The State Bank of Pakistan Launches Three Microfinance Development Funds

Dec 2008
Karachi, Pakistan, December, 20 2008 - SBP has launched three key microfinance sector development initiatives comprising ‘Microfinance Credit Guarantee Facility’, ‘Institutional Strengthening Fund’, and ‘Improving Access to Finance Services Fund’, for growth and development of microfinance sector.

These initiatives are part of the GBP 50 million (USD 75 million) ‘Financial Inclusion Program’ (FIP) supported by the UK Department for International Development (DFID) and an endowment fund worth 20 million dollars under the Asian Development Bank’s (ADB) Improving Access to Financial Services Program.

State Bank of Pakistan (SBP) Governor Dr Shamshad Akhtar on Friday launched these three initiatives to support the microfinance sector. The event was attended by all stakeholders, including donors, presidents/CEOs of commercial/microfinance banks, and representatives of Pakistan Microfinance Network and Pakistan Bankers Association.

These measures are expected to ease liquidity constraints of microfinance providers in view of the tighter liquidity conditions and sudden spike in inflation, which has severely affected the poor and marginalised some segments of the society.

The Microfinance Credit Guarantee Facility is expected to increase the flow of credit to microfinance sector. The facility aims to incentivise banks/DFIs to channelise funds to micro finance banks and micro finance institutions (MFBs/MFIs) for on-lending to low income segment of the population.

The facility will provide credit guarantees of up to 40 percent of the funding provided by banks/DFIs, and aims to develop market and graduate poor borrowers to mainstream financial service providers. Banks/DFIs will lend to MFBs at the SBP policy discount rate plus 200 bps. The funds channelised under facility to MFBs /MFIs shall be deductible from Demand and Time Liabilities of the banks/DFIs for the purpose of SLR and CRR calculation.

The facility will be established at State Bank of Pakistan (SBP) with the help of the UK Government Financial Inclusion Program grant funds equivalent of up to GBP 10 million to be used as the guarantee fund. The State Bank has issued necessary guidelines for operationalising the facility which were finalised after due consultation with stakeholders.

The MCG facility is expected to help raise local currency funds for eligible MFIs/MFBs. The loans portfolio under the guarantee scheme will be administered by banks. The facility will also help building links between micro borrowers and formal financial institutions. The familiarisation of the bank with the client should eventually lead to the “graduation” of the borrower.

The facility shall provide partial guarantees to minimise the perceived risk premium by covering part of the losses incurred on funds made available to MFBs/MFIs with the advantage of leveraging the guarantee fund a number of times while keeping the incentive for banks/DFIs to collect the loan. The lending of MCG facility will help these institutions to play their role in the growth of micro credit more effectively.

The Institutional Strengthening Fund is designed to build capacity of the microfinance sector. The fund is expected to enhance potential for growth and create depth in outreach by improving human resource quality, service delivery and increasing service availability to potential microfinance clients.

The fund has been established at the State Bank under the UK Government’s Financial Inclusion Program that involves funds equivalent to 10 million pounds sterling for institutional strengthening. The fund will provide grants for capacity building to generate on-lending resources through commercial sources, equity investments or deposit mobilisation strategy through improvement in management, governance, internal controls and functions.

The fund will also provide grants for employing cost reduction mechanisms for increasing outreach in rural and remote areas through product innovation, development or use of technology. In addition, the fund will provide grants for business development services to MFI clients or improving quality of services; and developing capacity for transformation of MFIs into licensed microfinance banks.

The fund will primarily focus on institutions that are already regulated, or are in the process of seeking a licence, or have solid plans for restructuring in the near future. SBP regulatory oversight will ensure transparency and good governance practices, which will ultimately lead to greater investment in the microfinance industry.

Moreover, ISF is capped at $1 million per year per grantee, and subject to at least 25 percent matching grant from the grantee. Grants may be made on annual basis, and institutions that qualify for funding in a year may also qualify for funding in another year, subject to good performance and submission of another successful proposal through the approved application procedure.

The Improving Access to Financial Services is also designed to enhance capacity of the microfinance sector and promote financial literacy. The fund has been established at the State Bank with the help of an endowment of $20 million under the ADB-supported ‘Improving Access to Financial Services Program - IAFSP’. The fund will provide benefits for and have positive impacts on rural and urban communities, in particular the poor and the women.

These benefits are both quantitative and qualitative in nature and include (i) capacity building and training of financial services providers to promote expansion into rural areas; product and service innovation, including savings, remittances and Islamic financial services; adoption and integration of new technologies and applications for improving access to financial services; (ii) capacity building and training of Government and regulatory authorities to support development of an inclusive financial sector and implementation of measures under the Program; and (iii) literacy programs (financial and basic) conducted by or on behalf of financial services providers for clients and potential clients to improve access to financial services and the utilisation of finance.

It may also be mentioned here that in Pakistan there are about more than 30 million people living below the poverty line. Despite the consensus that microfinance is an effective tool to alleviate poverty, the gap between demand for and supply of financial services for the poor and marginalised segments of population is very wide.

The current microfinance outreach of 1.8 million customers is limited to only around 5 percent of the potential market. The SBP and the Government of Pakistan are committed to increasing the number of microfinance borrowers to 3 million by the end of 2010, and 10 million by 2015, as documented in the national Microfinance Strategy adopted in 2007. In order to achieve the outreach target the microfinance industry would need substantial additional funding, the SBP said.

Source : Pakistan Views

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