External consultants have been hired to design business plans, devise investment strategy and organisational structure of the Pakistan Microfinance Investment Company.

The PMIC is to be set up in partnership with the UK Department of International Development, Germany’s development bank, KfW, (Bank aus Verantwortung) and the Pakistan Poverty Alleviation Fund. The foreign partners have offered to contribute funds for micro-finance operations. The finance ministry and SECP are currently examining thoroughly details of the poposed company’s structure.

According to the finance ministry, Pakistan’s microfinancing needs will grow manifold by 2018.This is indicated from the current Rs18bn catered to by the Pakistan Poverty Alleviation Fund (PPAF).

The PPAF is operating in 130 districts through 129 partner organisations with over 7.7m micro credit loans providing 61pc loans to women while 80pc financing is extended to rural areas.Since its inception in April 2000 to March 2015, PPAF has disbursed an amount of approximately Rs153bn to its 129 partner organisations in 121 districts across the country.

The SECP has recently introduced substantial reforms in the non-bank financial sector which will cater for the growing needs of micro finance buiness in the country.

The non-banking finance companies have been categorised in two main types: lending NBFCs and fund management NBFCs. Further, lending NBFCs – leasing companies, investment banks, housing finance companies. Discount houses have also been segregated in non-deposit taking and deposit-taking entities with distinct regulatory requirements.

In this connection, a new class of NBFCs i.e. Non-Bank Micro Finance Companies (NBMFCs) has been introduced. Comprehensive framework for providing finance to poor persons and micro enterprises (including conduct requirements for NBMFCs) has also been prescribed. This will also enable the SECP to regulate the micro finance institutions other than microfinance banks.

The existing companies other than NBFCs have been allowed to apply for licence to carry out lending activities subject to the fulfillment of prescribed eligibility criteria under the new regulatory regime. For instance, an equipment manufacturer, producer of home appliances or automobile assembler may undertake leasing of his own product as an ancillary activity by obtaining leasing licence. These amendments are likely to boost lending business in a regulated environment.

The SECP hopes that the new regulatory framework would be helpful in developing and promoting the non-banking financial sector in order to diversify the inherent systemic risk and to enhance the resilience of the financial system by increasing outreach and penetration especially for the micro, small and medium enterprises.

An annual assessment of the microfinance industry by Pakistan Micro-finance Network says a key challenge facing the sector had been the absence of regulatory and legal cover for the non-bank micro finance products.Though these organizations are among the pioneers of microfinance in the country they have witnessed their market share shrink over the years.

At the same time, another major challenge faced by the micro finance banks in mobilizing deposits has been the absence of membership of the national clearing house.

Lack of membership meant that micro-finance banks had to rely on commercial banks for clearance of their payments which led to increased turnaround time.

One of the main reasons for this has been lack of regulatory umbrella. Due to this, non-bank micro-finance providers have found it difficult to attract commercial financing.

Moreover, it has resulted in a lack of recourse mechanism for clients and practitioners and the non-bank micro-finance providers have remained vulnerable to the risk of external interference, the assessment report points out.

The Pakistan Microfinance Networks wants the SECP to play a stewardship role post-regulations similar to that of the SBP in case of micro-finance banks. A liberal interest rate regime for non-bank microfinance providers should be followed that focuses on market instruments of competition and full disclosures as followed by the SBP.

Published in Dawn, Business & Finance weekly, January 4th, 2016