ISLAMABAD, Oct 17: President General Pervez Musharraf on Wednesday allowed establishment of microfinance institutions in the country to provide “financial, infrastructural and organisational support to poor persons, particularly poor women, for mitigating their poverty.”

The law, however, has been drafted in such a way as to avoid a repeat of cooperative societies-like scandals, by providing a mechanism under which the State Bank of Pakistan would ensure that there was no political interference in such microfinance institutions.

The new law, called Microfinance Institutions Ordinance, 2001, provides that no person other than a company shall establish a microfinance institution without the issuance of licence from the State Bank of Pakistan.

The objective of the law is stated “to promote the establishment of microfinance institutions for providing organizational, and infrastructural support to poor persons, particularly poor women, for mitigating poverty and promoting social welfare and economic justice through community building and social mobilisation.”

The function and powers of the microfinance institutions would be to render assistance to micro-enterprises and provide microfinance services to poor persons, preferably poor women, with a view to alleviating poverty.

The microfinance institutions will be authorized to provide financing facilities, accept deposit, pledges, mortgages, hypothecations, provide professional advice to poor person regarding investments in small business, and pay, receive, collect and remit money and securities within the country.

No microfinance institution would be able to create a floating charge or the undertaking or any of its assets unless the creation of such floating charge was certified in writing by the SBP as not detrimental to the interest of the depositors of such institutions. Any such floating charge created without obtaining the certificate of the SBP would be invalid.

No microfinance institution would be able to operate in the whole country, unless it had a paid-up capital of five hundred million rupees.

A microfinance institution holding the licence for operation in a province would be required to have a paid-up capital of two hundred and fifty million rupees.

The microfinance institution operating at district level would be required to have a paid-up capital of one hundred million rupees.

Any person performing the functions of a microfinance institution, before the promulgation of this law, would be required to get licence from the State Bank.

Before granting any licence to any microfinance institution, the SBP would satisfy itself that the “institution is, or will be, in a position to meet its liabilities to the present or future customers in full as and when such liabilities accrue.”

A microfinance institution would have to maintain by way of cash reserve in cash in current account, opened with the State Bank or its agent, a sum equivalent to five per cent of its deposits.

The law stipulates creation of depositors’ protection fund for providing security or guarantee to persons depositing money in such institutions.

Five per cent of the annual after-tax profits of microfinance institution and profits earned on the investment of the fund would have to be credited to the depositors’ protection fund and such fund would be either invested in government securities or deposited with State Bank in a enumerative account.

The depositors’ protection fund, the law stipulates, would be used to make payments to the individual depositors with aggregate deposits of up to ten thousand rupees in case of liquidation of the microfinance institutions.