The Microfinance Sector in Pakistan

1
The Microfinance Sector in Pakistan

• Syed Mohsin Ahmed
• General Manager
• Pakistan Microfinance Network

2
Presentation Outline

• Pakistan and its Macro Economy
• The Microfinance Landscape
• Performance Trends
• Challenges

3
Macro Economy
Ultimate Objective 1) Create jobs, 2) Raise
incomes and 3) Reduce poverty
7.5 GDP
7.9 Inflation
4.2 Fiscal Deficit
Tax-GDP ratio10.5 Saving 18
Public debt 53.4 External Liab. 27.1
158.2 million population
Per Capita Income US 925.
Banking spread6.4-7.8
Trade deficit 9 Current account 5
Investments 23
Trade gone up from 20 to 46b
20 million banking clients with less then 6m
borrowers
Stable exchange rate.7 dep. last year
Low level of investments in the social sector
Forex covers almost 6 months of imports
Raising capital both debt and equity from
international markets
Economic Survey of Pakistan 2005-06
4
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

5
The Sector Landscape
6
Microfinance in Pakistan
MULTI-DIMENSIONAL
SPECIALIZED
7
Outreach
8
The Microfinance Potential
29.5 Million Adults
Poverty Line
9
Market for Microfinance
10
Market Penetration by Province
11
Reforms in the Microfinance Industry
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 Branchles
s Banking policy Product innovation Using
technology and other innovative avenues as
delivery channels
12
Reforms in the Microfinance Industry
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
13
Reforms in the Microfinance Industry
Privatization of KHB strategic ownership Transfor
mation 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)
14
Performance Trends
15
40 growth puts Pakistan in the top quartile
globally
Above 40 annual growth rate
16
Growth is evenly spread across peer groups
17
MFBs and RSPs lead the sector
18
Growth is spread across Pakistan
1,130,000
19
Except for Balochistan
20
Portfolio Yield inches up

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

21
Yields however are below global benchmarks
22
Sustainability remains flat
Regional Benchmarks-FSS (2005)Africa
91 Asia 116 Middle East and North Africa125
Latin America and Caribbean 111 East Europe
and Central Asia 117

• Low Portfolio Yields
• Asset Utilization
• Growth phase, high upfront costs

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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

• Clearer vision of mf
• Improved systems and internal controls
• Training of staff, especially loan officers
• High growth rate
• Newer players
• High write offs

Benchmark 5
24
MFB adds capital but Debt continues to finance
growth
25
Sector however is over capitalizedexcept for
RSPs
26
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

27
Costs are however globally competitive
28
Industry continues to targets the lower end of
market
29
Industry continues to target rural poor
30
.and percentage of women borrowers have increased
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Challenges
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Scale
3 Microfinance Banks 6 Specialized NGOs 1 Rural
Support Programme 1 Leasing Company
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Financing
Rs. 86 Billion
Savings (22)
25
Debt (47)
55
Rs. 14 Billion
Average Loan Rs. 20,000
Savings (1)
5
Debt (9)
Equity (17)
65
20
Equity (4)
30
34
Human Resources
Total Staff 20,000
1
Senior Management 200
15
Middle Management 3,000
84
Field Staff 16,800
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Policy and Regulation

• Public disclosure of social performance (e.g.
  outreach to women, rural areas)
• Provisioning requirement for MFBs
• 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 MFPs

36
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

37
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

38
Thank You
39
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