MICROCAPITAL STORY: State Bank of Pakistan Directs Shareholders of Microfinance Institutions to Deposit Their Shares in Blocked Accounts of the Central Depository Company of Pakistan

The State Bank of Pakistan (SBP) has recently issued a circular that requires shareholders of microfinance institutions (MFIs) to deposit their holdings in blocked accounts of the Central Depository Company (CDC) of Pakistan. Prior written approval is required before withdrawing the shares from the CDC, and the cost of opening and operating the blocked accounts will be borne by the shareholders.

The SBP took the measure in accordance with a clause in the Microfinance Institutions Ordinance 2001 that states that 51 percent or more of the paid-up capital of an MFI should be subscribed to by the promoters or sponsors of an MFI and those shares should remain in the custody of the SBP. The shares cannot be transferred nor can any encumbrance be placed upon them without prior written permission from the SBP. The regulation is essentially trying to ensure adequate capitalization of MFIs to protect MFI clients.

A just released paper by the World Bank entitled “Bringing Finance to Pakistan’s Poor”, summarized in this MicroCapital paper wrap-up, highlights the low penetration of financial services in Pakistan versus neighboring countries. Currently only 14 percent of Pakistanis use savings, credit, insurance, payments and remittance services from the formal financial system versus 48 percent in India, 32 percent in Bangladesh, and 59 percent in Sri Lanka. Policy efforts to increase access to finance in Pakistan have taken time to bear fruit. Financial institution willingness to expand access in Pakistan has been stinted by slow technological advances, weak legal foundations, unsuitable financial processes and products, and the difficulty local banks have had in serving SMEs profitably.

At a Dissemination Ceremony of the World Bank report, the Advisor to the Prime Minister on Finance, Shaukat Tarin, said that the government has set the target to increase the outreach of the microfinance services to three million borrowers by 2010. He said that there are 40 microfinance providers in Pakistan, including seven microfinance banks with an overall operating base of 1,550 branches and service centers, serving a clientele of approximately two million. “The potential cliental base of microfinance sector is estimated to be around 25-30 million borrowers of whom a significant portion still remains un-served by both the regulated and un-regulated sector”, he remarked.

A recent report by Microfinance Insights highlighted other troubles the Pakistani microfinance sector is encountering. In addition to an unstable political and economic environment and galloping inflation, the Pakistani microfinance sector has also faced myopic political intervention. For instance, in the populous Punjab region elected representatives have made statements claiming general amnesty for microloans. These statements can encourage poor credit discipline, undermining the quality and outreach of the sector as well as the credit-worthiness of clients. As reported on MicroCapital, Grameen Foundation and Women’s World Banking recently expressed grave concern over the statements and urged the Chief Minister of Punjab to take swift action to support the microfinance sector and curtail such inappropriate interventions.

By Laura Anderson, Research Associate

Additional Resources:

The News: MFIs need SBP Approval before withdrawing shares

The State Bank of Pakistan: Home

Microfinance Insights: Home, A Very Political Economy: The Ill-Advised Political Interference in Pakistans Microfinance Sector

MicroCapital Story: Grameen Foundation and Women’s World Banking Express Concern Over the Potential Crisis in Punjab, Pakistan’s Microfinance Sector

The World Bank: Home, “Bringing Finance to Pakistan’s Poor” by Tatiana Nenova, Cecile Thioro Niang and Anjum Ahmad

MicroCapital Paper Wrap-Up: “Bringing Finance to Pakistan’s Poor” by Tatiana Nenova, Cecile Thioro Niang and Anjum Ahmad

Associated Press of Pakistan: National Budget 2009-10 likely on June 6 or 13: Shaukat Tarin