MICROCAPITAL STORY: State Bank of Pakistan Launches Three Microfinance Development Funds With Proceeds from the UK Government Financial Inclusion Programme and the Asian Development Bank

The State Bank of Pakistan (SBP) has launched three microfinance initiatives: the Microfinance Credit Guarantee Facility, the Institutional Strengthening Fund, and Improving Access to Finance Services Fund. The initiatives are part of the GBP 50 million, or USD 75 million, Financial Inclusion Programme (FIP), a joint venture between SPB and the UK Department for International Development. The objective of the three microfinance initiatives is to provide liquidity to the microfinance providers in response to tighter liquidity conditions and a sudden spike in inflation. In 2008, Pakistan’s inflation rate reached 20.8 percent, primarily due to rising world fuel and commodity prices. The announced initiatives are also in line with the aggressive goals outlined in the Pakistani government’s Poverty Reduction Srategy Paper which MicroCapital reported on earlier this month. In the paper, the government implemented an evidence based policy and set a target of reaching out to three million microfinance borrowers by the end of 2010 and 10 million borrowers by 2015.

Microfinance Credit Guarantee Facility (MCGF)

This facility will provide incentives to banks and development financial institutions (DFIs) to provide funds to microfinance institutions which will then be used to provide credit to the MFI’s borrowers. Lenders will lend to the MFIs at the State Bank of Pakistan policy discount rate plus 2 percent. The incentives include a guarantee on repayment of 40% of the funds provided by banks and DFIs to MFIs. In addition to the guarantee, banks and DFIs may deduct the funds loaned to MFIs from their demand and time liabilities when calculating their statutory liquidity and the cash reserve requirements for regulatory purposes. GBP 10 million in grant funds from the UK Government Financial Inclusion Program will be used to help make up the guarantee fund. SBP plans to leverage the guarantee fund several times, thereby increasing the amount of funds that can be brought in from the formal banks under the guarantee program.

Institutional Strengthening Fund (ISF)

Again using GBP 10 million from the UK Government Financial Inclusion Program, the objective of the Institutional Strengthening Fund is to increase the capacity of MFIs by providing grants for them to make advances in their human resources, management, governance, internal controls, business development, cost reduction mechanisms, product innovation, and technology implementation.

The ISF is capped at $1 million per year per recipient, and is subject to at least a 25 percent matching grant from the recipient. With good performance and resubmission of their proposal, MFIs may be recipients of grants several years in a row. The fund will primarily focus on institutions that are already regulated, or are in the process of seeking a license, or have solid plans for restructuring in the near future.

Improving Access to Financial Services (IAFS)

This fund also is designed to enhance the capacity of MFIs with the additional goal of promoting financial literacy. The fund was established with a USD 20 million endowment from the Asian Development Bank (ADB) supported Improving Access to Financial Services Program. In addition to promoting an increase in capacity in many of the same ways as the ISF, the IAFS places some added focus on increasing capacity in remittances and Islamic financial services. It will also train government and regulatory authorities on supporting the development of an inclusive financial system. It will also enable financial services providers to provide financial and basic literacy programs to their clients and prospects.

The State Bank of Pakistan 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 bank’s 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). The SBP and the Government of Pakistan have set a goal increasing the number of microfinance borrowers to three million by the end of 2010, and to ten million by 2015, as documented in the national Microfinance Strategy adopted in 2007.

Microcapital reported on the Financial Inclusion Programme when it was established in September 2008. The program is a joint scheme between the State Bank of Pakistan and the UK Department for International Development (DFID). The program allows banks to provide wholesale credit to microfinance institutions for onward disbursement to microcredit borrowers in rural areas against the larger credit enhancement of the SBP. The DFID is the department responsible for Britain’s poverty-reduction efforts worldwide and is participating in the FIP as part of its aim to achieve the Millennium Development Goals set by the United Nations in Pakistan. The program will focus on financing for micro and small enterprises during the first year, then gradually focus on low-income housing and rural finance.

Headquartered in Manila, Philippines, the Asian Development Bank (ADB) is an international development finance institution whose mission is to help its developing member countries reduce poverty and improve the quality of life of their people. Pakistan has received about $18.59 billion in loans since joining ADB in 1966. The lending program in 2007 was a record that included almost $2.0 billion in loans and $20.2 million for technical assistance grants. ADB is working with the Pakistani government and the private sector to improve the country’s infrastructure, energy security, and basic public services. Aligned with national development objectives, ADB’s partnership priorities aim to attract investment, create champion industries and jobs, and improve the quality of life of citizens.

By Iyanna Holmes, Research Assistant

Additional Resources:

Asian Development Bank: Asian Development Bank and Pakistan, 2008 Fact Sheet

CIA World Factbook: Pakistan/Economy

Government of Pakistan Finance Division: Poverty Reduction Strategy Paper (PRSP) – II

MicroCapital Story: January 26, 2009, Revamping Pakistan’s Microfinance Sector: Government Reveals Aggressive Goals in Second Poverty Reduction Strategy Policy Paper; September 15, 2008, State Bank of Pakistan (SBP) Partners with DFID in Diversifying Agrocredit and Extending Access to Microfinance in Rural Regions

The MicroFinance Gateway: New Credit Guarantee Facility for Pakistani MFIs Launched

State Bank of Pakistan: Home, Maintenance of Cash Reserve Requirement (CRR) and Statutory Liquidity Requirement (SLR)

Symbiotics: The State Bank of Pakistan Launches Three Microfinance Development Funds