July 17, 2006	Monday	Jumadi-ul-Sani 20, 1427

THE concept of microfinancing, which is the provision of financial services to the very poor, is seen as a major tool for eradicating poverty in the developing world.

Pakistan’s advances in this field have been slow but recent amendments to the Micro Finance Institutions Ordinance—2001 (MFI) seek to overcome the problems besetting this sector.

Currently Pakistan has six microfinance banks (MFBs) out of which two have been in operation for four or five years while the other four have been licensed recently. There is also a formally recognised Pakistan Microfinance Network (PMN) which has captured 99 per cent of the market for MFIs.

However, these institutions support only 600,000 of the potential market of six million poor households. Also their lending profiles reflect a high degree of concentration in regions and sectors; most are rural focused. Gender-wise, 84 per cent of the borrowers are males although women have been the focus of micro financing projects worldwide.

Also, the administrative cost of delivery, disbursing and collecting of a tiny loan portfolio is much higher in comparison with conventional loan portfolios and so borrowers often end up paying higher interest rates.

The July 2006 amendment to the MFI ordinance seeks to resolve these problems. The amendment is designed to make microfinance banks. ‘socially responsible and financially sustainable institutions’ and, to ‘strengthen the regulatory and supervisory oversight of the State Bank.

’The tremendous potential of commercial banks has been recognised ; they have a huge branch network with more than 3000 branches in rural and semirural/periurban areas which can be utilised to extend microfinancing services. This is also expected to introduce competition among a large number of lenders and may help to improve both the services and the lending rates.

Institutions at the district level will be allowed to obtain licenses for five adjacent districts with the prescribed minimum capital requirement of Rs150 million. The amendments also aim to allow MFIs to tailor their products to meet the needs of their customers.

The Governor Of the State Bank, Dr Shamshad Akhtar , at a seminar on ‘Commercial opportunities in Micro and Small Business Lending’ said that the key to the development of the microfinance sector was first, to do away with subsidisation of microfinance services to commercialisation of such services ; MFIs should be economically self-sufficient.

Second, there must be a move away from single to multiple products; microfinance products include not just loans but also savings and insurance. Third ‘credit must be effectively priced’, and furthermore the ‘MFIs must disclose their effective interest rates to loan applications on standard guidelines.’ This mandated discipline of disclosing interest rates may help micro-lenders in focusing on steps they can take to increase their efficiency and thus lower their rates.

In order to facilitate commercial banks entry in the microfinance sector, the State Bank also issued guidelines for commercial banks. These included suggestions for setting up microfinance counters in existing branches, stand-alone MF branches, independent MS subsidiaries or by developing linkages with other MFBs anf NGO-MFIs.

There is a great potential for the micro finance sector and hopefully these changes will provide a boost to this neglected sector.