MICROCAPITAL STORY: Revamping Pakistan’s Microfinance Sector: Government Reveals Aggressive Goals in Second Poverty Reduction Strategy Policy Paper

As a part of a new policy matrix added to Pakistan’s Poverty Reduction Strategy Paper (PRSP)-II, new goals for the microfinance industry in Pakistan have been established, it was announced in the Daily Times. A target was set for the amount of microfinance lending throughout the sector in 2008/2009 to total Rs 37 billion (USD 468 million), and for the number of active borrowers to increase to 3 million for 2009/2010, and to 10 million by 2015. Additionally, for 2008/2009, it is intended for National Rural Support Programme (NRSP) to become a microfinance institutions (MFIs), and for the Microfinance Credit Guarantee Facility to be launched. Khushali Bank will also be granted legal status under MFIs Ordinance 2001 in this time period. By 2009/2010, a Community Investment Fund (CIF) will be launched, along with a feasibility credit rating mechanism for small borrowers.

During the period for PRSP-I, the microfinance industry grew at over 40 percent per year, and by March 2008 the sector totaled over 1.7 million savers, with a clientele of nearly 1.6 million borrowers. Microfinance became present in 105 districts, including some of the more remote districts, such as the Federally Administered Tribal Areas (FATA), outside of the four provinces bordering Afghanistan.

In Pakistan only 17 percent of the population has bank accounts and less than 4 percent are borrowers. Only 25 percent of total bank deposits and 17 percent of total borrowers are from rural areas, representing 10 percent and 7 percent of the total value of deposits and advances, respectively. The State Bank of Pakistan (SBP) has established a Development Finance Group which has developed a Financial Inclusion Programme (FIP) which is aimed at encouraging a shift in banks’ focus away from large companies to smaller companies and the household sector. The six main focuses of the FIP will be a well-target FIP, credit enhancement, sector transformation and institutional strengthening, innovation and delivery mechanisms, small enterprises and rural financing, and financial literacy. Additionally, as a part of its focus on development finance to serve the underserved markets, the FIP will include the launch of a number of initiatives for MFIs include:

  • Encouraging MFIs to develop commercially viable operations
  • Creating partnerships between commercial banks, microfinance providers and the post office
  • Developing a flexible regulatory regime which will allow innovation and growth for MFIs which will not compromise practical objectives
  • Providing mobile phone-base banking services

The State Bank of Pakistan (SBP) was inaugurated by Quaid-i-Azam Muhammad Ali Jinnah in 1946 as the central bank of Pakistan and was nationalized in 1974. The scope of the banks operations increased from its original mandate “to regulate the issue of Bank notes and keeping of reserves with a view to securing monetary stability in Pakistan and generally to operate the currency and credit system of the country to its advantage” to its expanded mandate in 1956, to “regulate the monetary and credit system of Pakistan and to foster its growth in the best national interest with a view to securing monetary stability and fuller utilisation of the country’s productive resources”. Total assets in 2008 stood at Rs. 1.05 trillion (USD 13.3 billion).

National Rural Support Programme (NRSP) was established in 1991 and is the largest rural support programme in Pakistan. Its mandate is to alleviate poverty through development activities and “harnessing people’s potential” and to bring the concerns of economically marginalized citizens to the public consciousness. It is present in 46 of the 127 districts throughout Pakistan.

Khushhali Bank was founded in 2000 as a part of Pakistan’s Poverty Reduction Strategy and its Microfinance Sector Development Program (MSDP). Khushhali Bank operates under the supervision of the SBP and its shareholders are comprised of a variety of central commercial banks. It is the largest and lead licensed MFI in Pakistan. At the end of 2007 its assets totaled USD 109 million, with a total loan portfolio of 43 million. Its debt to equity ratio stood at 269.85 percent and its return on assets stood at -3.86 percent. It had over 283 thousand active borrowers, of which 15.4 percent were women and the average loan balance per person was USD 152.

By Lori Curtis, Research Assistant

Additional Resources:

Daily Times: “Govt aiming to accelerate GDP growth rate

Pakistan Ministry of Finance: “Home” “PRSP-II

MIX Market: “Khushhali Bank Profile

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