components of Microfinance Ordinance 2001
Functions & Powers
to provide all types of financing facilities (excl:
Forex business) to poor persons
Provide home remittances
to accept deposits; pledges, mortgages,
hypothecations or assignments to property.
to borrow and raise money and open bank
accounts
to invest surplus funds in Government and other
marketable securities
to carry out survey and research, and issue
publications
to perform all such acts as may be necessary to
the attainment of their objectives;

20
 Components of Microfinance Ordinance 2001

Financial and Operation

Requirements
MFBs have to maintain 15% capital
adequacy ratio
MFBs have to maintain minimum capital
requirement as prescribed by State
Bank from time to time
MFBs have to maintain a depositors
protection fund where they will credit
5% of their after tax profit.
MFBs have to maintain CRR & SLR as
per regulations issued by SBP
21
 Components of Microfinance Ordinance 2001
Regulation & Supervision
Management and administration
(Board of Directors & CEO; Corporate
Governance)
Accounts & Audit
(maintenance of proper books/accounts;
prepare annual statement of accounts
audited by auditors)
Reporting to SBP
Liquidity and Reserves Requirement
SBPs power for Inspection and
investigation 22
Prudential Regulations for
Microfinance Banks
Agriculture Credit & Microfinance
Department

Grass Root Level Training Program on Microfinance

 Prudential Regulations for MFBs

These regulations are applicable to all Microfinance

Banks ( MFBs) licensed by the State Bank of Pakistan.

Microfinance Banks - MFBs shall mean companies

incorporated in Pakistan and licensed by the State Bank
of Pakistan as microfinance banks for the purpose of
providing microfinance services, especially mobilizing
deposits from the public and providing credit to poor
persons and micro-enterprises.

24
 Prudential Regulations for MFBs
(R)Risk Management
R-1: Minimum Capital requirements

Type of MFB Capital Requirements

District Rs. 300 million

Regional Rs. 400 million

Provincial Rs. 500 million

Nationwide Rs. 1 Billion

25
 Prudential Regulations for MFBs

R-2: Exposure against Contingent

Liabilities
- First 3 years-shall not exceed 3 times of its equity &
thereafter shall
not exceed 5 times of equity
R-3: Maintenance of Cash Reserve &
Liquidity
Cash reserve (CRR) equivalent to not less than 5% of
Demand Deposits and time deposits of less than 1 year.
Liquid assets (SLR) equivalent to at least 10% of its
demand liabilities and time liabilities of less than one
year. (Time liabilities over 1 years are excluded)
R-4: Statutory Reserve
The creation of a reserve fund to which following shall be
credited: 26
 Prudential Regulations for MFBs
R-5: Maximum Loan Size and Eligibility of
Borrowers HH Annual
Loan Limit
Income
Microenterpri Rs. 500,000 NA
se Rs. 150,000 Rs. 300,000
General Loan Rs. 500,000 Rs. 600,000
Housing
Loan
R-6: Maximum Exposure of a Borrower from
MFBs/MFIs/ Other Financial Institutions
Max. Limit of borrowers aggregate exposure < Rs. 150,000
for general loans, upto Rs 500,000 for housing and
microenterprise
Rationale: Upscaling;loans.
Adjusting inflationary impact; Product
diversification
R-7: Credit Report Check
Credit Information Report-mandatory if credit facility
exceeds Rs. 30,000 27
27
 Prudential Regulations for MFBs

R-8: Classification/Provisioning of
Loans/Advances
1. PD = 30+
OAEM Provision = N/A

2. Sub-
PD = 60+
Standar
Provision = 25%
d

3.
PD = 90+
Doubt-
Provision =
full
50%

PD = 180+
4. Loss
Provision =
100%
In addition, the General Provision is 1% of net outstanding loan
portfolio. 2828
 Prudential Regulations for MFBs

R-9: Rescheduling/Restructuring of Loans

-duly approved policy

R-10: Charging-off Non-Performing Loans

(NPLs)
- Charge off, one month after the loan is classified as loss

R-11: Classification of Investments and

Other Assets
-Investments: Held for Trading, Available for Sale, Held to
Maturity

R-12: Investments of Funds

-MFBs may invest their surplus funds in Government
Securities, A rated debt securities like TFCs and units of
those mutual funds.
29
 Prudential Regulations for MFBs

(M) Money Laundering, Terrorist

Financing & other Unlawful Activities
Minimum standards are required to be followed by all
MFBs. MFBs are free to take additional measures as per
risk involved in line with Financial Action Task Force
(FATF) recommendations.
M-1 Customer Due Diligence
1. Know Your Customer/Customer Due Diligence Policy: All MFBs shall
formulate a comprehensive KYC/CDD Policy duly approved by the
Board of Directors.
2. System, Controls and Procedure: Compliance set up, adequate
screening procedure, on-going employee training program, audit
function, policies and procedures.
3. Identity of Individual Customers
4. Documents required for other than individual accounts
5. Verification of identity
6. Micro savings
7. Identification and verification of Beneficial Owner
8. Anonymous Accounts
9. Purpose of Accounts
10.On-going Customer Due Diligence 30
 Prudential Regulations for MFBs
12. Walk-in Customer
13. Government Account
14. Public Awareness Campaign on Requirement of CNIC
15. New Technology
16. Non-satisfactory KYC/CDD

M-2: Record Retention

M-3: Reporting Currency/Cash Transactions

(CTR)

M-4: Reporting Suspicious Transaction (STR)

M-5: Implementation of obligations under

31
UNSC Resolution
 Prudential Regulations for MFBs
(G) Corporate Governance
G-1: Size and Composition of the Board
i. Min. 7 members
ii. Not more than 25% of the members from the same family
iii. At least 2 independent members
iv. Not more than 25% of the members as paid executives of
MFBa
v. Chairman who is not the CEO of the MFBs
G-2: Remuneration to Directors
-No payment other than reasonable fee
-Reasonable fee not exceeding Rs. 25,000 per meeting
G-3: Responsibilities of Board of Directors
-BoD shall define mission and set goals & objectives
-Approval annual business plan, and monitor progress on
regular bank 32
 Prudential Regulations for MFBs

G-4: Fit and Proper Test

- For Board members and President : SBP approval required
- For key executives: Intimation to SBP

G-5: Restrictions on Certain Types of

Transactions
MFB shall not;
i. Allow any facility for speculative purposes
ii. No exposure on its sponsors, directors, employees
iii. Offer preferable treatment to deposit account of its
sponsors, directors or employees
iv. Enter into leasing, renting, sale/purchase of any
directors/employees
v. Hold, deal or trade in real estate except for use of MFB
33
 Prudential Regulations for MFBs

G-6: Internal Audit

-MFBs shall have Internal Audit department
-Director of the dept. will directly report to BoD

G-7: Policy Frameworks

-MFBs shall formulate policies for all functional area of
operations

G-8: Guidelines on Internal Controls and Risk

Management
-MFBs shall follow at minimum the instructions and standards
in guidelines on
i) Risk Management ii) Internal Controls, iii) IT Security
34
 Prudential Regulations for MFBs

G-9: Credit Rating

- MFBs shall get themselves rated by any rating agencies with 3
years of grant of license
G-10: Declaration of Fidelity and Secrecy
- Every member, director, auditor and staff member shall make a
declaration of fidelity and secrecy
G-11: Contributions and Donations for Charitable,
Social, Educational and Public Welfare Purposes
- MFB shall develop approved policy/guidelines for making
donation/contributions
- Total donations/contributions during a year shall not exceed
approved amount
- All donations shall be approved by BoDs
- Disclosure in annual audited financial statements
35
 Prudential Regulations for MFBs
OPERATIONS (O)
O-1: Cash Payments Outside the Authorized Place of
Business
open new places of business with prior permission of State
Bank

O-2: Reconciliation/Settlement of Account Entries

The entries booked in the Inter-Branch Accounts and/or suspense
Account must be reconciled/cleared and taken into proper
heads of accounts within the 30 days from date of entry

O-3: Deposits
- MFBs shall develop appropriate products for attracting deposits
and encouraging savings

36
 Prudential Regulations for MFBs

O-4: Consumer Protection

MFBs are required to implement following provisions with 6
months
A. Financial Literacy
B. Transparency and Disclosure
C. Complaint Redressal Cell
D. Collection Practices

O-5: Submission of Quarterly Returns

MFBs shall submit quarterly data online on prescribed
Quarterly Data File Structure (DFS)

O-6: Window Dressing

MFBs shall refrain from adopting any such measure
37
 Prudential Regulations for MFBs

O-7: Permission to Regarding Receipt Grants

MFBs shall ensure prior permission for SBP before
receiving any type of grants

O-8: Reporting to Credit Information Bureau

MFBs shall;
i. Provide factual and accurate data to SBP
ii. Sign and agreement with SBP to avail online facility to
obtain credit worthiness reports
iii. Submit CIB data of their borrowers on prescribed formats
iv. Report in writing to CIB subsequent clearance of overdues
v. Reflect detail of re-payment/settlement of
overdues/defaults
vi. Share their customers date with private CIB
38
Licensing Process

Licensing of MFBs

Balancing outreach vs a vs Regulatory

Requirement
39
MFBs Licensing Process

Licensing Process

Incorp. Commencem
SBP
Application SBP NOC with ent of
License
SECP business

Ingredient of a Business Proposal

Clarity on vision and business objectives
Detailed market analysis / survey, feasibility study
Financial /business projections along with the underlying assumptions
Governance / management structure
Sponsors along with their net worth certification
Equity plan covering present and future requirements
Article & memo of association

40
MFBs Licensing Process

Post License Requirements

Commence operations within six months of the grant of license
Subscribe committed capital and obtaining certificate of
commencement of business from SECP.
Permission of commencement of MF business from SBP.
After permission of commencement for MF business, MFB
shall apply to SBP for grant of branch licenses under MFBs
branch licensing policy.

41
NGOs Transformation

1. Why to Transform
2. Transformation Continuum
3. Independent Institutional Assessment
financial position, governance structure, human resources,
control systems and accounting and information systems.

4. Financial Position & Capacity

. detailed review of assets especially credit quality

. Assessment of the real value of MFIs obligations; respective
maturities, likely impact on the transformation
. Operationally & Financially self sufficient

5. Transformation Decision

. Board shall authorize Licensing application to SBP for operating as

Microfinance Bank
42
Commercial Banks to do MF

1. huge branch network

Advanta 2. stable sources of funds
ges (deep pockets)
3. well-established systems

1. Counters at Existing
Branches
2. Standalone Branches
Models 3. Establishing Independent
subsidiary
4. Partnering with MFB/Is

43
?
Thank you!

45