Public Disclosure Authorized 40586 - World Bank...ZTBL) in the early 1970s, the Government of Pakistan (GoP), civil society, and later the private sector have been interested in extending

AID EFFECTIVENESS INITIATIVE

COUNTRY-LEVEL

EFFECTIVENESS AND ACCOUNTABILITY REVIEW WITH A POLICY DIAGNOSTIC

PAKISTAN

April 2007

Eric Duflos (CGAP)Alexia Latortue (CGAP)

Rochus Mommartz (CGAP Consultant)Graham Perrett (CGAP Consultant)Stefan Staschen (CGAP Consultant)

40586

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

TABLE OF CONTENTS

LIST OF ACRONYMS ............................................................................................................................. ivACKNOWLEDGMENTS ............................................................................................................................ vMAP OF PAKISTAN ............................................................................................................................... viPAKISTAN CLEAR WITH A POLICY DIAGNOSTIC—EXECUTIVE SUMMARY ........................................ 1I. BACKGROUND ............................................................................................................................... 3

II. OVERVIEW OF MICROFINANCE IN PAKISTAN ............................................................................... 5Economic and Social Context .................................................................................................................... 5Evolution of the Financial System ............................................................................................................. 5History of Microfinance in Pakistan ...........................................................................................................6Microfinance Stakeholders ......................................................................................................................... 7Microfinance Funders ................................................................................................................................. 9

III. ANALYTICAL FRAMEWORK ......................................................................................................... 10Microfinance at a crossroad—from unsustainable growth to a robust inclusive financial system ......... 10

IV. FINANCIAL SYSTEM GAP ANALYSIS ............................................................................................ 12MICRO LEVEL (retail financial service providers) ................................................................................ 12Strengths at the Micro Level .................................................................................................................... 12Challenges at the Micro Level ..................................................................................................................12Donor Recommendations at the Micro Level .......................................................................................... 14MESO LEVEL (support services, wholesale finance/apexes, networks) ................................................ 16Strengths at the Meso Level ..................................................................................................................... 16Challenges at the Meso Level .................................................................................................................. 16Donor Recommendations at the Meso Level ........................................................................................... 17MACRO LEVEL AND ROLE OF GOVERNMENT (Policies, laws, regulations, supervision, and

other government interventions) ......................................................................................................... 20Strengths of the Macro Level ................................................................................................................... 20Challenges at the Macro Level ................................................................................................................. 20Recommendations at the Macro Level ..................................................................................................... 22

V. DONOR SYSTEMS ........................................................................................................................ 25Strengths of Donor Systems in Pakistan .................................................................................................. 25Challenges of Donor Systems in Pakistan ............................................................................................... 26Recommendations for Improving Donor Systems ................................................................................... 28

ANNEXES ............................................................................................................................................. 31Annex 1—Summary Matrix of Recommendations .................................................................................. 33Annex 2—Recent Trends in Pakistan Microfinance ................................................................................ 34Annex 3—Microfinance Providers ...........................................................................................................39Annex 4—Legal Framework According to Institutional Types ............................................................... 41Annex 5—Profile of PPAF ....................................................................................................................... 42Annex 6—List of Donor Projects .............................................................................................................43Annex 7—Donor Instruments .................................................................................................................. 44Annex 8—Donor Funding in Microfinance ............................................................................................. 45Annex 9—List of Documents Consulted ................................................................................................. 46Annex 10—List of Persons Consulted ..................................................................................................... 51

iii

LIST OF ACRONYMS

ADB Asian Development BankAECI Agencia Española de Cooperación Internacional AKAM Aga Khan Agency for MicrofinanceAKRSP Aga Khan Rural Support ProgrammeCDNS Central Directorate of National Savings CGAP Consultative Group to Assist the Poor CLEAR Country-level Effectiveness and Accountability ReviewEC European CommissionFSAP Financial Sector Assessment ProgramFSD Financial System DevelopmentGDP Gross Domestic ProductGoP Government of PakistanGTZ Gesellschaft für Technische ZusammenarbeitHDI Human Development IndexIFAD International Fund for Agricultural Development IFC International Financial CorporationIFI International Finance InstitutionIMF International Monetary FundINGO International NGOJBIC Japan Bank for International CooperationKB Khushhali BankMDG Millennium Development Goals MFB Microfinance BankMFI Microfinance InstitutionMFP Microfinance ProvidersMGP Microfinance Group PakistanMIS Management Information SystemNBP National Bank of PakistanNGO Nongovernmental OrganizationNPL Nonperforming Loan NRSP National Rural Support Programme NSS National Savings SchemesOCT Orangi Charitable Trust OPP Orangi Pilot ProjectPAR Portfolio at RiskPFSSRP Pakistan Financial Services Sector Reform ProgrammePMN Pakistan Microfinance NetworkPPAF Pakistan Poverty Alleviation FundPR Pakistan RupeesPRSP Punjab Rural Support Program QAMM Quality of Aid Management for Microfinance IndexRSP Rural Support ProgramRSPN Rural Support Programmes Network SBP State Bank of PakistanSDC Swiss Agency for Development and CooperationSECP Securities and Exchange Commission of PakistanSRSP Sarhad Rural Support Programme TA Technical AssistanceTRDP Thardeep Rural Development ProgrammeUNDP United Nations Development ProgrammeUSAID United States Agency for International DevelopmentWB World BankZTBL Zarai Taraqiati Bank Limited

iv

ACKNOWLEDGMENTS

The review team extends a heartfelt note of thanks to everyone who participated in the PakistanCLEAR with Policy Diagnostic. A great number of people involved in microfinance in Pakistangenerously met with the team, often more than once, and sometimes had to travel to meet us. Whilewe take responsibility for the views expressed in this report, our work would not have been possiblewithout these important meetings.

More specifically, we thank the governor of the State Bank of Pakistan, Shamshad Akhtar, andher staff for their extensive cooperation, especially on the Policy Diagnostic component. We are alsomost thankful to the donor staff who championed this initiative: Sukanda Lewis and Azim Hashimi,ADB; Stephen Rasmussen, World Bank; and Richard Kohli and Kanwal Bokharey, SDC. Awais Buttfrom the European Commission/PFSSRP played an instrumental role in coordinating the InformalDonor Group on Microfinance’s (a gathering of the main funders of microfinance) participation in thereview, including remarkable diligence in compiling background readings, helping to select keyinformants, and serving as a resource for the team’s many questions. We also extend our gratitude toMohsin Ahmed and all the staff of PMN—they are an invaluable source of knowledge on Pakistanimicrofinance who willingly gave of their time and ideas. PMN also helped the review team organizevisits to microfinance practitioners and clients, which helped anchor our views in the Pakistani reality.

As the logistics coordinator for the review, Asim Mustaq’s tireless efforts were essential to thesuccessful execution of the review. Mr. Mustaq provided first-class support to the team—thank you.

We would like to thank our CGAP colleagues. Tim Lyman provided key inputs in the designof this joint aid effectiveness and policy review, and he helped prepare the debriefing presentation andfinal report. Elizabeth Littlefield, Rich Rosenberg, and especially Syed Hashemi provided key advicethroughout the process. Finally, Aude de Montesquiou played an essential role throughout all thestages of the review and in finalizing the report.

April 2007

v

vi

Exchange rate in February 2007: 1 US Dollar (US$ 1) = 60.77 Pakistan Rupees PRs

MAP OF PAKISTAN

PAKISTAN CLEAR WITH A POLICY DIAGNOSTIC—EXECUTIVE SUMMARY

At the request of eight development agencies (through the informal donor group) and the governor ofthe State Bank of Pakistan (SBP), CGAP conducted a Country-Level Effectiveness and AccountabilityReview (CLEAR) combined with a Policy Diagnostic in Pakistan in November and December 2006.CLEARs and Policy Diagnostics have been carried out in over a dozen countries separately; bothmethodologies were combined for the first time in Pakistan. The CLEAR with Policy Diagnostic forPakistan resulted in recommendations for two separate, but closely linked, types of actors: internationalfunding agencies and government agencies.Recent developments in the banking sector. Pakistan implemented an impressive privatization ofthe banking sector in the 1990s. State participation in the sector decreased from over 80 percent in1990 to less than 20 percent today. The financial sector is now relatively stable and is a driving forceof economic growth. However, penetration of financial services remains low: only about 3 percent ofthe population has access to the banking sector.Evolution of pro-poor finance. Since the establishment of the Agricultural Development Bank (nowZTBL) in the early 1970s, the Government of Pakistan (GoP), civil society, and later the privatesector have been interested in extending financial services to poor and low-income Pakistanis. Thiswas often done with support from international funding agencies and focused mostly on credit. In theearly 1980s, the Aga Khan Rural Support Programme (AKRSP) and the Orangi Pilot Project (OPP)were launched. These, and the Rural Support Programs (RSPs), were general support institutions thatprovided a wide variety of social services, including financial services. By the mid-1990s some RSPscreated specialized microfinance units—one of which became Kashf Foundation, a key microfinanceprovider (MFP) in Pakistan today. In the early 2000s, the GoP stepped up efforts to develop microfinance, with considerable fundingfrom large donors like the World Bank and the Asian Development Bank (ADB). The wholesalefacility Pakistan Poverty Alleviation Fund (PPAF) made its first loan to MFPs in 2002, and it nowdominates the refinancing market. One year later, the GoP facilitated the creation of Khushhali Bank.Today, Khushhali Bank is the largest retail institution specialized in microfinance. However, it was aspecific microfinance ordinance created by SBP in 2001 that marked the beginning of a new era formicrofinance: by 2007 six microfinance banks (MFBs) had received licenses. The PakistanMicrofinance Network (PMN) emerged in parallel. PMN is now a strong industry associationcommitted to transparency.Findings at a glance. Despite a sound regulatory framework for microfinance and significantinjections of donor funding estimated at close to US$ 400 million over the past five years, there is alack of strong, sustainable institutions that are able to reach the scale necessary to have significantimpact. To date, microfinance in Pakistan has been largely regarded as a social service rather than afinancial service. Institutions that offer microfinance programs often do not clearly separate them fromsocial programs. Many MFPs have staff with strong social sector backgrounds, but little financialsector expertise. And the emphasis on providing immediate assistance to target groups rather than onproviding ongoing access to financial services means that microfinance programs have not achievedsustainability, despite large injections of development funds. Funders and the GoP have missed an opportunity to create a strong and inclusive financial system asa result of an ambivalent attitude toward sustainability and a lack of commitment to interest rates thatcover costs. The results speak for themselves: The sector has grown at a relatively modest pace (700,000 micro-borrowers out of a population of 160 million), and it relies on unsustainable institutions (from thehundreds of MFPs in Pakistan, only two are sustainable). Although SBP set-up a conducive regulatoryframework, few institutions use it, and the GoP remains involved in direct provision of credit. At theretail level, microcredit dominates while savings and other financial services are largely undeveloped.To achieve greater access to capital on the part of institutions serving the poor, better protection ofpoor people’s savings, and increased legitimacy and professionalization of the sector, microfinancemust be integrated into the financial system at all levels (micro, meso, and macro). An overview ofthe strengths and challenges of Pakistani microfinance at the three levels of the financial system ispresented in the table on page 2.

1

Microfinance at a crossroad. The CLEAR with Policy Diagnostic review took place at a critical timefor microfinance in Pakistan. Heightened interest from several parts of the GoP (political and technical)together with the launch of several new donor projects by DFID, SDC, and USAID and the new ADBloan provide an opportunity for a new direction. Whether this opportunity will be used to create a newbusiness model and boost for commercial microfinance depends on many stakeholders. This report is addressed to all funders and government agencies that support microfinance in Pakistan.It provides a snapshot of key issues facing the development community and policy makers engaged inor concerned with microfinance. This report offers concrete recommendations on how to tackle theseissues. A table in Annex 1 summarizes all the recommendations of the report. The following are sevenpriority recommendations determined by the reviewers: 1. Insist on sustainability. Funders must not encourage institutions to pass funding subsidy

through to clients in the form of below-market interest rates. Funders should support specializedMFPs and insist on full cost-recovery interest rates in their funding agreements with MFPs.

2. Encourage innovation, new actors, and new approaches. Funders should create an internationaltender to attract experienced microfinance players (to build greenfield banks, for example) andsupport technological innovations, such as mobile phone-based financial services.

3. Promote a commercial wholesale market. Donors who fund PPAF’s microfinance activitiesshould consider whether and how to provide fresh funds for the microfinance component. Theyshould help PPAF spin-off its microfinance lending operations while developing incentives forcommercial banks to lend to MFPs.

4. Diversify use of funding instruments. Funding agencies (private and public) should spendmore money on capacity building rather than funding large credit lines through government.They should adapt to market needs by offering a palette of instruments, with a focus on thosethat provide incentives for savings mobilization.

5. Create a joint TA facility. During the take-off phase of microfinance, donors should make high-quality, flexible, and demand-driven TA available, possibly through a joint facility.

6. SBP should focus on regulation and supervision as a core role. SBP is the government agencyin Pakistan with the most knowledge about microfinance. It has a specific mandate regardingregulation and supervision and should focus on this core mandate and function, while spreadinggood practice principles within the GoP.

7. Delineate government’s appropriate role as facilitator. The GoP has a crucial role to play as aprotector and a promoter of microfinance, but it should not provide microcredit directly to clients.

PAKISTAN

2

Strengths Challenges

Micro

• There is a steady growth rate of services,and geographical coverage is improving

• Telecommunications and physical infrastructure can be leveraged for financial services

• Institutional foundations for growth are weak (onlytwo MFPs are sustainable )

• Until recently, few MFPs had a successful business model for sustainable microfinance

• MFPs are not responsive to clients’ needs

Meso

• PPAF allowed 100 flowers to bloom: thereare many MFPs

• There is an active network—PMN

• The PPAF structure limits sustainable growth • There is a lack of top-notch training and technical

assistance (TA)• The commercial wholesale market is limited

Macro

• The macroeconomic and financial environment is supportive

• There is a supportive microfinance legal and regulatory framework

• SBP uses an extensive consultative process for new policies

• Some relevant actors within the GoP do not understand microfinance

• SBP is at risk of overstretching its primary mandate• There are limitations of the regulatory framework

(see full report for details)• There is inadequate information available on full

scope of the sector• The role of the GoP in direct retail credit delivery is

inappropriate

COUNTRY-LEVEL EFFECTIVENESS AND ACCOUNTABILITY REVIEW WITH A POLICY DIAGNOSTIC

3

__________________________1 Seventeen agencies, including Agence Française deDéveloppement, African Development Bank, AsianDevelopment Bank, the European Commission, Finland,GTZ, ILO, the Netherlands, SIDA, and USAID, took part indrafting the Terms of Reference.2 For more information on Microfinance Donor PeerReviews, visit www.cgap.org/projects/donor_peer_reviews.html.3 AFD, AfDB, AsDB, DFID, EC, Finland, Ford Foundation,GTZ, ILO, IFAD, the Netherlands, Sida, USAID, andUNDP/CDF

__________________________4 For more information on CLEARs, visit www.cgap.org/clear.5 For more information on the Compact for Better Aid forAccess to Finance and the Quality of Aid Management forMicrofinance Index visit www.cgap.org/portal/site/CGAP/menuitem.693e7785c87ea9a167808010591010a0/.

I. BACKGROUND

In early 2002, the Consultative Group to Assistthe Poor (CGAP) launched an Aid EffectivenessInitiative with leading development agencies,using microfinance as a test case. In its firststage, between April 2002 and November 2003,the initiative sponsored Microfinance DonorPeer Reviews of 17 bilateral and multilateraldevelopment agencies.1 The peer reviews helpeddonors focus on factors they could most directlyinfluence: their own procedures, processes, prac-tices, and systems. Top management and staff ofparticipating agencies appreciated the frank andactionable recommendations of the reviewteams. All agencies are currently implementingthe recommendations, with promising results.2

The peer review exercise culminated in a high-level meeting in February 2004 calledLeveraging Our Comparative Advantage toImprove Aid Effectiveness. At that meeting,participants synthesized the lessons learnedfrom the reviews, and they discussed steps forfurther collective action. Following the meeting,the 17 agencies issued a joint memorandum thatendorsed five core elements of donor aid effec-tiveness in microfinance: (1) strategic clarity,(2) staff capacity, (3) accountability for results,(4) relevant knowledge management, and (5)appropriate instruments. Collectively, theseelements are referred to as the “aid effectivenessstar.” The agencies also committed to a four-step work program that included a mandate toexpand the aid effectiveness work to the field.

CGAP member agencies jointly designed theCountry-level Effectiveness and AccountabilityReviews (CLEARs).3 CLEARs focus on strategicissues relevant to the effectiveness of funders.They are not comprehensive sector studies thatdeeply analyze financial systems development

(as do the Financial Sector Assessment Programs).Rather, CLEARs rely on an interview-basedmethodology and a review of relevant literatureto assess development agencies’ systems andpractices against the concrete and specific chal-lenges of building an inclusive financial systemin a particular country.

CLEARs strive to help funding agencies identifygaps in financial systems and to design interven-tions that build on their respective comparativeadvantage. CLEARs also aspire to motivatefunders to improve their internal procedures andsystems so they can work more effectively withothers in the field and, thus, better contribute toreducing poverty and achieving the MillenniumDevelopment Goals. Five CLEARs were con-ducted from October 2004 through December2006. The first CLEAR took place in Cambodiain October 2004, followed by Nicaragua inFebruary 2005, Madagascar in May 2005, andSri Lanka in October 2005.4

On 20 October 2006, the second high-levelmeeting of CGAP members, Better Aid forAccess to Finance, gathered together heads ofagencies and top managers of 29 developmentagencies. Under the leadership of Jean-MichelSeverino (AFD) and Kemal Derviş (UNDP),the agencies committed to four actionablesteps in the Compact for Better Aid for Accessto Finance, including improving field-levelcoordination and reporting to a new Quality ofAid Management for Microfinance Index(QAMM).5

Parallel to its aid effectiveness work, CGAPalso works on improving the policy envi-ronment for microfinance. In 2005, CGAPlaunched a scaled-up Policy Advisory Initiativeto encourage policy makers to adopt policiesthat help expand access to financial services.Policy diagnostics, which analyze the policyenvironment for financial institutions servingthe poor as a basis for formulating reformrecommendations, are an important tool of thePolicy Advisory Initiative.

In early 2006, eight development agencies,through the informal donor group, requestedCGAP to conduct a review of the effectivenessof the funders’ support to microfinance inPakistan.6 At the same time, the governor of thecentral bank, the State Bank of Pakistan (SBP),asked CGAP for assistance in developing astrategy for SBP to expand microfinance.Donors tend to work closely with governmentagencies in Pakistan, and many fund access-related policy work. In consultation with boththe donor group and SBP, CGAP decided tocombine its aid effectiveness review metho-dology with the policy diagnostic approach.The result is the CLEAR with Policy Diagnosticreview that includes recommendations to twoseparate, but closely linked, sets of actors—inter-national funding agencies (bi- and multilateralagencies, international financial institutions [IFIs],investors, foundations, and nongovernmentalorganizations [NGOs]) and government agencies(SBP, ministries involved in finance issues, andregional authorities).

The CLEAR with Policy Diagnostic reviewtook place in Pakistan (Islamabad, Karachi,and Lahore) from 15 November to 4 December2006. The review team was comprised of EricDuflos and Alexia Latortue (both CGAP staff)and CGAP consultants Graham Perrett, StefanStaschen, and Rochus Mommartz. Tim Lyman(CGAP) advised on the policy aspects of thereview and participated in the debriefings inIslamabad.

The team interviewed more than 100 peoplerepresenting a broad cross-section of stake-holders, from government officials, to represen-tatives of all types of microfinance funders andprojects, to management and staff of micro-finance providers (MFPs).7 The team alsoconducted an in-depth literature review andcollected information through questionnairesand focus groups. Team members traveled toLahore and met with MFP managers, staff, and

clients of Kashf Foundation, Khushhali Bank,Akhuwat, and the Punjab Rural SupportProgram (PRSP). In addition, team membersspent one full week with SBP staff to help themreflect on their role in further supporting thedevelopment of microfinance. For all matterspertaining to the legal and regulatory frame-work, the team benefited from the expert assis-tance of Vellani & Vellani, a Pakistani law firm.On 4 December, the review team organized twodebriefings, one with about 50 stakeholders(government, funders, and practitioners) andone with the management of leading fundingagencies. The team also provided specialdebriefings to Salman Shah, the advisor to thePrime Minister and to the SBP Governor.

This report is addressed to all funders and gov-ernment agencies that support microfinance inPakistan. It provides a snapshot of key issuesfacing the development community and policymakers engaged in or concerned with micro-finance. This report offers concrete recommen-dations on how to tackle these issues.

CGAP, as a convener of 33 funding agencies,of which at least 11 support microfinance inPakistan, is available to discuss this report inmore detail. CGAP can also help fundingagencies implement recommendations thatfocus on joint initiatives. Support is envisionedat the country level for joint initiatives and atthe headquarters level for supporting and rein-forcing changes suggested by the peer reviews,when applicable. CGAP is also available tocontinue its fruitful collaboration with SBP andother parts of the government.

Section II of this report provides a briefoverview of microfinance in Pakistan. SectionIII presents the analytical framework for thereview. Section IV presents an analysis of thethree levels of the financial system (micro, meso,and macro), and it provides recommendationsfor funders and the Government of Pakistan(GoP) to help build an inclusive financial sys-tem. The discussion of the macro level consistsof an analysis of the policy environment formicrofinance. Finally, Section V examines thestrengths and weaknesses of donors’ systemsrelative to their microfinance operations, and itoffers concrete recommendations.

PAKISTAN

4

__________________________6 The agencies were ADB, DFID, the EC, IFAD, SDC,UNDP, USAID, and the WB. 7 The term “microfinance provider” is widely used todescribe the broad range of organizations providing finan-cial services to the poor, and it includes both regulatedmicrofinance banks (MFBs) and unregulated microfinanceinstitutions (MFIs).

II. OVERVIEW OF MICROFINANCE

IN PAKISTAN

Economic and Social Context

Pakistan has a population of 160 million (2006),of which 65 percent live in rural areas. It is arelative outlier in the region, ranking low onboth gross domestic product (GDP) per capita(US$ 840) and the Human Development Index(HDI).8 The country has suffered from decadesof internal political disputes, low levels offoreign investment, and a costly, ongoing con-frontation with neighboring India.

However, far-reaching macroeconomic reformsthat started in the 1990s are now yielding posi-tive results and have helped transform Pakistaninto a relatively stable and resurgent economy.Real GDP has increased to an average rate ofover 7.5 percent per annum during the last threeyears (2004 to 2006). With the population grow-ing at an average rate of 2 percent per annum,the real per capita income has grown at a satis-factory average rate of 5.6 percent. Medium-term prospects for job creation and povertyreduction are the best they have been in morethan a decade.9 The small and medium enter-prise sector, which constitutes 90 percent ofbusiness in Pakistan, is regarded as an importantinstrument of employment promotion.10 Theofficial unemployment rate, which stood at 8.3percent in 2002, declined to 6.5 percent in2005.11

Total remittances inflows through formal chan-nels from 2001/02 to 2005/06 amounted to overUS$ 19 billion, averaging 4.1 percent of GDPduring the last four years. The sharp increase inremittances, coupled with a growth in exports,

has offset the trade and invisible deficit. As aresult, foreign exchange reserves increased froman average of US$ 1.3 billion in the 1990s toover US$ 12.12 billion, and Pakistan hasenjoyed a stable exchange rate over the last sixyears.

Inflation remains the biggest threat to the econ-omy. It jumped to more than 9 percent in 2005because of strong domestic demand and supplyprice shocks emanating from increasing com-modity and oil prices. The SBP managed tobring down inflation to 7.5 percent in 2006 bytightening monetary policy.

Despite the positive macroeconomic develop-ments in recent years, widespread povertyremains a core problem in the country. Inresponse to the rise of poverty during the 1990s,the GoP launched two Poverty ReductionStrategy papers (2001 and 2003). The PovertyReduction Strategy centers on acceleratingeconomic growth and maintaining macro-economic stability, while investing in humancapital, augmenting targeted interventions,expanding social safety nets, and improvinggovernance. Over the last five years, the govern-ment spent US$ 22 billion on poverty-relatedand social sector programs to cater to the needsof the poor and vulnerable sections of society.12

These efforts helped to reduce the number ofpeople living under the poverty line from 33percent of the population to the currently reported24 percent. However, strong differences persistbetween rural and urban areas: 28 percent of therural population lives below the poverty line,compared with 15 percent of the urban popula-tion below the poverty line.

Evolution of the Financial System

The evolution of the financial system inPakistan is characterized by a long reformprocess that started in the late 1990s. The reformprocess focused primarily on building an effi-cient and competitive banking sector throughprivatization. It aimed at increasing transparen-cy (greater disclosure and financial reporting)


5

__________________________8 Pakistan is ranked 134 out of 177 countries in UNDP’s2006 Human Development Report.9 Participation of agriculture in GDP has fallen by 5 percentagepoints over the last 10 years, now contributing around 20percent. Source: The World Bank Group, “Pakistan at aGlance,” 9/15/06, unpublished document.10 State Bank of Pakistan, “Implications of LiberalizingTrade and Investment with India,” Research and EconomicPolicy Departments, Karachi, 2004.11 Pakistan Economic Survey 2005/2006, Ministry of FinancePakistan (chapter 4 page 2) (available on Web page ofMinistry of Finance).

__________________________12 Source, Government of Pakistan Finance Division DirectorGeneral (Debt Office)/ E.A, “Highlights of the Economy andFederal Budget 2006–7”. Unpublished document.

and strengthening the supervisory capacity ofSBP by introducing a modern information sys-tem, gaining greater autonomy from theMinistry of Finance (MoF), and reforming itshuman resources. These changes helped to laythe foundation for the future development of thefinancial sector. Today, the financial sectorexhibits a good degree of stability and sound-ness. It is one of the driving forces of economicgrowth.

The success of the reform process is reflected inthe following statistics. The state’s participationin the banking sector decreased from over 80percent in 1990 to less than 20 percent today,and banks have doubled their total assets since2000.13 The now-dominating private banks havealso drastically improved their performance. Onaverage, commercial banks show a sufficientcapital adequacy ratio (slightly above 12 percent).They have also lowered their nonperformingloans from a high of around 20 percent in1999/2000 to a current 6 percent. Commercialbanks have improved their efficiency by reduc-ing their cost/income ratio from 90 percent to 42percent, and they reported their strongest resultsin history in 2006 with return on equity (aftertax) reaching on average 26 percent.14

This strong performance boost was accompa-nied by a significant increase in outreach ascommercial banks improved their retail busi-nesses. Banks’ SME lending also has beengrowing very quickly, registering as much as 40percent growth in 2003 alone, placing SMElending growth just after consumer lendinggrowth. A still relatively high liquidity environ-ment (around 33 percent of total assets) islikely to motivate commercial banks’ efforts toincrease their outreach.

However, even given these positive develop-ments, the Pakistani financial sector has not yetreached sufficient breadth or depth. The bankingsector serves only around 5 million borrowers (3percent of the population) compared with 20million depositors. The loan portfolio/GDP ratioof banks is around 30 percent (while OECD

countries reach 80–100 percent). Finally, mostof the banking activities are concentrated inKarachi and the other urban centers, leavinglarge parts of the country underserved. Thebanking sector has not yet shown any seriousinterest in serving poorer clients, and it is farfrom being prepared to do so. In rural areas, thePak Post Savings Bank provides elementarysavings and payment systems. The GoP is stillthe primary source of funding in rural areasthrough Zarai Taraqiati Bank Limited (ZTBL),the former Agricultural Development Bank.

History of Microfinance in Pakistan

The establishment of the Agricultural Develop-ment Bank of Pakistan (now ZTBL) in the early1970s represents an early effort to extend creditto poor people. The bank was established witha vision to provide rural finance to farmers,especially small farmers. However, as has beenthe case of many agricultural banks worldwide,the Agricultural Development Bank ran hugelosses because of low lending rates and politicallending that resulted in major defaults by largelandlords.15 It thus required continuous injec-tions of government subsidies.

The civil society entered the microfinance sectorin the early 1980s when the Aga Khan RuralSupport Programme (AKRSP) launched itscredit operations in the North in 1982 and withthe establishment of the Orangi Pilot Project(OPP) in the same year. The AKRSP modelwas replicated throughout Pakistan in the 1990swith the establishment of National RuralSupport Programme (NRSP) and the SarhadRural Support Programme (SRSP). These ruralsupport programs (RSPs) were general supportinstitutions that provided a wide variety ofsocial services, including financial services.Providing financial services to the poor wasoften socially driven and highly subsidized;little effort was made to recover delinquentloans.

To address these shortcomings, in 1996 someRSPs started to create specialized microfinanceunits, and the specialized microfinance NGO

PAKISTAN

6

__________________________13 Source: FSAP.14 SBP, Quarterly performance review of the banking system,September 2006.

__________________________15 PMN, “Evolution of Microfinance Industry,” unpublisheddocument.

Kashf Foundation was established. In 1998, theprecursor of the Pakistan Microfinance Network(PMN) began to play a role in representingemerging MFPs. Further developments followedin 2000, when the Pakistan Poverty AlleviationFund (PPAF) made its first loan to MFPs, andSBP opened a microfinance unit. In 2001, theGoP helped to create a major retail institution,the Khushhali Bank, dedicated to serving thepoor.

The 2001 Microfinance Ordinance marked thebeginning of a new era in microfinance. Withthe ordinance and various other subsequentregulations, SBP laid the foundations to stimu-late the development of an inclusive financialsystem. This strategy was driven mainly by theinsight that MFBs can play an important role inincreasing the outreach of financial services. By2007, six MFBs had received licenses.Nevertheless, the overall expansion of this stillyoung industry has been less rapid and lesssolid than expected. The total number of loansoutstanding is still negligible compared with thetotal potential demand (see Annex 2 on recenttrends), and deposit services are not welldeveloped.

Microfinance Stakeholders

Microfinance Practitioners NetworkPMN was created following a series of informalmeetings among Pakistani delegates to the1997 Microcredit Summit in Washington, D.C.These delegates recognized the benefits ofhaving an industry association. In 1999, theMicrofinance Group Pakistan (MGP) wasincorporated with funding from the Aga KhanFoundation and the Asia Foundation. It laterbecame PMN, a legal entity under the 1984Companies Ordinance.

PMN’s mission and vision is to help foster theemergence of strong retail MFPs that are able toprovide quality and diverse financial services ona large scale on a sustainable basis. To pursuethis goal, PMN advocates for an enabling policyenvironment, encourages the acceptance ofgood practices throughout the sector, promotesthe use of performance standards, and supportsfinancial transparency.

As of December 2005, PMN had 18 membersand 27 MFPs reporting to its MicroWatchbulletin. PMN produces detailed statistics onmembers’ performance.16

Financial service providers A multitude of institutions provide micro-finance services in Pakistan, ranging fromgovernment-owned institutions, MFBs, andcooperatives. Most of them are not specializedin financial services, but rather combine micro-finance with other development or welfareprograms, including health, education, commu-nity infrastructure, and human resource devel-opment. The main categories of MFPs are thefollowing:

l MFBs. MFBs are licensed by SBP, andthey are subject to SBP oversight. Thereare six MFBs: Khushhali Bank (KB),Network Microfinance Bank, Pakistan-Oman Microfinance Bank, RozgarMicrofinance Bank, Tameer MicrofinanceBank, and the First Microfinance Bank.

l Multisectoral NGOs. Some NGOs runmicrofinance operations as part of theirintegrated development programs. Manyare PMN members, including SungiDevelopment Foundation, DevelopmentAction for Mobilization and Emancipation(DAMEN), Save the Poor, TaraqeeFoundation, and Community SupportConcerns.

l Specialized NGOs.17 Other NGOs specializein microfinance or have microfinance as amajor focus. Specialized NGOs that arepart of PMN include Asasah, KashfFoundation, OPP, Sindh Agricultural andForestry Workers, SAFWCO, and ThardeepRural Development Programme (TRDP).

l RSPs. RSPs consist of programs that runmicrofinance operations as part of theirintegrated development programs. RSPsthat are members of PMN include theNational Rural Support Program, thePunjab Rural Support Program, and theSarhad Rural Support Program.


7

__________________________16 See www.pmn.org.pk.17 PMN usually calls specialized NGOs “specialized MFIs”in its reports.

l Commercial Financial Institutions(CFIs). The core business of CFIs is notmicrofinance, but they have a separatemicrofinance department or division. ORIXLeasing Pakistan is part of this group.

l Commercial Banks. Many commercialbanks provide microfinance services—although probably not in large quantities.Only a few track microfinance as a distinctproduct category. These banks include FirstWomen’s Bank, Bank of Khyber, and SMEBank.

l Government-owned Institutions. Beyondcertain government-owned commercialbanks like the Bank of Khyber, severalgovernment-owned institutions that reachpoor clients are often overlooked in discus-sions on MFPs. There are several majorexamples: NBP provides a range of servicesto microentrepreneurs, including creditand savings; Pak Post Saving Bank (often

called Post Bank) is the main supplier ofsavings and money transfer servicesthrough 7,500 branches across Pakistan18;ZTBL, supported by ADB, provides creditand savings services through its 343branches; and the Central Directorate ofNational Savings (CDNS), attached to theMoF, borrows funds from seven NationalSavings Schemes (NSS). CDNS operatesthrough 12 regional directorates and 366savings centers, servicing over 4 millionaccounts.19 Based on preliminary CGAPestimates that do not include NSS, PakPost and ZTBL account for more thantwo-thirds of the small-balance savingsaccounts. A recent government project,named the Rozgar Scheme, also providescredit facilities. It targets young peoplewith loans of up to 100,000 PRs (aboutUS$ 1,646) on highly subsidized termsthrough NBP.

l Cooperatives. The cooperative societiesused to have about 53,000 outlets, a sec-ondary structure of provincial cooperativebanks, and a federal bank of cooperativesas an apex institution. However, the entirecooperative movement went through aseries of crises.20 Although the review teamdid not conduct a thorough research oncooperatives, it appears that cooperativesplay a limited role in microfinance today.Most cooperative banks, as well as second-tier institutions, have closed down. It is notclear how many of the cooperative societiesare still operating or how many of themoffer financial services.

l Informal Providers. As is common inmost countries, there is a wide network ofinformal lending mechanisms throughoutPakistan. These include “committees”(rotating savings and credit associations),family and friends, landlords, inputproviders, traders, and moneylenders.Although it is difficult to quantify themonetary amount of services providedthrough these mechanisms (particularly

PAKISTAN

8

__________________________18 Out of about 13,000 post office branches, 7,500 offerfinancial services.19 Source: World Bank, Islamabad.20 Source: ZTBL at a Glance Brochure.

Box 1. Profile of Khushhali Bank

Khushhali Bank (KB) was established in August 2000under the GoP's Poverty Reduction Strategy. As partof this strategy, the Pakistan Microfinance SectorDevelopment Program (MSDP) was developed witha loan of US$ 150 million from ADB. US$ 70 millionof this loan was made available to KB to fund micro-finance lending. KB was initially capitalized by severalcommercial banks, and it is supervised by SBP undera specifically designed ordinance. It is headquarteredin Islamabad, and it operates 64 branches throughoutthe 38 districts in the country, including Azad Jammuand Kashmir.

KB was the GoP's first major initiative to service thedemand for microfinance services. The bank uses agroup-lending community-based methodology as ameans to reduce transactional costs. Its productline includes short-term microloans ranging up toUS$ 500 for working capital and loans for capitalexpenditures.

According to KB's Web site (www.khushhalibank.com.pk),as of December 2005, the number of active borrow-ers was 227,000 with a loan portfolio outstanding of1,923.2 million PRs (US$ 32.05 million). The averageloan outstanding was 8,500 PRs (US$ 142), andthe portfolio-at-risk greater than 30 days was 4.8percent. Total equity was 1,895.7 million PRs (US$31.6 million). For the financial year 2005, the opera-tional self-sufficiency ratio was 71.5 percent and thefinancial self-sufficiency ratio was 51.2 percent.

Source: PMN Performance Indicators Report, 2005.

credit), it is likely to be widespread. Clientsinterviewed by the CLEAR team duringfield visits highlighted the importance ofsuch providers. According to clients, effec-tive interest rates charged by moneylendersare usually around 300 percent per year.

Wholesale facilities (apexes) PPAF is the main provider of wholesale refi-nancing to MFPs. It was launched with WorldBank support in 1999 to address a range ofdevelopment challenges, including the lack ofaccess to funding by nearly all unregulatedMFPs. Today, it refinances about 56 percent ofthe microloans disbursed by retail providersthat are members of PMN. PPAF’s MicrocreditLoan Fund has 10,513 million PRs (US$ 175.2million), and its current outstanding portfolio toMFPs is 4,013 million PRs (US$ 66.9 million).For more information on PPAF see Annex 5.

Beside PPAF, the Orangi Charitable Trust(OCT)/OPP also offers wholesale financing on alimited scale to a number of rather small MFPsin the provinces of Sindh and Punjab.

Policy makers and supervisorsSBP is the supervisor of the formal bankingsector, which includes the six MFBs.Commercial banks abide by the 1962 BankingCompanies Ordinance, while MFBs fall underthe 2001 Microfinance Ordinance. TheSecurities and Exchange Commission ofPakistan (SECP) prudentially regulates non-banking finance companies and insurancecompanies. NGOs and RSPs are registered bythe SECP as not-for-profit companies underSection 42 of the 1984 Companies Ordinance orby provincial registration authorities either as

societies under the 1860 Societies RegistrationAct or as trusts under the 1882 Trusts Act.21 Thedegree of regulatory oversight by these provin-cial registration authorities is negligible. SeeAnnex 4 for a description of the legal frame-work for each type of institution that providesmicrofinance services.

Microfinance Funders

At least 11 bilateral and multilateral donor agen-cies fund microfinance in Pakistan, along withseveral international NGOs and private funders.The two largest funders are ADB and the WorldBank, with commitments for microfinancebetween 2000 and 2005 of about US$ 330 mil-lion from the ADB and US$ 169 million fromthe World Bank (the two largest recipients beingKhushhali Bank and PPAF, respectively).22 TheDepartment for International Development(DFID) is now coming in as the third largestfunder in the market, with future commitmentsof at least US$ 80 million until 2010.


9

Box 2. Funders of Microfinance in Pakistan

International:Multilateral agencies: ADB, EC, IFAD, IFC, ILO,UNDP, World BankBilateral agencies: AECI, DFID, JBIC, SDC, USAIDInternational NGOs: PLAN, ACTED, Save theChildren US, Islamic ReliefInternational Private Investors: Citigroup, DeutscheBank (Global Commercial MicrofinanceConsortium), Shore Bank Int., Aga Khan Agency forMicrofinance (AKAM)

Domestic funders:NGOs: Orangi Charitable TrustGovernment: Ministry of Finance

__________________________21 MFBs are licensed under SBP. Banks and MFBs are alsoregistered as companies under SECP, yet the prudential reg-ulation by SBP is by far more important.22 See Annex 8 on donor funding in microfinance.

III. ANALYTICAL FRAMEWORK

Microfinance is a rapidly changing field.International development assistance agenciesendorsed Good Practice Guidelines for Fundersof Microfinance in 2006, which reflects a con-sensus of lessons learned over the past 30 yearsand translates them into practical operationalguidance for staff of funding agencies.23 TheGuidelines will be revised periodically as thefield of microfinance continues to evolve andinnovate. The Guidelines envision the integra-tion of microfinance into the formal financialsystem as a means to achieve massive outreachand maximum impact. The vision and opera-tional guidance outlined in the Guidelinesserves as the standard against which the actionsand behaviors of funding agencies are assessed.

Large-scale, sustainable microfinance can beachieved only if financial services for the poorare integrated into overall financial systems atthe micro, meso, and macro level (see Box 3).At the micro level, the retail financial institu-tions and other suppliers that provide servicesdirectly to clients are the backbone of the finan-cial system. They are the best positioned tounderstand and respond to clients’ demand for arange of financial services well beyond micro-enterprise credit—services that encompasssavings, insurance, and transfers. In turn, at themeso level, retail institutions require supportservices to train their staff, improve theirsystems, refinance themselves, and become

more transparent. Finally, institutions at both themicro and meso level evolve best in a conduciveenvironment, the macro level, where policies,regulations, and supervision set appropriaterules of the game and create incentives forincreased access.

The key to the effectiveness of donors andsocially oriented investors is to complementprivate capital and accelerate domestic marketsolutions. Funders can participate at the microlevel through concessional finance (grants andlending below market rates), which has a role inbuilding the institutional capacity of financialservice providers and underwriting the develop-ment of experimental services; or at the mesolevel by supporting market infrastructure, suchas rating agencies, credit bureaus, and auditcapacity; or at the macro level by fostering anenabling policy environment. Although donorscannot necessarily work well on all three levelsof the financial system, each intervention—whatever the level—should promote the growthof the sector as a whole.

In general, integrating microfinance into finan-cial systems allows for greater access to capitalon the part of institutions serving the poor. Itprovides better protection of poor people’ssavings. And it increases the legitimacy andprofessionalization of the sector.

Microfinance at a crossroad—fromunsustainable growth to a robust inclusivefinancial system

When assessed against the analytical frame-work, it becomes apparent that microfinance inPakistan has much to achieve. To date, micro-finance in Pakistan has been regarded as asocial service rather than a financial service.Institutions that offer microfinance programsoften have not clearly separated them fromother programs. Staff have had strong socialsector backgrounds, but weak financial sectorbackgrounds. And the emphasis on providingimmediate assistance to target groups ratherthan providing ongoing access has meant thatmicrofinance programs have not achievedsustainability despite large injections of devel-opment funds.

PAKISTAN

10

Box 3. Three Levels of the Financial System

Micro: Retail financial service institutions (e.g., NGOs,finance companies, banks, financial cooperatives,leasing companies, and other suppliers, such asmoneylenders, agricultural traders, etc.)

Meso: Service providers and industry infrastructure(e.g., networks, trainers, auditors, informationtechnology providers, wholesale financing facilities,credit bureaus)

Macro: Policy, laws, and the regulation andsupervision framework (e.g., banking regulationsand interest rate policy)

__________________________23 For more information on the Good Practice Guidelinesfor Funders of Microfinance, visit www.cgap.org/docs/donorguidelines.pdf.

Funders and the GoP have missed an opportuni-ty to create a strong inclusive financial systemas a result of an ambivalent attitude towardsustainability and a laissez-faire attitude towardcost-recovery interest rates. Sustainability—thatis, the ability of an institution to cover itsoperational and financial costs—is crucial inorder for retail providers to continue providingaccess to financial services and to expand theiroperations without needing further subsidies.Indeed, the beauty of microfinance is that ityields on-going social returns independent ofsubsidies. A strong microfinance sector canwithstand setbacks, and it can continue to growirrespective of the whims and fashions of devel-opment trends.

Pakistan succeeded in implementing an impres-sive privatization of the banking sector inremarkable time. Similarly, a new approach and

a new business model are needed for micro-finance to truly thrive in the country. Growthled by sustainable, sound, and innovative insti-tutions is the best way to ensure that massivenumbers of poor Pakistanis will have permanentaccess to diverse financial services that helpthem take advantage of opportunities and man-age life’s risks.

Though donors never actively obstructed retailfinancial providers from focusing on sustain-ability in the past, they were mostly mute orcomplacent on the issue. To initiate a newapproach to microfinance in Pakistan, donorsmust send clear signals, establish incentives,and condition funding to MFPs based on a com-mitment to reaching sustainability. If far greaternumbers of Pakistanis are to have access toquality financial services, the way of the pastcannot chart the course of the future.


11

IV. FINANCIAL SYSTEM GAP

ANALYSIS

Using the analytical framework, the CLEARteam examined strengths and weaknesses of thefinancial system at the micro, meso, and macrolevels and provided recommendations.

MICRO LEVEL (retail financial service providers)

Poor people require access to diverse financialservices on a permanent basis from sound insti-tutions. In Pakistan, despite the reasonablegrowth of microborrowers over the past fewyears, the future looks bleak because the growththat has been achieved is unsustainable. It is notcertain where future growth will come from,because few of the existing providers have thecapacity or business model to expand quickly ortransform themselves into banks. MFBs, withsome exceptions, have not met expectationswith regard to sustainability, growth, or productdiversification, and commercial banks have dis-played little interest in downscaling. Finally, thecooperative sector appears to have collapsed.

The following recommendations are addressedgenerally to all microfinance funders inPakistan. Recommendations at the micro levelattempt to tackle the recurring theme of unsus-tainable growth presented earlier. Sustainablegrowth requires sound and efficient institutions.In 2006, combined MIX Market and Micro-credit Summit data showed that the weightedaverage annual growth rate in numbers ofborrowers for all MFPs globally was 16 percentin profitable institutions, but only 2 percent inunprofitable institutions.24

Strengths at the Micro Level

Steady growth rate. Despite concerns with theperceived slow growth and low market penetra-tion, the results of the past few years are not thatbad. From the end of 2001 to the end of 2005,the number of microborrowers among PMNmembers increased by an average of 60 percent

annually.25 This growth was largely driven byKashf Foundation, Khushhali Bank, NRSP,and TRDP. Geographical coverage from theseinstitutions corresponds to population densitypatterns across the country. Two-thirds of thecountry’s 123 districts have some coverage byPMN members, with services concentrated inthe three most heavily populated provinces ofPunjab, North West Frontier, and Sindh.

Existing infrastructure. In looking for poten-tial avenues for increasing growth massively,two types of infrastructure merit mention.Exploring ways to tap into existing physicaland telecommunications infrastructure is worth-while because it is generally much cheaper andfaster to leverage an existing network than tocreate a new one.

Physical infrastructure. Several state-ownedinstitutions, including ZTBL and Pak Post havesignificant networks throughout the country.These institutions serve a diverse range ofclients, including low-income and poor peoplethat are in the same market segment as micro-finance. Unfortunately, little is known about thequality of the services they offer, and withoutsignificant changes, they are unlikely to be anengine for growth (see current trends inAnnex 2). Moreover, the challenges of dealingwith the legacy of heavy bureaucracy, possiblepolitical influence, and staff with poor bankingskills at the state-owned institutions cannot beunderestimated.

Telecommunications infrastructure. The 40 millionmobile phone subscribers in Pakistan offer greatopportunities to reach poor clients. Indeed, experi-ence from several other countries, including thePhilippines, shows how telecommunicationsinfrastructure can been successfully exploited.Moreover, mobile phone operators have nobureaucratic legacy issues.

Challenges at the Micro Level

Weak institutional foundations for growth.The steady growth of the past few years is built

PAKISTAN

12

__________________________24 Gonzalez, A., and R. Rosenberg. “The State ofMicrocredit—Outreach, Profitability, and Poverty”(Presentation).

__________________________25 Many figures used in this part of the analysis come fromPMN, which provides a reliable source of information on asignificant share of the institutions that provide retail financialservices to poor people in Pakistan.

on a shaky foundation that does not bode wellfor future continued growth, not to mentionaccelerated expansion.

Prevalence of unsustainable institutions. Onlytwo of the 27 institutions reporting to PMN aresustainable: Kashf Foundation and OCT.26 As aresult, most MFPs are depleting their capital andthus rely on donors and/or subsidized creditfrom PPAF to continue operating. The weakfinancial position of MFPs limits opportunitiesfor diversifying funding sources from commer-cial banks, international investors, or localdeposits. Weak, unsustainable MFPs are notgood candidates for transformation into MFBs.Although retail providers cannot be expected tobe sustainable overnight, and the path towardsustainability may differ according to localmarkets, global (and Pakistani) evidence suggeststhat new institutions are reaching sustain-ability more rapidly—often within three years ofoperations.

Thin middle management. Sustainability is notjust about financial soundness. Competenthuman resources are also critical to the long-term viability of institutions. Although Pakistanhas some top-level universities and traininginstitutes, MFPs find it difficult to attract andretain good staff, especially middle managementwilling to work in rural areas. Accountants areeasy to find, but graduates with the managerial,strategic thinking skills, and the judgmentnecessary to open and manage branches arerare. Some multiservice institutions, such asRSPs, are staffed with middle management thatcome from social services backgrounds and donot possess financial management skills.

Limited demonstration business model, untilrecently. Countries that have been successful inexpanding microfinance have often had a leadinstitution that served as a “demonstration”model to the rest of the market. ACLEDA inCambodia and Bancosol in Bolivia, for exam-ple, paved the way for a vibrant set of institu-tions to follow. Even though some may arguethat Kashf and Tameer Bank have the potentialto play this role, several reasons help explain

why such models have not yet fully emerged inPakistan.

Sustainability is not a major focus amongMFPs. Though most microfinance stakeholders—MFPs, donors, government representatives—notethe importance of sustainability, few articulate aspecific strategy for its achievement. This istrue even of MFPs that have business plans. Ingeneral, the long-term management vision andcorresponding strategy for achieving sustain-ability is missing from MFPs.

Low interest rates do not permit full cost recovery.Most MFPs in Pakistan do not charge theirclients interest rates that are high enough toenable them to cover their costs and grow theirportfolio. A look at the average operatingexpenses of PMN members compared with therevenues generated from the loan portfolio(yield on portfolio) suggests that MFPs are notpricing their loans appropriately. On the onehand, the average operating expense ratios ofPMN members are basically in line with theregions’ overall low ratios (PMN is at 22.4percent and total Asia is 22.8 percent). On theother hand, revenues generated from the loanportfolio (e.g., the yield on portfolio) are low at18.8 percent for PMN members (compared with30.7 percent in Asia on average).27

Subsidies passed on to clients. The most suc-cessful MFIs worldwide have benefited fromconcessional funding and/or grants from donors.Donor support, such as up-front investment andsubsidized wholesale funding, helps MFPs buildtheir capital base and build systems to laterbecome sustainable. These subsidized funds arenot meant to be passed on to the end client.Passing on the subsidies means that institutionsforgo the opportunity to become strong enoughto raise commercial capital, or intermediatefunds, and grow independently of donor funds.Moreover, the subsidies can skew the creditculture because clients are not exposed to thereal cost of obtaining credit. Although it mayseem morally attractive to pass subsidies toclients, it actually prevents a larger number of


13

__________________________26 For figures, see Table 5 on financial sustainability inAnnex 2 on recent trends in Pakistan microfinance.

__________________________27 Figures from Stephens, B., and Hind Tazi [editor] et al.“Performance and transparency: A survey of microfinancein South Asia,” Microfinance Information eXchange, Inc.,Washington, D.C., January 2006.

people from accessing services in the long run,because institutions cannot expand significantlywithout using initial subsidies to build theirown capacity. Invested well, donor subsidiescan yield ongoing returns, not just a one-timeresource transfer.

Confusion between microfinance and charity.Microfinance has received attention from theGoP, donors, and the Pakistani civil society as auseful means to reduce poverty. Unfortunately,it often has been perceived as a kind of socialtransfer, or charity. The main preoccupation is totransfer funds to specified target groups and, ifthe funds rotate, all the better. The predominantview and business model perpetuated by donorsand the main wholesale facility has erred onthe side of social services rather than financialservices.

Lack of responsiveness to clients. The rangeand nature of product offerings by MFPs leavesmuch to be desired. The Pakistan microfinancemarket is dominated by one financial service—credit—and many MFPs use a methodologyinspired by the Grameen model. Clients makedo with institutions that nearly all offer the iden-tical product, typically a small loan with six- ortwelve-months tenure, group guarantees, and bi-weekly repayments.

The lack of deposit services deserves particularemphasis. Beyond compulsory savings, fewinstitutions offer, or try to attract, depositservices. Though MFBs can legally mobilizedeposits, most do not focus on microsavings.First Microfinance Bank offers deposit services,but its large savings portfolio with a relativelylow number of accounts suggests that it reacheswealthier clients. Tameer Bank has a diverseportfolio, including institutional savers as wellas a few microsavers. Commercial banks havenot shown interest in microsavings at all, norhas the government-backed Khushhali Bank.Pak Post is probably the most important sourceof microsavings. According to CGAP estimates,Pak Post has 3.6 million savings accounts, withan estimated 70 percent below 10,000 PRs(about US$ 165) though it is hard to get goodnumbers. See Annex 2 on recent trends foradditional details.

Donor Recommendations at the Micro Level

Insist on sustainability. Donors should domore than send signals about the importance ofsustainability. They should condition disburse-ments of funds against the achievement of thiskey goal. In agreeing to milestones for furtherfunding tranches, donors should take the timeto understand MFPs’ business models. ThoughMFIs around the world are getting sustainablemore quickly, the number of years it takesto reach sustainability depends in part on thetargeted client segment and the zones of inter-vention (urban versus rural, for example).

Support specialized MFPs. With few excep-tions, the largest and best providers of financialservices to poor people are either specializedMFIs/banks or institutions that have units ordepartments dedicated to microfinance. Althoughpoverty reduction requires a holistic approachand microfinance alone is not sufficient, the trackrecord of stand-alone microfinance suggeststhat donors should support institutions that focusstaff and activities on the provision of sustainablefinancial services. The reason is simple: thedelivery of financial services to the poorrequires banking skills and specific systems andoperating procedures that are different fromsocial mobilization and development (e.g., MIS,loan analysis and recovery). Micro-level finan-cial services delivery is a specialized business—albeit a social one—in its own right. Donorswho currently support multipurpose institutionsshould help them separate their financial servicesfrom other services and share lessons learnedfrom the few institutions that have managed toprovide both services globally (e.g., BRAC,BASICS, and more recently, Bandhan28).

Insist on full cost-recovery interest rates incontracts with retail financial institutions.Donors should insist that retail MFPs chargecost-recovery interest rates to clients. Thisrequirement should be part of all donors’contracts/agreements that involve direct fundingto the retail level or indirect funding via inter-mediaries, such as apexes or project managementunits located within a government body. Cost-recovery interest rates need to cover operational

PAKISTAN

14

__________________________28 For more information, visit www.bandhanmf.com.

costs, the loan loss provision, cost of funds,and a profit margin that will be used for rein-vestment in the institution to fund expansion. Inparallel, donors should promote efficiency,transparency, and competition to ensure clientscan access quality financial services at the bestprice possible, and they should discourageMFPs from passing on subsidies to clients.

Encourage innovation, new actors, and newapproaches. There is a large unmet demandfor financial services among poor people alongwith the weak micro level dominated by unsus-tainable institutions. This suggests that there isroom for additional players and an urgent needfor new approaches and innovation. Donorsshould do their part to encourage the nextgeneration of microfinance in Pakistan.

Create international tenders to attract experi-enced microfinance players. There is space inthe market for new retail financial serviceproviders with strong management teams, soundoperating models, effective internal systems,knowledge of product development, and inno-vative delivery channels. Greenfield institutionsshould be considered. The upcoming entry ofBRAC in Pakistan is also promising. Attractingthe best players—whether international, region-al, or domestic—through a demand-driven ten-der with a transparent due diligence process (butwith minimal micromanagement) could providea powerful demonstration effect by sustainableinstitutions capable of high growth. The tenderwould be for flexible funding to cover start-upand expansion costs.

Bring in investors for know-how, governance,and equity. As some MFPs mature and reachsustainability, they will need new types of fund-ing partners. The current donors should use theircontacts to draw in development finance institu-tions, investment funds, and social investors thatoffer not only new instruments, but perhaps mostimportant, key know-how and strong governance.Donors can help this process by (1) disseminatingknowledge about the Pakistani microfinancesector internationally in partnership with PMN;(2) organizing investors’ fairs to showcase thebest and brightest institutions (two-way learning);and (3) using individual contacts to bring inselected investors on a case-by-case basis.

Promote mobile phone-based financial services.Fast developing experience in other countriesshows that mobile phone-based financial servicescan work for the poor and can scale up veryrapidly (e.g., Globe Telecom’s G-Cash productin the Philippines). Some donors are alreadyeither involved, or planning to get involved, insupporting this new age of microfinance.Preliminary results from a recent CGAP diag-nostic of the legal framework for mobile phonebanking in Pakistan suggest that the marketcould easily be opened up by amending somekey laws affecting mobile phone banking. Theinformal donor group should help coordinatefunding for this field, given donors’ growinginterest.

Fund up-front investment costs of informationcommunication technology (ICT). Technologyholds the promise of reducing transaction costsfor financial service delivery and increasingoutreach to clients in remote areas. The use oftechnological devices, such as personal digitalassistants, can also improve the efficiency andtransparency of loan officers. These technolo-gies involve high upfront costs that donors canhelp support, including investing in hardwareand software, training staff, and revising opera-tions. Introducing new technology also requiresmarket research to understand client usage andacceptance.

Make use of existing infrastructure. Donorscould prudently explore possible strategicalliances between existing MFPs and state-owned financial institutions with large net-works, such as Pak Post Savings Bank andZTBL. Admittedly, this could be tricky—it isuncertain how this potential opportunity couldbe exploited. Therefore, the key is to start slowlywith a thorough analysis of these infrastructuresto obtain a better understanding of their opera-tions and to become more familiar with theirmanagement. Depending on the results of suchinvestigations, there may be a role for donorsto help underwrite pilot projects. It might beprudent to start with savings.29


15

__________________________29 The Post Bank is legally not permitted to go into thelending business and would not have the capacity to do so.

Establish incentives for retail providers todiversify funding sources. Donors should useperformance-based contracts that include an exitstrategy, thus making it clear from the outsetthat subsidized funds are temporary so thatMFPs will use them wisely to prepare for amore commercially oriented future. Donors alsocan provide positive incentives for MFPs toaccess commercial refinancing by offering TAand training on how to negotiate with banks oncontracts and proposals for loans, revolvinglines, overdrafts, etc. Because only MFBs canintermediate funds, donors can also help pay forthe often expensive costs of transformation,including underwriting transformation plans,upgrading systems, legal costs, subsidizing atransformation manager, etc.30

MESO LEVEL(support services, wholesale finance/apexes,networks)

The meso level (market infrastructure) of thefinancial system has an important role in sup-porting the consolidation and expansion of retailproviders, promoting transparency, and provid-ing wholesale financing. Nonfinancial servicesthat help strengthen governance, financial man-agement, information systems, and deliverytechnologies are not readily available to MFPsin Pakistan. Moreover, the structure of thewholesale finance market contributes to theunsustainable growth that characterizes micro-finance in Pakistan.

Strengths at the Meso Level

PPAF allowed 100 “flowers” to bloom. PPAFprovided capital and TA to a core group ofemerging MFPs in the country, which surelycontributed to the growth of the sector atits early stage, because very few MFPs weresavings based, and commercial banks were notinterested in lending to emerging MFPs. AsPakistan microfinance is preparing to enter anacceleration phase, the outstanding question is

whether rapid market expansion will be drivenby a multitude of relatively small institutions(“100 flowers”), a few dominant market leaders,or perhaps a combination of both. PPAF also hasplayed a significant role in social development.Social development and the provision of basicservices, such as shelters, water, education, andhealth, are at least as important as microfinanceto reduce poverty.

An active network. PMN is an independent andwell-respected organization. Its management iswell-connected with Pakistani retail MFPs, GoPactors concerned with microfinance, and inter-national microfinance discussions. With supportfrom donors, such as DFID, USAID, SDC, andthe EC, the network has become the best sourceof transparent information on key indicators,such as outreach and sustainability. Its annualperformance indicators report is a hallmark pub-lication.31 PMN also engages in some advocacywork, and it represents a good portion of thetraditional MFPs.

Challenges at the Meso Level

Structure of leading apex limits sustainablegrowth. Several donors have injected largeamounts of money into PPAF given the popu-larity of microfinance and the ease of channel-ing funds through an apex institution. Thistrend is continuing. The dominance, structure,and incentives of PPAF pose several chal-lenges for which donors that fund PPAF areresponsible.

No cost-recovery strategy. PPAF does notpreclude its MFP partners from charging cost-recovery interest rates to their clients, butneither does it encourage or require it. MostMFPs pass on the subsidized wholesale interestrate (8 percent, compared with 11–14 percentmarket rate from commercial banks) to theirclients. With this interest rate subsidy pass-through, the retail providers are not able torecover their costs with revenues from interestcollected and thus are not able to invest instrong systems that can ultimately becomesustainable. As long as subsidized funds fromPPAF are available, MFPs will continue to

PAKISTAN

16

__________________________30 See Ledgerwood, J., and Victoria White, “TransformingMicrofinance Institutions: Providing Full Financial Servicesto the Poor,” 2006, and State Bank of Pakistan, “NGOTransformation Guidelines,” State Bank of Pakistan,Karachi, 2005.

__________________________31 See www.pmn.org.pk.

grow and reach more clients. But, if fundsdisappear or are reduced, MFPs will not havethe means nor strategy to continue growingindependently. Moreover, the availability ofcheap funds with limited performance require-ments creates disincentives for MFPs to diversi-fy their funding sources either by going to thecommercial market or by transforming intoMFBs to be able to intermediate deposits. (Thelatter is more feasible in Pakistan today giventhe lack of commercial banks’ interest in smallbalance deposit mobilization). PPAF may actu-ally provide incentives against sustainability asinstitutions that do become sustainable loseaccess to PPAF’s funds for TA.

Blurred line between social services and financialservices. PPAF’s partners receive funding forboth financial services and social services fromthe same entity (even if these functions areincreasingly separated within PPAF). Interviewswith partners suggest that this approach createsmixed messages about the institutional require-ments for providing these two types of serviceswell. Most of PPAF’s partners are multipurposeorganizations governed by people with socialbackgrounds that are perhaps better positionedto offer social services than financial services.Without strong internal financial skills, MFPsare unable to cover their costs and therefore tooffer sustainable financial services to anincreasing number of poor people.

Rigid disbursement procedures may not besufficiently responsive to partners’ needs. Forexample, linking grant and TA as a proportion ofthe loan size could create inappropriate incen-tives for participating organizations to take loansjust for TA, because some partners may need justTA and no debt. Moreover, this approach allowsfor little tailoring of capacity-building servicesto MFPs’ needs based on their stage of develop-ment and specific strategy/business plan.

Lack of top-notch training and TA. For smallerMFPs, it can be difficult to find basic training inall aspects of microfinance operations. Moresophisticated MFPs have an even harder time.Although accountants are easily available, it ismuch harder to find and train middle managerswho are critical to preparing for growth, manag-ing growth, and expanding operations.

Limited commercial wholesale market.Commercial banks are reticent to lend toMFPs. Those who do insist on draconian termsof up to 133 percent cash collateral, whichmeans not only zero leverage, but negativeleverage. Several reasons explain banks’extreme conservatism. First, MFPs are notfinancially sustainable—commercial banksworldwide get interested only when they seeopportunities for profits at a tolerable risklevel. Second, banks have no appetite becausethey have lower risk alternatives, such as treas-ury bills (they can pay 2–5 percent on savingsaccounts and get either 8.8 percent for sixmonths or 9 percent for 12 months on treasurybills). If a greater number of MFPs becomesustainable (and will therefore need commer-cial capital to grow), new opportunities forcommercial wholesaling will undoubtedlyarise. At that point, commercial banks’ interestmay emerge, but the risk will then be that banksmay be crowded out by cheap funds availablefrom donors and PPAF.

Donor Recommendations at the Meso Level

The donor community has made significantcontributions at the meso level, especially bysupporting the development of a strong net-work, the PMN, and by providing wholesalefunding at the infant stage of the microfinanceindustry. Donors, however, have underestimatedthe need for a more commercial approach tomicrofinance refinancing institutions. Perhapsmore important, they have generally neglectedthe most critical area of support required inPakistan: building the capacity of MFPs toenable them to expand in a sustainable way.

Promote commercial wholesale market.Donors can and should play a leading role inpromoting sustainable refinancing mecha-nisms for MFPs. Recommendations include thefollowing:

Spin-off lending operations of PPAF andestablish an “access to finance fund.” Themajor funders of PPAF, most notably the WorldBank, but also IFAD and USAID, shouldcarefully consider whether and how to furtherfund the microfinance component of thisapex. For the “take-off” (the second phase of


17

microfinance toward more sustainable growth),donors should adopt a marked policy shift thatprioritizes a commercial approach to wholesalefunding and a focus on the provision of high-quality capacity-building support. Institutionsthat work in remote areas or with very poorclients might require more time and support tobecome financially sustainable.

Pakistan is a huge country with a large unmetdemand for microfinance funding. Creating aseparate legal entity for accessing refinancingfor more mature, commercially oriented MFPsis an attractive approach. This entity could helpMFPs/MFBs to mitigate exchange rate risk, toinitiate capital market operations like securitiza-tions or bond issues. It could extend guaranteesfor MFPs to borrow domestically or abroad. Thebest legal institutional set up for this fund wouldhave to be determined following more researchand thought.

Even more important than legal form are thesuggested operating principles for this facility.Principles that appear extremely important tothe review team include the following:

l Insist on complete separation from anysocial services, to protect both socialservices and financial services.

l Ensure that donor/government fundingcomes directly to the fund, not through theparent structure (in the event the fund isestablished within PPAF’s legal structure).

l Adopt commercial lending principles (e.g.,commercial/cost-recovery interest rates,leveraging funds through the use ofguarantees, and transparency in reportingof a spun-off entity).

l Have a separate, experienced board offinancial sector professionals for theproposed “access to finance fund.”

Develop incentives/eliminate disincentives forcommercial banks to lend to MFPs. Inter-national donors could organize forums andvisits with other bankers interested in micro-finance to expose Pakistani banks to micro-finance. Donors could support the GoP to fundcampaigns to increase the overall knowledgeand transparency of the microfinance marketand foster a vision of commercially oriented

microfinance among key stakeholders involved.32

Donors also could help MFPs negotiate withcommercial banks and provide TA for MFPs toproduce solid business plans. These activitieswould help commercial banks have a clear under-standing of how the microfinance market isevolving and the risks and opportunities it entails,which is key for commercial banks that want tocalculate with precision how they will/canmanage risks of any lending operation. Finally,development finance institutions like AsianDevelopment Bank and KfW should use instru-ments that promote access to domestic, commer-cial funding markets, such as guarantees, andmake creative use of their funds to take first losstranches or pay the legal fees of securitizations.

Create a joint TA facility. Because micro-finance in Pakistan is on the verge of a possible“take off” stage, donors should prioritizemaking available high-quality, flexible, demand-driven TA. Placing a high priority on TA willrequire a mindset change for most donors witha lot of experience in the country. An attractiveoption is to establish a major TA facility. Oneor two donors could take the lead to set-upthe facility, keeping it open for others to joinover time. This would avoid a situation wherea multitude of donors offer small TA grants tovarious MFPs with different criteria and differ-ent reporting and monitoring mechanisms. Sucha facility could take various forms. DFID andUSAID, in particular, have funded interestingmodels globally that are worth exploring. In thelong run, MFPs should be able to purchase TAfrom existing private and public TA providers,so this facility would have to have a limitedlifespan. Principles to consider in designingsuch a facility include the following:

l Expert management is key. Donors shouldhire management who have a good trackrecord in TA provision, who are well-versed in TA good practices, and who havebroad networks with a range of local,regional, and international TA providers.

l A significant, patient upfront investment andcommitment is needed. Donors probablyshould plan on a five-year facility to start.

PAKISTAN

18

__________________________32 The Financial Institutions (Recovery of Finances) Ordinance2001, mentions setting up banking courts for debt recovery.

Preferably, the facility should base itsfunding decision on the business plan ofthe candidate MFPs.

l Insistence on the performance-basedprovision of TA and on some form of cost-sharing with MFPs is needed to maximizeeffectiveness. Early in the process, donorsshould put in place performance andsustainability incentives.

l A core package of services should focus onstrategic and business planning, governance/board composition, human resourcedevelopment, financial structure, branchmanagement, and product development.

l Links to the financial and banking sectorsare beneficial. Donors should think abouthow to tap into banking training (NIBAF,Institute of Bankers of Pakistan).

l Flexible approaches to institutional devel-opment should be put in place, includingexecutive programs, certificate programs,exposure visits, workshops, in-houseresident advisors, etc.

Conduct action research on specific areas(savings, Pak Post Savings Bank). Donors canhelp MFPs consider options for diversifyingtheir product range (now focused on workingcapital loans) by paying for market studies onthe supply and demand for financial services.Product development is sorely needed, but itwould be imprudent to rush into new approachesor set targets for new products without a soundbasis of analysis. An upcoming access tofinance study funded by DFID, the World Bank,and SDC using the Finscope methodology willprovide valuable information on the demandside. Several donors and PMN also haverecently decided to place a greater emphasis onsavings. CGAP has developed an assessmentmethodology to identify opportunities andconstraints to deposit mobilization at the threelevels of the financial system. This experiencecould be of use.33 Donors also could consider

financing a thorough study of Pak Post SavingsBank to better understand its functioning, per-formance, and clientele reached (how manylow-income clients). The study could thenexplore the feasibility of improving existingservices, creating linkages with MFPs to reachpoor clients, and adding new services.

Continue support for PMN. Although PMNshould seek to provide fee-earning servicesand progressively earn more of its ownincome, it is reasonable to assume there will bea need for further donor subsidies to finance its“public good services.” Its transparency andadvocacy work are especially important publicgoods. PMN could even consider stepping upits transparency work. With donor support, itcould, for example, co-finance ratings forMFPs, especially with rating companiesincreasingly offering differentiated products,such as institutional assessments and social rat-ings. It also should determine how to ensurethe three regional networks (Sindh, Punjab,and Sarhad MFN) complement each other inthe best possible way.

Understand the full range of organizationsreaching poor and low-income people.MFPs are narrowly defined in Pakistan. Yetstudies on the global provision of financialservices to poor people indicate that a largerange of organizations, often state-owned, alsotouch the same market segment that interestsmicrofinance.34 Currently, most microfinancestakeholders focus on organizations that aremembers of PMN or that get funding fromPPAF. There are, however, many organizationsthat require significant attention. Such organi-zations include postal banks, savings banks,etc. Donors in Pakistan could pay for PMN, theBureau of Statistics, or even a rating firm tobroaden data collection from institutions suchas ZTBL, Pak Post Savings Bank, and theNational Savings Scheme (NSS). Doing sowould provide a much better picture of allfinancial services reaching poor people inPakistan.


19

__________________________33 Five Country Level Savings Assessments have beenconducted by CGAP in 2005 (Benin, Bosnia, Mexico,Philippines, Uganda). A toolkit for Country Level SavingsAssessments is currently being developed by CGAP andshould be available soon on www.microfinancegateway.org/resource_centers/savings/country_level_assessments.

__________________________34 Christen, Robert Peck, Richard Rosenberg, and VeenaJayadeva, “Financial Institutions with a Double BottomLine: Implications for the Future of Microfinance,”Occasional Paper 8, Washington, D.C.: CGAP, July 2008.

MACRO LEVEL AND ROLE OFGOVERNMENT (policies, laws, regulations, supervision, andother government interventions)

The GoP has historically played a significantrole in promoting microfinance. Since the1990s, SBP, in particular, has shown keen inter-est in expanding poor people’s access to micro-finance, and interest has increased among otherparts of the government more recently. This sec-tion looks at the results of years of macro-levelinterventions by both donors and the GoP: thatis, the current legal and regulatory and govern-ment policy environment for microfinance inPakistan. Finally, it offers recommendationsboth to donors that work closely with govern-ment agencies and to government agenciesthemselves that are most concerned with micro-finance, notably SBP.

Strengths of the Macro Level

Supportive macroeconomic and financialenvironment. Pakistan benefits from a relativelysound macroeconomic environment with a stablecurrency and positive economic growth ofalmost 7 percent per year. The GoP also suc-cessfully launched an ambitious financial sectorreform, which resulted in the privatization of 80percent of the banking sector. The soundness ofbanking institutions has also improved, with asharp reduction of nonperforming loans (NPLs),capital adequacy improvements, and a recenttrend of good profitability. Moreover, thePakistani banking sector is in compliance withmost of Basel’s 25 core principles and 39 out of41 International Accounting Standards.

Supportive microfinance legal and regulatoryframework. Pakistan introduced a specializedlaw for MFBs in 2001 (the MicrofinanceInstitutions Ordinance), which is respectedworldwide. The law, together with its imple-menting regulations, describes several types ofMFBs, offering NGOs that provide financialservices a ready option for transformation intoprudentially licensed and supervised depositoryinstitutions and also providing a vehicle forstarting greenfield MFBs. (The law does notaffect NGO MFPs that do not engage in retaildeposit taking, and they are permitted to accept

compulsory savings, provided these are held intrust for customers in a licensed bank.) AllMFBs are required by law to be rated annuallywithin three years of being granted a license, inkeeping with the regulator’s appropriate empha-sis on transparency. SBP’s parallel issuance ofguidelines for commercial banks undertakingmicrofinance, which prescribe four differentmodes of doing so, exemplify the regulator’scommendable encouragement of a variety ofinstitutional models at the retail level. In gener-al, SBP has used its rule-making powers quiteeffectively to strike a sensible balance betweenprovisions aimed at creating a viable space fornew MFPs and provisions aimed at preservingthe soundness of the regulated institutions andthe protection of their retail depositors.

In the past five years, SBP also has considerablystrengthened its own institutional capacity asregulator and supervisor of MFBs and commer-cial banks engaged in microfinance. SBP hasprioritized training its staff on basic micro-finance; it also has organized specific trainingon supervising MFBs. SBP has implementedspecial procedures for the supervision of MFBs,and SBP has dedicated trained staff for micro-finance inspections.

Extensive consultative process on new policiesby SBP. SBP follows the good internationalpractice of inviting feedback from financialinstitutions and other stakeholders when devel-oping new policies. For example, SBP sends allnew policies as drafts for consultation to theindustry. In the process of finalizing the recent2006 Finance Bill, which included amend-ments to the 2001 Microfinance InstitutionsOrdinance, PMN and others provided commentsto SBP, and SBP listened. Such consultationcould serve as an example to countries world-wide.

Challenges at the Macro Level

Misunderstandings about microfinance.Although SBP is viewed by many as the leadgovernment agency for microfinance, there areother important government agencies, such asMoF and the Prime Minister’s Office, that alsoare involved. In addition, there seems to besome common misunderstandings about recent

PAKISTAN

20

evolutions in microfinance, about what it canaccomplish, and about how it can function sus-tainably. These misunderstandings tend to takeseveral different forms.

Overstated expectations of microfinance as aninstrumental poverty alleviation tool. ThePakistan Poverty Reduction Strategy Papermakes microfinance one of the main vehiclesfor targeting the poor and vulnerable. There isindeed good evidence that access to a range offinancial services can play a strong role in alle-viating poverty, but microfinance is by nomeans a magic bullet. Many other services, suchas health, education, and infrastructure, mayhave more direct impact on poverty alleviation.

Limited awareness of good practice micro-finance principles. Outside SBP, few GoP staffknow about microfinance good practice. Forexample, some staff at SECP do not know thatcredit-only MFPs can register with them. Someplayers in the market believe that all MFPs mustbe registered with SBP. However, credit-onlyMFBs do not have to come under SBP regula-tion, but can operate under several legal forms,the one with the strongest external oversightbeing a company limited by guarantee under thejurisdiction of SECP. Where knowledge of goodpractice does exist, it tends to be concentrated atthe central level. Very few government staff atthe regional level are aware of microfinancegood practices. Provincial governments some-times intervene in the financial sector withunsustainable approaches. For example, one ofthe few remaining provincial-owned financialinstitutions, Bank of Khyber, started by theNorth West Frontier Province government, wasforced to restructure several times because ofloan losses, then moved into microfinance, butits board members did not allow cost-coveringinterest rates.

Lack of willingness to address real costs ofmicrocredit delivery openly. Many people inGoP believe that clients’ main concern is a lowinterest rate. But global and domestic evidenceshows that access and quality of services are atleast as important to many poor households.Interest rates ought to be compared with thenext best alternative, which is often the informalmoney lender (not commercial banks).

Issues pertaining to SBP. Although SBP is astrong regulator with a deep commitment to andknowledge of microfinance good principles, itnonetheless has its own challenges.

Risk of overstretching mandate. According tothe 1956 SBP Act, SBP’s role is to regulate themonetary and financial system of Pakistan and tofoster its growth. The possibility of SBP takingon a more promotional role could potentiallyconflict with its duties as prudential regulatorand supervisor if, for example, SBP were tobecome involved with funding decisions con-cerning licensed and supervised institutions.Overstretching its mandate also could provechallenging in terms of staffing, because someSBP staff trained in microfinance supervisionhave already left or have been rotated to a dif-ferent department linked to SBP’s promotionalgoals.

Narrow concept of microfinance as separatefrom the overall financial sector. Microfinanceis about all types of small-scale lending, retaildeposit taking, and other financial services forthe poor. However, in its strategy, the SBP hastreated microfinance as distinct from agricul-ture, housing, and Islamic finance, and the SBPDevelopment Finance Group has been struc-tured accordingly. This artificial isolation hastranslated into separate SBP concept notes foreach of these areas, despite the considerableoverlap among them.

Limitations of regulatory framework. Despitefavorable regulatory framework for micro-finance in Pakistan, certain limitations came tolight during the review.

Aspects of the Microfinance Ordinance and itsprudential regulations restrict MFBs fromgrowing. Some regulatory provisions createobstacles for the growth of current MFBs andmay discourage some new MFPs from becom-ing licensed. For example, the 150,000 PRs(about US$ 2,468) loan ceiling prevents MFBsfrom diversifying their client base when clientsgrow and require larger loan amounts.35 MFBs


21

__________________________35 The loan size limit has only recently (February 2007)been increased from 100,000 PRs to 150,000 PRs. However,80 percent of the loan portfolio should still be within theprevious limit of 100,000 PRs.

cannot offer loan products that require largeramounts, such as housing loans, even if thesestill serve the poor. Clients with strong potentialto create employment cannot be served at all,because there is very little supply of loansbetween 150,000 and 1 million PRs (the sizeneeded for a medium enterprise). The require-ment for MFBs to lend only to poor persons istoo restrictive and difficult to monitor.36

Minimum capital requirements are not adjustedto district population. The uniform minimumcapital for district-level MFBs can make it diffi-cult to establish viable institutions in districtswith low population density, because the capitalrequirements may be too high in these districts.

Insufficient information on full scope of thesector. There is a lack of nationwide supply-side data on all the types of financial servicesthe poor require. This issue is partly linkedwith a narrow and varying understanding ofwhat “microfinance” is. For example, the CreditInformation Bureau, which is part of SBP,includes only data from regulated financialinstitutions (banks, MFBs, and NBFCs), whilePMN captures only data from approximately27 MFPs (which includes mostly unlicensedMFPs). Neither does it include data from thePak Post Saving Bank or the NSS. The lack ofinformation on the full scope of the sector pre-vents regulators and policy makers from takinginto account all the market players, especiallyon the savings side.

Inappropriate intervention in credit delivery.Although there is broad recognition that the GoPhas made significant progress in transforming astate-owned banking system into a private-ledcommercial banking system, the GoP is stillinvolved in direct credit delivery and this rolecould be exacerbated by the upcoming elections.For example, the government-owned ZBTLlends at 9 percent (or 8 percent, net of therebate), which is below market rates, and it hashuge NPLs. Despite numerous restructuringplans with donors’ assistance, ZBTL continuesto make a large number of subsidized small

loans in rural and agriculture finance (336,000microloans last year). Another example isKhushhali Bank. Despite its private ownershipstructure, almost every stakeholder interviewedconsidered it to be a state bank. The president ofKhushhali Bank is appointed by the president ofPakistan, and many people mentioned that theBank has to follow GoP recommendations toopen branches such as those in the earthquakeareas. Although a majority of the bank’s direc-tors represent the private banking sector, theyapparently do not have a strong influence onoperations and strategic decisions, and share-holders do not receive dividends. The new gov-ernment-led Rozgar Scheme, which targets 2million young people with business loans atsubsidized interest rates, is a clear illustration ofincreased activity of GoP in retail credit deliv-ery. It is ironic that, on the one hand donors helpthe government privatize its formal banking sec-tor, while on the other hand they support thegovernment’s direct involvement in retailmicrocredit.

Recommendations at the Macro Level

Although SBP is not the only government actorwith authority and responsibility for the finan-cial system, the following recommendationspertain largely to SBP’s role in promoting theexpansion of sustainable microfinance, bothfrom a regulatory/supervisory perspective andfrom a general policy perspective. Donors thatsupport SBP and other parts of the GoP also canbenefit from these recommendations.

SBP to focus on core role in regulation andsupervision. SBP’s primary role is to regulateand supervise the banking sector, includingmicrofinance. It also has a role to foster thedevelopment of the financial services, but itneeds to get the right emphasis and balancebetween “promotion” and regulation.

Avoid situations that may create conflicts ofinterest for SBP. SBP should not get involvedin funding decisions that create a conflict ofinterest with its role as supervisor. If SBP has toconduct due diligence on incoming proposalsfrom financial institutions or make fundingdecisions about such proposals, it compromisesits neutrality as a supervisor of the same

PAKISTAN

22

__________________________36 The 2006 amendments to the Microfinance Ordinanceauthorize SBP to prescribe the income level determiningwho is regarded poor. SBP has set the limit at an annualincome of 150,000 PRs.

institution. Donors will need to make sure thatthey do not push SBP to play such a role, even ifit may be very tempting to do so, given the SBP’sstrengths as a partner for work on microfinance.

View microfinance as a range of financialservices. When formulating strategies for devel-oping an inclusive financial sector and makingdecisions about its own organizational structure,SBP should treat microfinance as an issue thatcuts across different areas. As such, it shouldmake available international know-how in allareas of development finance, including housingfinance, rural finance, SME finance, agriculturallending, Islamic finance, and microfinance.These should not be viewed as distinct and unre-lated disciplines when formulating conceptnotes. More important, interest in extending var-ious types of credit to the unbanked poor shouldnot eclipse their need for other types of financialservices, particularly small-balance savingsproducts and affordable payment services.

Improve dissemination of SBP’s policies, regula-tions, and guidelines. SBP, possibly with donorsupport, should organize seminars for line min-istries, provincial governments, and the industryat large, to sensitize them on the existing regula-tory framework and to clarify who should comeunder the purview of SBP and who should not.For example, credit-only MFPs do not and donot need to come under the purview of SBP.

Disseminate key principles of microfinance andinternational experience widely. To reduce theknowledge gap between SBP and the rest ofGoP regarding microfinance, and especiallyabout what it takes for microfinance to grow ona sustainable basis, SBP should sensitize otherparts of the government, including SECP, MoF,and provincial authorities. Exposure needs todeepen beyond top management ranks. Thissensitization also could include financialproviders that are not typically consideredmicrofinance organizations, such as ZTBL, PakPost Saving Bank, and commercial banks.

Refine regulatory framework. Some minorpolicy changes could improve the environmentfor institutions to transform into MFBs andfacilitate current players’ ability to innovatearound products and delivery channels. Butthese changes alone will not bring about the

emergence of sound institutions that can ensurefuture sustainable growth. Major change willhappen only once a critical number of sustain-able institutions emerge in the country. Thereview did not identify regulatory obstacles asa primary factor preventing the emergence ofsustainable MFPs.

Introduce more flexibility on loan size limit.SBP could allow for a more flexible loan sizelimit while at the same time preventing missiondrift, for example, by combining a higher loansize limit with a limit for the average size ofoutstanding loans.

Change the requirements that MFBs serve onlypoor people. To prevent overexposure to con-sumer loans and the risk of regulatory arbitrage,SBP could limit the ratio of loans extended tosalaried people over total portfolio.

Link minimum capital requirements for district-level MFBs to population size. The current 100million PRs capital requirement for district-level MFBs should be decreased in low-densitydistricts. While working on adjustments toensure outreach in underserved areas, SBPshould balance this objective with its ownsupervisory capacity.

Establish a conducive framework for branchlessbanking. CGAP’s recent policy and regulatorydiagnostic on branchless banking in Pakistanwill provide concrete recommendations forhow SBP and other government actors canhelp branchless banking take off in Pakistan. Aspreviously noted, branchless banking is a prom-ising way of lowering transactions costs offinancial service delivery, taking advantage ofexisting infrastructure, such as post offices,retail shops, and petrol stations.

Subject Khushhali Bank to the same regulatorytreatments as MFBs. There are some importantdifferences in the legal, regulatory, and supervi-sory treatment of Khushhali Bank and otherMFBs that should be corrected. Harmonizedtreatment would send a positive signal domesti-cally and globally to investors that there is alevel playing field for all MFBs in Pakistan. Itshould also be a precondition for selling thegovernment’s stake in Khushhali Bank (NBPowns 23.5 percent of KB).


23

Establish internal standards for responding torequests that require approvals by SBP. SBPshould set targets for its response time torequests coming in from the market, for exam-ple for license applications, branch opening, orchanges of board membership. Setting andmeeting appropriate response standards wouldenhance SBP’s professional reputation andhelp ensure prompt decisions on applicationsfrom the market. Such a measure would send animportant signal to local and internationalinvestors and reduce barriers to entry.

Continue to require NGOs that want to collectvoluntary savings from the public to apply for alicense. The current SBP policy of authorizingNGOs to mobilize compulsory savings shouldbe maintained because compulsory savingsusually represent a small portion of the loansclients seek to obtain from NGOs. These sav-ings should continue to be held in an accountwith a financial institution regulated by SBP inthe name of the client or client group. In general,CGAP considers that any institution that col-lects savings from the public should be pruden-tially regulated to avoid putting poor people’ssavings at risk. However, in addition to compul-sory savings, exceptions also can be made forsavings collected from members in small, member-owned organizations because (1) the cost ofsupervising many small organizations is toohigh for most central banks; (2) the alternative(shutting them down) would most likely lead topoor people putting their savings in even riskierplaces, e.g., under the mattress; and (3) the risk isusually minimal because of these organizations’small size. Of course, further investigation intothe specificities of Pakistan would be requiredfor more detailed legal advice.

Delineate government’s appropriate role as thatof facilitator. GoP has a potentially importantfacilitating role to play in developing access tofinance in Pakistan, beyond creating the optimalregulatory and supervisory environment. Thereview team has several recommendations on howthe GoP could improve its role as a facilitator,while avoiding direct provision of credit services.

Base future strategies on a full understanding ofwhere poor people access financial services.The GoP, with SBP taking the lead, is currentlydeveloping a strategy for increasing access tofinance. The strategy, and the diagnostic under-pinning it, should be careful to treat micro-finance as an integral part of the financialsystem rather than as something separate andunique to itself. Understanding where (thediversity of financial providers—not only PMNmembers) and what kind of financial services(not only credit, but also savings, transfers,insurance, etc.) poor people currently access isessential to ensure the strategy is based on asound diagnostic. The process of developingthe strategy should include consultation withother parts of GoP that are concerned withmicrofinance, such as the MoF and provincialgovernments.

Be realistic about targets. The review revealeda focus on ambitious outreach targets formicrofinance. The overriding focus on targets,especially ones that may be overambitious andthat are not likely to be met, can distract fromthe more fundamental question of creatingsustainable institutions that will serve clients. Inaddition, it raises the risk of undue disappoint-ment if targets are not reached. Such a scenariocould lead the government to take a proactiverole at the retail level to quickly meet the targetor it could unfairly penalize strong MFPs thatcould eventually reach scale.

Avoid initiating government credit programs. Inthe context of the overall lack of sustainabilityand the poor performance of government-owned banks in Pakistan, GoP should avoidcreating new credit programs such as the RozgarScheme. Instead, GoP should continue to phaseout its existing credit programs. GoP also shouldbe cautious with large-scale loan forgivenessprograms, because such a policy decreasescredit discipline, which negatively affects thegrowth of the sector. Instead, GoP should insiston increasing sustainability in the delivery offinancial services to the poor.

PAKISTAN

24

V. DONOR SYSTEMS

The fundamental premise of CGAP’s work onimproving the quality of aid is that it is theresponsibility of development agencies to gettheir own houses in order to engage effectively inmicrofinance. In spite of significant funding andbroad consensus on good practice microfinance,many donor programs waste money, underminemarkets, and fail to reach their objectives.

Many factors, such as local politics, governanceand regulation, macroeconomic conditions,partner performance, and the ability of develop-ment agencies to work together and engage withlocal stakeholders, influence the impact ofmicrofinance programs at the country level.Literature on the quality of aid tend to focus onthese factors. Unfortunately, there is little dis-cussion about the supply side of the equation—the quality of the management systems of thedevelopment agencies themselves.

Five core elements of effectiveness—strategicclarity, staff capacity, accountability, knowledgemanagement, and instruments—are key toimproving the way in which funders supportfinancial systems for poor people. These coreelements emerged from the 17 MicrofinanceDonor Peer Reviews facilitated by CGAP, andthey have been confirmed through the fiveCLEARs conducted to date. These elements,depicted as the Aid Effectiveness Star (Figure 1),are defined in Box 4. They have been formalizedin the updated Good Practice Guidelines forMicrofinance Funders.

Although not every agency can be equally strongin each area, a minimum level of performance inall areas is critical for donors to achieve so theycan abide by the “do no harm” principle.37 Theseelements have been discussed, refined, endorsed,and reconfirmed time and time again by devel-opment agencies. Their relevance is clear:improving these elements creates an environ-ment conducive to designing better microfinanceprograms (and other types of programs as well).

Figure 1. The Aid Effectiveness Star

Using the Aid Effectiveness Star as a frame-work, the following sections discuss the extentto which the development agencies working inPakistan are set up to support microfinanceeffectively. Individual agencies may fare betteror worse than this common description of thedonor community as a group. In this section,specific agencies are mentioned by name onlyto provide examples of strengths.

Strengths of Donor Systems in Pakistan

Progression toward a financial systemsapproach. After a long history of funding sub-sidized credit lines, donors are now taking abroader approach that tackles the challenge ofimproving poor people’s access to financialservices from a financial systems perspective.Donors are examining constraints and opportu-nities at all three levels of the financial system


25

Box 4. Elements of Aid Effectiveness

Strategic Clarity: Coherence of agency’s vision ofmicrofinance. Vision is in line with accepted goodpractices.

Staff Capacity: Staff with technical capacity.Appropriate systems to select and monitor out-sourced expertise and implementing partners.

Accountability: Knowledge of the microfinanceportfolio. Transparency of portfolio performance.

Knowledge Management: Knowledge gained fromagency’s own and other’s experience.

Instruments: Ability to work directly with the privatesector. Wide range of flexible instruments.

__________________________37 See Tamara Cook, with input from CGAP staff,“Maximizing Aid Effectiveness in Microfinance,” CGAPDonor Brief No. 22, February 2005, www.cgap.org/docs/DonorBrief_22.pdf.

Figure 1. The Aid Effectiveness Star

Strategic Clarity

Accountability forResults

Relevant KnowledgeManagement

AppropriateInstruments

Staff Capacity

Effectiveness

and are viewing poor people’s finance as anintegral part of the financial sector. The upcom-ing ADB loan for improving access to financialservices, which goes beyond refinancing byincluding building the capacity of key institu-tions at all levels of the financial system, illus-trates this new trend.

Learning from past experiences. Severaldonors have taken stock of lessons learned fromtheir first generation of microfinance program-ming. Donors like ADB, SDC, and UNDP havelearned that money or capital is not the mainconstraint to extending microfinance and thatproviding massive credit lines to one institutiongenerally is not the best approach. Most havereoriented their programs to include funds forcapacity building. The CLEAR team heard of 14donors and investors that are providing or plan-ning to fund TA. Moreover, some donors aretaking serious action on the recommendationsof evaluation reports, including redesigning oradjusting programs. For example, the FinancialSector Strengthening Program of the SwissDevelopment Cooperation (SDC) refocused itssupport in its second phase of microfinanceprogramming to support more promisinginstitutions.

Selected experimentation with new instru-ments. The bulk of donor funding for micro-finance still flows through loans to govern-ments. However, several newer funders tomicrofinance are increasingly using otherinstruments such as equity and guarantees. Forexample, the Deutsche Bank’s GlobalCommercial Microfinance Consortium isproviding funding through guarantees. InNovember 2006, it extended a US$ 500,000Standby Letter of Credit for the benefit ofAsasah, an MFP in Lahore. The GlobalCommercial Microfinance Consortium borrowsin local currency from Deutsche Bank Karachito lend to Asasah. In this case, the funderis analyzing both the bank and the MFP andis bearing the foreign exchange risk.38 Somefunders are experimenting with more creative

funding approaches, such as providing the firstloss coverage for bond issues.

The increasing use of diverse instruments fol-lows the arrival of new types of funders tomicrofinance in Pakistan, including the GrameenFoundation, Unitus, Shorecap, the IFC, Soros,and OPIC. These funders bring new know-howthat will likely influence more traditional donors.

Emergence of donor coordination. An infor-mal microfinance donor group was establishedin 2004. The group includes major microfinancefunders and provides a useful mechanism forcollaboration. As a result, coordination amongthe various donors seems to be improving. Astriking example is the swift response of donorsto the pressure to use microfinance followingthe October 2005 earthquake. A joint note fromthe WB and DFID, which received supportfrom other donors, helped programs separateemergency/recovery grants from microfinance.This approach is a stark contrast to what hap-pened in Sri Lanka following the tsunami,where massive amounts of uncoordinated fundsthat mixed grants with microfinance rushed intothe affected areas. Concerted donor efforts andengagement also contributed to a recent shift ofADB programming from focusing uniquely onKhushhali Bank to focusing on a new loan thattakes a broader financial systems approach.

Challenges of Donor Systems in Pakistan

Pakistan is among the countries with the largestamounts of donor funding for microfinanceglobally. Yet despite significant funding, donorsmissed opportunities to help build a solid finan-cial system with sustainable institutions servingpoor and low-income populations. In fact, thebest developed level of the financial system isone where donors have had limited input: regu-lation and supervision. The challenges outlinedbelow attempt to explain why donors havefailed to foster the rapid development of a sus-tainable, inclusive financial system in Pakistan.The way in which donors have used their fundinginstruments is certainly a major contributor to this.

Strategic Clarity/Vision

Lack of understanding of what financial sys-tems development entails. Donors lack a clear

PAKISTAN

26

__________________________38 To learn more about guarantees, see Flaming, M.,“Guaranteed Loans to Microfinance Institutions: How DoThey Add Value?” Focus Note 40, CGAP, Washington,D.C., January 2007.

strategy for helping to develop a financial sys-tem that is inclusive and that serves the needs ofall people, including poor people. Lack of aclear strategy stems from a fundamental lack ofunderstanding of the financial sector, appropri-ate business models for retail institutions togrow without subsidies, the support servicesneeded, and poor people’s demand for financialservices. Consequently, most donors concen-trate too narrowly on the potential size of themarket for microcredit, with a near obsessivefocus on outreach numbers. Too little attentionis spent on the institutions, market infrastruc-ture, and enabling environment that will be ableto deliver quality financial services to largenumbers of poor people. As previously men-tioned, donors have learned that new approach-es are needed. Most now have a sense of whatnot to do, but not yet what to do. There is a gapbetween the international good practices formicrofinance endorsed by most donors and theway in which they implement programs on theground.

Poor knowledge about the key drivers of sus-tainability. Donors do not sufficiently promotesustainability of retail institutions because theydo not fully understand how strong, sound,sustainable institutions are built. Although someof the most successful MFIs in the world bene-fited from grants or concessional loans whenthey started, they were later able to refinancethemselves through the private sector or depositmobilization. In fact, access to free or cheapcapital is not the key driver to sustainability.Rather, crucial elements of sustainability aremanagement capacity, institutional capacity,financial soundness, product range, ability tointermediate, and funding structure. Moreover,donors may have misplaced the need for sus-tainability at the meso level, thinking that thesustainability of the refinancing wholesale facil-ity they support was an end in itself.

Accountability for ResultsMisplaced measure of success. Pakistan is a keystrategic partner for many leading donors.However, the measure of commitment to thecountry seems to have been reduced to howmuch has been disbursed rather than how greatan impact the funding has had. Measuring

success this way has created harmful “disburse-ment pressure.” Several donor staff privatelycited that the major incentive is to get moneyout the door, not the actual results achievedwith donor funds. One donor staff was told to“spend the money at all costs.”

Little performance-based funding. There appearsto be little link between performance and dis-bursements. The review team learned of caseswhere, despite the existence of performance-based contracts, disbursements continued with-out renegotiation, even when major targets weremissed. In several instances, including for oneof the largest programs, donor staff responsiblefor monitoring projects did not have the appro-priate technical skills to determine whether theproject was on track.

Unpredictability of donor funding. Though notunique to donors supporting microfinance inPakistan, it merits mention that donors too oftendo not respect their engagement with partners.For example, changing donor priorities/strategiesat headquarters resulted in funding being cutliterally overnight in at least one case.Unpredictable donor funding nearly led to abreakdown of regional networks.

Staff CapacityOver-reliance on a few technical staff. Giventhe huge amounts of donor funding in Pakistan(about US$ 400 million disbursed between2000 and 2005), the number of donor staffwith microfinance/financial sector training inthe country is disproportionately low. Thoughdonors work through various intermediariesand often outsource responsibility for technicalwork, a minimum level of trained, internalstaffing is important to collaborate effectivelywith other funders and stakeholders like PMNand GoP and to ensure basic oversight. If one ortwo of the stronger donor staff were to leave,there would be a significant vacuum.

InstrumentsOveremphasis of credit lines through govern-ment. Since the 1990s, the vast majority ofdonor funds has come in the form of loans togovernment for on-lending. Donors’ intentionwas to provide an important up-front invest-ment to jump-start microfinance in Pakistan.


27

Unfortunately, they did not place enoughemphasis on institutional capacity to absorbthese large credit lines, and there was an imbal-ance between credit lines and TA. These largecredit lines also hampered the emergence oflocal refinancing mechanisms and fundingmarkets.

l The availability of cheap credit serves as adisincentive for savings. Very few MFPstry to develop savings services, becausethey are continuously relying on cheapfunds from donors.

l Large credit lines crowd out both local andinternational commercial investors. Localand international investors consider thePakistani market too risky because of theprevalence of cheap funds.

l Retail-level institutions are complacentand not keen to diversify their fundingsources. MFPs tend not to be interested indeveloping savings services as a means tointermediate, and they have little incentiveto seek funding from commercial banksbecause they are readily refinanced bywholesale funds and direct subsidizedcredit lines.

l By channeling funds to GoP for develop-ing microfinance, donors often facilitatepublic sector involvement in retail-levelfinancial service delivery. This is not anappropriate role for governments. Para-doxically, there is more governmentinvolvement at the retail level in micro-finance than in the formal banking sectorin Pakistan.

Poor deployment of instruments. Although thechoice of donor instrument for supportingmicrofinance is not always ideal, neither is theactual use of the instruments chosen. Severaldonors provide funds on the condition thatinstitutions target specific regional areas ortypes of clients. Some donors inappropriatelyintervene in institution management, to theextent of micromanaging salaries and staffingnumbers. In some cases, donors use procure-ment rules that preclude MFPs from selectingtheir own consultants.

CoordinationLack of donor coordination in programming. Inspite of progress made by the informal donorgroup, there is still little coordination in actualprogramming. As a result, many donors work onparallel programs, each focusing on their ownpriorities rather than aligning their respectiveprograms according to their and others’ compar-ative advantage. Developing programs in anuncoordinated manner may lead to furtherinefficiencies, especially now as a large numberof donors show interest in funding TA andmany new programs are being designed.

Recommendations for Improving DonorSystems

The following recommendations are meant tohelp the donor community address the abovechallenges. These recommendations have seri-ous implications for how donors design, man-age, and monitor their programs. Some can beundertaken directly by staff based in Pakistan,while others will require a much higher levelagency commitment, including possibly frommanagement. CGAP is available to help fundersimplement these recommendations.

Strategic Clarity/Vision

Adopt a financial systems approach to expandingpoor people’s access to sustainable financialservices. Much is known globally about what ittakes to adopt and implement a financial sys-tems approach. The Good Practice Guidelinesfor Funders of Microfinance (also known asthe “Pink Book”) provides a good starting pointfor donors in Pakistan to review their approachto funding microfinance.39 The informal donorgroup could play a pivotal role in helpingdonors in the country develop a common visionand joint “rules of the game” for funding micro-finance as was done by the donor group in SriLanka following a CLEAR mission. These rulesincluded, for example, to base funding decisionson institutions’ plans to become sustainable andinsist on cost-recovery interest rates, etc.

PAKISTAN

28

__________________________39 Good Practice Guidelines for Funders of Microfinance,www.cgap.org/docs/donorguidelines.pdf.

Accountability for ResultsProvide clear and strong incentives for achievingsustainability and efficiency. Donors should useperformance-based contracts to ensure fundingis linked to performance against agreed-uponindicators in key areas, such as outreach, sus-tainability, and efficiency. Standards for suchindicators already exist and are part of the GoodPractice Guidelines for Microfinance Funders.In negotiating minimum performance indica-tors, donors should prioritize institutions’ ownbusiness plans and targets, not their own dis-bursement requirements. Additionally, staffresponsible for monitoring progress reportsshould possess the skills—or receive training—to interpret the results and take action ifneeded.

Be a reliable and consistent partner. Donorsmust be consistent with the institutions theysupport. They must respect their own policiesand commitments, including making timely dis-bursements and communicating policy shifts aspromptly as possible.

Staff Capacity

Engage financial-sector specialists for largeprograms. Based on current and future needs ofmicrofinance programs, management of leadingdonor agencies in microfinance in Pakistanshould ensure they have sufficient technicalstaff in the country to manage portfolios whilecoordinating with others. Because microfinanceis a technically intensive area of development,it would be appropriate to have at least one per-son at half time for each large program. Sincethe review last December, two key staff withtechnical knowledge have moved to otherassignments.

Train existing staff. At a minimum, donorsshould ensure that program managers responsiblefor microfinance are “literate” in financial-sector development and have received appropri-ate training because not every donor can affordto have technical staff specialized in micro-finance. Several options for short-term trainingare available.40

InstrumentsAdapting the choice and use of instrumentsdeployed by donors working in Pakistanrequires serious political will.

Diversify use of instruments. Different MFPsrequire different types of support and, accord-ingly, funding instruments based on theirstructure and stage of development. Moreover, amix of funding instruments is appropriate forvarious aspects of building the appropriatemarket infrastructure and promoting a soundpolicy environment. As microfinance inPakistan evolves from the start-up phase, flowsof donor funds are still needed, but the qualityof those flows will need to be different. Notevery funder dollar, pound, or euro is equal! Theinstrument, terms, and structure of donor fundsmake a big difference. Moreover, as micro-finance becomes more commercial, donor sub-sidies will need to be increasingly strategic—which requires increased sophistication but notnecessarily increased amounts. Donors shouldmeet the market’s evolving needs with a widerpalette of instruments, such as grants, guaran-tees, and equity. Vanilla credit lines are nolonger sufficient. Donors who do not have theappropriate instruments to meet the new needsof the market may wish to cede their place toothers. Strong donors of the past may not bestrong donors of the future. In case some of thefunders have significant disbursement pres-sures, they may want to reorient some of theirfunding into other development sectors thatrequire larger program size, such as infrastruc-ture and social sectors.

CoordinationStrengthen informal donor group on micro-finance. Experience in other countries hasshown that solid coordination can play a sig-nificant role in rationalizing support to thesector (e.g., Uganda, Nicaragua, and Cambodia).In Pakistan, there are a few principles that arerequired for a well-functioning coordinationgroup. The donor group may want to do thefollowing:

l Choose a lead agency with conveningpower, and make a commitment to have onestaff member responsible for facilitating


29

__________________________40 The Boulder Microfinance Training Program in Turin,Italy (www.bouldermicrofinance.org), and the CGAP/MFMIdonor training (www.themfmi.org) are two options.

coordination, and have this responsibiltyclearly noted in their terms of reference.

l Ensure that the largest funders are wellrepresented in the group and that their headoffices are involved when necessary (espe-cially in the case of centralized funders).

l Invite new types of microfinance fundersto join (e.g., social investors) to reflect theevolution of the funding market.

l Work on specific issues. Collaborationworks best when members share commoninterests on substantial issues (e.g., savings,

branchless banking). The group should alsolook at broad financial-sector issues (agri-cultural/rural finance, housing finance, etc.).

Key activities for the group could include keep-ing an updated list of donor projects involvingmicrofinance, discussing all new projects at anearly stage, coordinating on operational support(e.g., five donors support SBP), organizing jointreviews, performing program appraisals, or con-ducting a comparative advantage exercise.CGAP is available to support the activities andthe development of this donor group.

PAKISTAN

30

ANNEXES

;

RTN

UO

CN

UO

CC

A D

NA SSE

NEV ITC EF FE LE VEL -Y

CITS

ON

GA I

D YCIL

OP A

HTIW

WE IVER YTIL I

BAT

AX

EN

NS

—1Y

RA

MM

UM

XIR

TA

FO

RD

NE

MM

OC

ES

NOI

TA

33

LEVEL

CH

ALL

EN

GE

SR

EC

OM

ME

ND

ATI

ON

S F

OR

DO

NO

RS

and

GoP

ORCI M

•W

eak

inst

itutio

nal f

ound

atio

ns fo

r gro

wth

: mos

t ins

titut

ions

are

un

sust

aina

ble

and

mid

dle

man

agem

ent c

apac

ity is

wea

k •

Lim

ited

dem

onst

ratio

n bu

sine

ss m

odel

unt

il re

cent

ly:M

FPs’

low

inte

rest

ra

tes

do n

ot p

erm

it fu

ll co

st re

cove

ry, e

spec

ially

bec

ause

subs

idie

s ar

e pa

ssed

on

to c

lient

s; s

ome

prov

ider

s co

nfus

e m

icro

finan

ce w

ithch

arity

•La

ck o

f res

pons

iven

ess

to c

lient

s: p

rovi

ders

ove

rwhe

lmin

gly

offe

r the

sa

me

prod

uct a

ndte

rms;

dep

osit

serv

ices

larg

ely

unde

velo

ped

•In

sist

on

sust

aina

bilit

y: s

uppo

rt sp

ecia

lized

MFP

s an

d co

ntra

ctua

lly in

sist

pro

vide

rs c

harg

eco

st-re

cove

ryin

tere

st ra

tes

•En

cour

age

inno

vatio

n, n

ew a

ctor

s, a

nd n

ew a

ppro

ache

s: c

reat

e te

nder

s to

attr

act e

xper

ienc

ed

mic

rofin

ance

pla

yers

(e.g

., G

reen

field

); br

ing

in in

vest

ors

that

offe

r kno

w-ho

w, g

over

nanc

e,an

d eq

uity

;pr

omot

e m

obile

pho

ne-b

ased

fina

ncia

l ser

vice

s; fu

nd u

p-fro

nt in

vest

men

t cos

ts o

fIC

T, m

ake

use

of

exis

ting

phys

ical

infra

stru

ctur

e•

Esta

blis

h in

cent

ives

for r

etai

l pro

vide

rs to

div

ersi

fy fu

ndin

g so

urce

s

OSE M

•D

onor

s fu

ndin

g co

nditi

ons

and

curre

nt s

truct

ure

of P

PAF,

the

lead

ing

apex

, lim

it su

stai

nabl

e gr

owth

: no

stric

t inc

entiv

es fo

r par

tner

s to

reco

ver

thei

r cos

ts; b

lurri

ng o

f soc

ial a

nd fi

nanc

ial s

ervi

ces;

rigi

d di

sbur

sem

ent

proc

edur

e s•

Lack

of t

op-n

otch

qua

lity

train

ing

and

TA•

Lim

ited

com

mer

cial

who

lesa

le m

arke

t

•Pr

omot

e co

mm

erci

al w

hole

sale

mar

ket:

spin

-off

PPAF

lend

ing

oper

atio

ns a

nd e

stab

lish

an “a

cces

s to

fin

ance

fund

”; de

velo

p in

cent

ives

/elim

inat

e di

sinc

entiv

es fo

r com

mer

cial

ban

ks to

lend

to M

FPs

•C

reat

e a

mul

tidon

orTA

faci

lity:

prov

ide,

dem

and-

base

d, q

ualit

y in

stitu

tiona

l dev

elop

men

t ser

vice

s in

a

perfo

rman

ce-b

ased

man

ner

•C

ondu

ctac

tion-

orie

nted

rese

arch

on

spec

ific

area

s:re

sults

of r

esea

rch

on k

ey to

pics

like

sav

ings

and

po

tent

ial p

laye

rs li

ke P

ak P

ost S

avin

gs B

ank

wou

ld b

enef

it th

e in

dust

ry

•C

ontin

uesu

ppor

t for

PM

N: “

publ

ic g

ood”

ser

vice

s, i.

e., t

rans

pare

ncy

wor

k, s

houl

d be

mai

ntai

ned

•U

nder

stan

d th

e fu

ll ra

nge

of o

rgan

izat

ions

reac

hing

poo

r and

low

-inco

me

peop

le:o

btai

n co

mpl

ete

pict

ure

of th

e entire

supp

lysi

de

CA MOR

•M

isun

ders

tand

ing

abou

t mic

rofin

ance

by

som

e re

leva

nt a

ctor

s w

ithin

G

o P: o

vers

tate

d ex

pect

atio

ns o

f mic

rofin

ance

as

pove

rty a

llevi

atio

n to

ol; l

imite

d aw

aren

ess

of g

ood

prac

tice

prin

cipl

es; u

nwilli

ngne

ss to

op

enly

add

ress

real

cost

s of

mic

rocr

edit

deliv

ery

•S

BP

risk

s ov

erst

retc

hing

man

date

:pro

mot

iona

l rol

e co

uld

dive

rt fro

m

core

func

tion

•O

vera

ll fa

vora

ble

regu

lato

ry fr

amew

ork

has

afe

w s

peci

fic li

mita

tions

(s

ee fu

ll re

port

text

)•

Insu

ffici

ent i

nfor

mat

ion

on fu

ll sc

ope

of s

ecto

r•

Inap

prop

riate

gov

ernm

ent i

nter

vent

ion

in c

redi

tdel

iver

y

•S

BP

shou

ld fo

cus

on it

s co

re m

anda

te o

f reg

ulat

ion

and

supe

rvis

ion:

avoi

dm

akin

g fu

ndin

g de

cisi

ons

abou

tpro

vide

rs it

then

has

to s

uper

vise

; im

prov

e di

ssem

inat

ion

on S

BP’

s po

licie

s, re

gula

tions

, and

gu

idel

ine s

•R

efin

e re

gula

tory

fram

ewor

k:in

trodu

ce m

ore

flexi

bilit

y in

loan

siz

e lim

it; c

hang

e re

quire

men

ts th

at

MFB

s se

rve

only

poo

r peo

ple;

adj

ustm

inim

um c

apita

l req

uire

men

ts fo

r dis

trict

-leve

lMFB

s; e

stab

lish

cond

uciv

e fra

mew

ork

for b

ranc

hles

s ba

nkin

g; s

ubje

ct K

hush

hali

Ban

k to

sam

e tre

atm

ents

as

MFB

s;co

ntin

ue to

requ

ire th

at N

GO

s w

antin

g to

col

lect

vol

unta

ry s

avin

gs fr

om p

ublic

be

licen

sed

•D

elin

eate

gov

ernm

ent’s

role

as

faci

litat

or:b

ase

futu

re s

trate

gies

on

full

unde

rsta

ndin

g of

whe

re p

oor

peop

le a

cces

s fin

anci

al s

ervi

ces;

be

real

istic

abo

ut ta

rget

s; a

void

initi

atin

g go

vern

men

t cre

dit p

rogr

ams

S METSYS RONOD

•St

rate

gic

clar

ity/v

isio

n: la

ck o

f und

erst

andi

ng o

f wha

t fin

anci

alsy

stem

deve

lopm

ent e

ntai

ls; p

oor k

now

ledg

e ab

out k

ey d

river

s of

sus

tain

abilit

y•

Acc

ount

abilit

y fo

rres

ults

:mis

plac

ed m

easu

re o

f suc

cess

on

disb

urse

men

ts ra

ther

than

per

form

ance

; litt

le p

erfo

rman

ce-b

ased

fund

ing;

fund

ing

is u

npre

dict

able

•S

taff

capa

city

:ove

r-rel

ianc

e on

a fe

w te

chni

cal s

taff

•In

stru

men

ts: o

vere

mph

asis

on

cred

it lin

es th

roug

h go

vern

men

t; us

e of

in

stru

men

ts is

con

stra

inin

g to

MFP

s•

Coo

rdin

atio

n: L

ack

of d

onor

coo

rdin

atio

n in

pro

gram

min

g

•S

trate

gic

clar

ity/v

isio

n:tre

at m

icro

finan

ce a

s pa

rt of

the

finan

cial

sys

tem

•Ac

coun

tabi

lity

forr

esul

ts:p

rovi

de c

lear

and

stro

ng in

cent

ives

for a

chie

ving

sus

tain

abilit

y an

d ef

ficie

ncy

in p

erfo

rman

ce-b

ased

con

tract

s; b

e a

relia

ble

and

cons

iste

nt p

artn

er•

Sta

ffca

paci

ty: e

ngag

e fin

anci

al s

ecto

r spe

cial

ists

for l

arge

pro

gram

s; tr

ain

exis

ting

staf

f•

Inst

rum

ents

: ada

pt a

nd d

iver

sify

use

of i

nstru

men

ts to

mat

ch e

volv

ing

need

s of

som

e M

FPs

•C

oord

inat

ion:

stre

ngth

en in

form

al d

onor

gro

up o

n m

icro

finan

ce

ANNEX 2—RECENT TRENDS IN PAKISTAN MICROFINANCE

The figures in this annex illustrate the recent trends in outreach and sustainability of institutions thatprovide financial services to the poor in Pakistan. The information presented is based on PMN figuresand research conducted by the review team.

PMN members come from a range of formal and semiformal institutions that are able to report to thenetwork regularly and are willing to share their data with other MFPs. In October 2006, PMN wascomposed of four MFBs, five MFPs, four RSPs, three NGOs, and two CFIs.41 However non-PMNmembers provide a majority of microfinance services (both credit and savings) in Pakistan. To accountfor these institutions, the review team complemented PMN results with estimated outreach andperformance indicators, based on interviews and self-reporting mechanisms of non-PMN providers.

OutreachLoans. PMN members’ active borrowers represent 4 percent of the total population. During 2001–2005,reporting members of PMN’s loan portfolios outstanding grew at a compounded rate of 60 percent perannum, thus reaching approximately 640,000 active borrowers. Much of this growth occurred in2003–2005 as MFBs (in particular Khushhali Bank) proceeded to grow to scale and Kashf Foundationcontinued to enjoy rapid growth. RSPs (especially the National Rural Support Program) also continuedto grow. Despite this rapid growth, PMN’s overall share of microcredit activity is relatively small whencompared with the loan portfolio outstanding of non-PMN member microfinance services providers.

In contrast to the 60 percent compounded growth in the number of loans, the growth in the averageloan portfolio outstanding grew only at a 41 percent annual compounded rate over the same period,which indicates that PMN members tended to make smaller loans over that period.

Although no formal monitoring of the entire sector exists, the review team estimated that the totalmicroloan portfolio outstanding as of 31 December 2005 was approximately 73 billion PRs (aboutUS$ 1.2 billion), consisting of about 1.4 million loans outstanding.42 As figures 2 and 3 indicate, PMNmembers represent about 8 percent of loan portfolio outstanding, but approximately 45 percent of thetotal number of loans outstanding. Furthermore, figures 2 and 3 highlight that ZTBL is the largestlender to the micro and small loan sector in Pakistan, with approximately 81 percent of loan portfoliooutstanding, and 39 percent of total borrowers.

PAKISTAN

34

__________________________41 Source: Performance Indicators Report, PMN, Islamabad, 2005.42 These numbers are based on the assumption that all loans of less than 100,000 PRs (US$ 1,666) would be classified as micro-finance loans (especially for input loans extended by ZBTL to the farming sector). This estimation is conservative because themicroloan ceiling has just been raised to 150,000 RPs by SBP. A further estimate was then made regarding the likely proportionthese loans represented compared with the total loans disbursed. 43 Two categories of MFPs have less than 1 percent and are not represented in the figure (Orangi and PO Partners of PPAF thatare not members of PMN).

Estimated National Gross Loan Portfolio Outstanding

Figure 2. Estimated National Microfinance Gross Loan Portfolio Outstanding per Type of Retail Institution 43

MFPs reporting to PMNZTBLNational Bank of PakistanFirst Women's Bank

Co-operative Banks <100K

Microfinance Banks not members of PMN

6%2%

1%2%8%

81%

Fig 3

Tab 1

Tab 2 1

Although members of the PMN network have enjoyed steady growth over the past few years, theyoffer only a partial view of the sector, especially in terms of gross portfolio outstanding.


35

__________________________44 Source: PMN. In PIR, all except Network MF bank are PMN members. In the Microwatch non-PMN members that report tous are Network MF bank, Pak Oman MF bank, Tameer MF bank, Save the Poor, Jinnah Welfare Society, Lachi Project, andRCDS.45 PMN usually calls specialized NGOs “Specialized MFIs” in its reports.46 Ibid.

% of total number of outstanding loans

MFPs reporting to PMNZTBL National Bank of PakistanFirst Women's BankCooperative BanksOrange PartnersPartner Organizations of PPAF (not members of PMN)Microfinance Banks not members of PMN

46%

39%

6%2%

3% 1% 1%2%

Figure 3. Estimated Outreach: Number of National Microfinance Loans per Type of Retail Institution

Table 1. Growth in Gross Loan Portfolio of MFPs That Report to PMN (000 PRs) 44

LenderCategory 2000 2001 2002 2003 2004 2005

MFBs 0 0 0 737,669 1,610,150 2,344,414

MFIs45 33,371 791,742 168,059 393,490 564,765 947,902

RSPs 203,195 638,195 1,030,723 1,123,083 1,283,599 1,706,761

NGOs 13,065 22,886 58,527 110,319 186,796 370,094

CFIs 0 0 241,621 245,011 308,894 319,119Total 249,631 1,452,823 1,498,930 2,609,572 3,954,204 5,688,290

Table 2.1. Growth in the Number of Loans of MFPs That Report to PMN 46

LenderCategory 2000 2001 2002 2003 2004 2005

MFBs 0 0 0 95,090 177,648 248,091

MFIs 7,444 16,855 40,800 93,122 99,441 132,867

RSPs 5,690 76,570 118,814 142,716 136,454 208,995

NGOs 2,372 5,108 11,252 21,251 26,282 40,913

CFIs 0 0 6,147 8,648 11,336 12,552Total 15,506 98,533 177,013 360,827 451,161 643,418

Low levels of savings. In relation to the level of national savings by small savers, PMN members playonly a marginal role, with less than 5 percent of the estimated small savings accounts nationwide. Thelargest deposit taker is Pakistan Post Office Savings Bank, with an estimated 78 percent of totaldeposits mobilized, followed by ZTBL with approximately 9 percent market share. Growth in savingsmobilization by PMN members has lagged behind the growth rate of loans, having increased at anannual compounded rate of 17.5 percent since 2001. Table 3 details the relatively low level of savingsmobilization by PMN members, primarily because of the low degree of interest in savings by MFBs.For example, Khushhali Bank doesn’t provide saving services at all. The low savings volumes ofPMN members can be explained partly by the fact that a majority of PMN members are not legallypermitted to intermediate savings (with the exception of MFBs and CFIs). Nearly 50 percent of thetotal savings mobilized by PMN members are held by First Microfinance Bank.

Table 3.

Figure 4.

Table 4.

PAKISTAN

36

__________________________47 Source: CGAP CLEAR estimates (microloans below 100,000 RPs).48 Source: PMN.49 Five categories of MFPs have less than 1 percent and are not represented on the figure (National Bank of Pakistan, FirstWomen’s Bank, Orangi Partners, Partner Organizations of PPAF that are not members of PMN, MFBs that are not PMN members).

Table 2.2. Microcredit Outreach of MFPs that Report to PMN Compared withOther Providers of Microcredit47

Estimates2005 PMN ZBTL NBP Other Total

Gross Portfolio(‘000 RPs)

5,688,000 58,915,000 4,500,000 4,020,000 73,123,000

Number of Borrowers 643,000 549,000 90,000 139,000 1,421,000

Table 3. Volume of Savings by PMN Members (000 PRs)48

InstitutionCategory 2000 2001 2002 2003 2004 2005

MFBs 0 0 0 392,048 468,974 679,240

MFIs 1,463 6,540 20,613 11,860 8,541 7,894

RSPs 481,721 696,367 912,358 496,457 541,869 646,941

NGOs 10,570 8,854 10,592 94,159 13,222 20,494

CFIs 0 0 0 0 0 0Total 493,754 711,761 943,563 994,524 1,032,606 1,354,569

Estimated National Microfinance Savings

Figure 4. Estimated National Microfinance Savings (percentage of total volumes of savings by type of institutions) 49

MFPs reporting to PMNZTBL (total)Pak Post BankCo-operative Banks <10K

RSPs not reporting to PMN

1% 5%9%

78%

7%

Table 4 shows the estimated number of national savings accounts with balances of less than 10,000 PRs(about US$ 165) as of December 2005. Basic data for this statistic are scarce and do not include accountswith NSS.

Decent geographical coverage. National coverage is extensive, largely thanks to the 13,419 postoffices throughout Pakistan, the 7,500 commercial bank branches (although some rural branches arebeing closed), and the 343 ZTBL branches. In addition, geographical coverage is reinforced by theexisting network of RSPs. PMN members themselves provide a reasonable geographic coverage, withservices in approximately two-thirds of the 123 districts in the country. This concentration is heaviestin provinces with the greatest population densities, with 442 outlets in Punjab (population 74 million),220 outlets in Sindh (population 31 million), and 112 outlets in the North West Frontier (population20 million). The province with the least penetration is Balochistan, which has the lowest populationdensity of all of the provinces and federal territories. The region where there is the greatest degree ofcompetition amongst PMN members is around Lahore, where Khasf Foundation, Khushhali Bank, andseveral RSPs all compete.

Loan portfolio quality. Overall loan portfolio quality of PMN members, as measured by the portfolioat risk greater than 30 days (PAR>30), has moved progressively closer to internationally acceptedlevels despite reversals in 2002 and 2003. CFIs and RSPs have the poorest performance. The CFIsresults, representing less than 6 percent of the total portfolio outstanding, reflect the poor performanceof the Bank of the Khyber. This bank was founded by the provincial government, and its creditpolicies and procedures have been subject to political influence; however, it is in the process of beingrestructured. RSPs had a relatively high level of loans in arrears in 2002 (about 18 percent), but thesewere progressively worked down in 2003 and 2004. The sharp decline in their PAR>30 ratio in 2005was because of a high level of loan write-offs that were deemed uncollectible.

The loan portfolio of the other MFPs is worse than the portfolios of PMN members. The main lender,ZTBL, with an estimated 81 percent share of total microfinance loans outstanding, has an estimatedloan in arrears rate of more than 50 percent. Anecdotal evidence and field interviews suggest that someRFPs have significant portfolio quality issues.

Financial sustainability. The sustainability of institutions reporting to PMN has been disappointing,with only two members reported to be operationally and financially sustainable (Khasf Foundationand the Orangi Project). One reason for this is that the average yield on portfolio for all PMNmembers is 18.8 percent, compared with an average yield for Asia of 30.7 percent. By comparison,the yield on portfolio for Khasf Foundation is 28.5 percent. Conversely, the operating expense ratio ofall PMN members, at 22.4 percent, compares favorably with the Asian average of 22.8 percent.


37

__________________________50 According to SBP, end of June 2005, there were 27m accounts and 5m accounts under 5000 PRs.

Table 4. Estimated number of savings accounts below 10,000 PRs (not including NSS)50

Institution Number of AccountsPak Post Savings Bank 2,570,000

ZTBL 800,000

PMN 824,000

Cooperative Banks 307,000

Other 130,000Total 4,631,000

Table 5.

The impact of Khasf Foundation on the results of the MFP group is substantial, because it representsmore than 80 percent of the assets, and its adjusted net income more than offsets the accumulatedlosses of other MFPs. The large swing in the performance of CFIs reflects changes relating to therestructuring of the Bank of Kyber.

The profitability of many institutions that are not PMN members is highly questionable. Many of themcharge below-market rates (e.g., ZTBL lends at a net 8 percent). Together with poor loan repaymentrates, this means that many of them would be unprofitable if they reported in accordance withgenerally accepted accounting principles.

PAKISTAN

38

__________________________51 Source: PMN.

Category of Institution 2000 2001 2002 2003 2004 2005

MFBs 0 0 0 56.2 44.9 53.2

MFIs 78.1 78.7 109.1 105.0 136.6 114.1

RSPs 131.2 105.2 95.3 85.0 77.0 62.6

NGOs 37.1 57.6 45.3 45.8 69.9 60.7

CFIs 0 0 40.7 44.8 144.1 50.1

Table 5. Financial Self-Sufficiency Ratio (%) 51

ANNEX 3—MICROFINANCE PROVIDERS


39

Memberof PMN

Supervisedby SBP Legal Structure

Description of Entities

Yes No Yes NoRegistered

under Companies Ordinance

Registeredunder Societies Registration Act

Microfinance BanksFirst Microfinance Bank X X XKhushhali Bank X X XNetwork Microfinance Bank X X XPak Oman Microfinance Bank X X XRozgar Microfinance Bank X X XTameer Bank Limited X X X

Microfinance InstitutionsAkhuwat X X XAl Falah Development Organization X X XAl-Madad Foundation X X XAl-Mehran Rural X X XAnjuman Falaha-o-Behbood X X XAshasha X X XBhaahn Beli X X XBhattai Welfare Association X X XBukhari S.W. Association X X XCommunity Base Education X X XCommunity Development Concern X X XCommunity Support Concern X X XCommunity Uplift Program X X XDevelopment Action for Mobilization and Emancipation X X X

Distagir C.C.C. Society X X XGoth Seengar Foundation X X XHuman Development Foundation X X XHWA Foundation X X XIndus Community Development X X XIslamic Relief X X XJinnah Welfare Society X X XKashf Foundation X X XKhagi Cooperative X X XKhuda Ki Basti X X XKhwendo Kor X X XKorangi Credit Society X X XKurrum Rural Support Organization X X XLDC X X XMarvi Rural Development Organization X X XMarvi Social Cultural W. Association X X XMehran Educational X X XMilap X X XNarowal Rural Development Program X X X

Continued on p. 40

PAKISTAN

40

Memberof PMN

Supervisedby SBP Legal Structure

Description of Entities

Yes No Yes NoRegistered

under Companies Ordinance

Registeredunder Societies Registration Act

Nojawanan Welfare Association X X XO.W.P.R.A. X X XOrangi Pilot Project X X XOrganization for Participatory Development X X XOrganization for Participatory Environment X X XPak Social Welfare X X XPFFF X X XPoverty Eradication Network X X XPunno Aqil Welfare Forum X X XRural Community Development Society X X XSaath Development Society X X XSAFWCO (Sindh) X X XSAHARA X X XSahkar Development Foundation X X XSave the Poor X X XShadab Rural Development X X XShah Shal Sami Welfare Association X X XShama Roshan X X XSHEDS X X XSind Development Society X X XSind Rural Partner Organization X X XSindh Rural Support Programme X X XSingh Goth Suddar Foundation X X XSofi Shah Inyat Shaheed X X XSoon Valley Development Program X X XSorath Samaji Taraqiyati Tanz. X X XSujak Samudi Welfare Association X X XSwabi Women Welfare Society X X XTaraqee Foundation X X XTrust for Rural Development X X XVillage Welfare Society X X XWomen Welfare Organization Poonch X X XYoung Samaji Tanzeem X X X

Rural Service ProvidersAga Khan RSP X X XBalochistan RSP X X XGhazi Barotha Taraquati X X XLachi Poverty Reduction X X XNational RSP X X XPunjab RSP X X XSarhad RSP X X XSindh Graduates Association X X XSindh RSO X X XThardeep RDP X X X

ANNEX 4—LEGAL FRAMEWORK ACCORDING TO INSTITUTIONAL TYPES


41

SBP SECPVarious provincial Registration Authorities

BankingCompaniesOrdinance

MFIOrdinance

SocietiesRegistration /

Trusts ActInsuranceOrdinance

CompaniesOrdinance

CompaniesOrdinance,Section 42

Banks MFBs InsuranceComp.NBFCsNGOs/RSPs

Non-Banks

RegulatoryAuthority

Main Law

InstitutionalType

Banks

ANNEX 5—PROFILE OF PPAF

PPAF was founded by the GoP in 1997 as an apex institution to act as a wholesaler of funds to civilsociety organizations. Its initial capital was in the form of an endowment from the GoP, the proceedsof which have been invested in government securities. Subsequent funding for its activities comesfrom a variety of donors and lenders, including the World Bank and IFAD, and from retainedearnings.

PPAF works with those societies whose target markets are the poor rural and urban communities ofPakistan. PPAF places a special emphasis on meeting the needs of women in these areas. Its overallgoals and objectives are as follows:

l To empower the poor, and to increase their incomes

l To provide credit to PPAF’s partner organizations (the civil societies), and to help them expandtheir microfinance programs

l To provide grants and loans on a cost-sharing basis for the development of small-scalecommunity infrastructure projects

l To create and enhance the access of disadvantaged communities to health and education services

l To strengthen the capacity of partner organizations

These goals and objectives are achieved through four core components:

l The Credit and Enterprise Development Component, which manages microfinance activities

l The Community and Physical Infrastructure Component, which oversees the building of healthand education infrastructures at the community level

l The Human and Institutional Development Component, which provides capacity building andtraining to partner organizations

l The Social Sector Development Component, which provides health and educational services atthe community level

Although PPAF is a poverty alleviation fund, its largest activity is the provision of microfinanceservices. For the financial year ending June 2006, its total disbursements was 6,205 million PRs (US$103 million), of which 3,705 million PRs (US$ 61.7 million), or 59 percent, was for microfinance.Moreover, funding available through the Microcredit Loan Fund (financed by grants and loansprovided through the GoP by IDA), totals 10,513 million PRs (US$ 175 million). As of 30 June 2006,the microcredit loans outstanding to 39 MFPs amounted to 4,013 million PRs (US$ 66.9 million),representing 30 percent of total assets. Of these loans, the largest borrower is the National RuralSupport Program, with a loan outstanding of 1,751 million PRs (US$ 29.2 million).

PPAF currently lends to its partner organizations at an interest rate of 8 percent, and it takes collateralin the form of the loan portfolio and the other assets that are created by the loan itself. Concurrent withthe loan, PPAF also provides an operating subsidy to the partner organization equal to 10 percent ofthe loan amount. Traditionally, it has enjoyed a high-quality portfolio, with a loan repayment rate of100 percent.

PPAF has a strong balance sheet, with investments and savings accounts amounting to 48 percent oftotal assets. It is highly profitable, recording gross income for FY 6/2006 of 761.5 million PRs(US$ 12.7 million), with income from its substantial investment portfolio comprising 423.8 millionPRs (US$ $7.1 million) of this amount. Net income for the year was 501 million PRs (US$ 8.35million). For the 12 months ending June 2006, the overall return on equity was 34 percent, and thereturn on assets was 5 percent.52

PAKISTAN

42

__________________________52 These data were sourced primarily from the PPAF Web site and its most recent annual report.

ANNEX 6—LIST OF DONOR PROJECTS

MICRO LEVEL

MFPs- ADB funded the establishment of Khushhali Bank, supports the restructuring of ZTBL, and set

up a fund for district-level MFBs working in rural areas- AECI set up a Spanish Microcredit Fund that provides hard currency refinancing and TA to

eligible MFPs - DFID provided grants and loan capital to Kashf Foundation and to MFPs in NWFP- EC funds the development of MIS for MFPs and provides capacity building for MFPs to give

them access to new sources of funding - IFC supported the establishment of a greenfield MFB (Tameer Bank) with TA, loans, and equity- IFC (jointly with CGAP) funds a market study on mobile banking and provides TA for product

development and training for branch managers- IFC provided equity capital for First MicroFinance Bank- SDC funds capacity building of six MFPs and one MFB- SDC supports four leasing companies in their efforts to serve the MSE sector- UNDP provides TA for a state bank (First Women Bank), an MFB (First MicroFinanceBank),

and a leasing company (Orix Leasing) with a special focus on microcredit for women- USAID supports Khushhali Bank in increasing its outreach in remote areas (Balochistan, Sindh,

and Federally Administered Tribal Areas)- USAID provides support to financial institutions that serve the “missing middle” (loans ranging

from $500 to $30,000) (implemented by ShoreBank Advisory Services)- USAID works with PPAF to cater to the needs of entrepreneurs that have outgrown traditional

MFIs

MESO LEVEL

TA and refinance support- DFID supports PMN- DFID, SDC, and the World Bank provide funding for the Access to Finance Study (following the

FinMark model)- EC provides support in the training sector by funding the Centre of Excellence and by developing

a certification course for microfinance bankers (in cooperation with IBP and NIBAF)- EC provides funding for Orangi Charitable Trust as a wholesale lender- IFAD funds the creation of an innovation facility within the Pakistan Poverty Alleviation Fund to

enable the funding of innovations in microfinance- SDC supports the Leasing Association of Pakistan, a training organization (Centre of

Excellence), PMN, and two regional networks- The World Bank provides loans and grant funding to the PPAF, an apex institution refinancing

MFPs and providing grants for small-scale infrastructure projects

MACRO LEVEL

- ADB supported the adoption of the new regulatory framework for MFBs and established variousmicrofinance funds (Microfinance Social Development Fund, Risk Mitigation Fund, DepositProtection Fund)

- SDC funds capacity building for SBP in microfinance regulation and supervision

Note that this list is not exhaustive.


43

ANNEX 7—DONOR INSTRUMENTS

This table illustrates the type of funding instruments funders use in Pakistan to support microfinance.

All data are self-reported.

PAKISTAN

44


BW

DAFI

PD

NU

DIFD

CE

CFI

CDS

BD

A

DIAS

U

ICE

A

Project typeStand alone x x x x x x x x

Microfinance component x x x x x

Level of financial systemMicro x x x x x x x x x

Meso x x x x x x

Macro x x x x

Grants for TA to/throughRetail institutions (NGO or private) x x x x x x x

Government-owned retail institutions x

Government, other (incl. PIUs) x x

Networks/training institutes x x x x x

Apexes/wholesale facilities x x x

Umbrella projects/multidonor projects x x

Grants for capital to/throughRetail institutions (NGO or private) x x x

Government-owned retail institutions

Government, other (incl. PIUs)

Networks/training institutes x

Apexes/wholesale facilities

Umbrella projects/multidonor projects

Loans for TA to/throughRetail institutions (NGO or private) x x

Government-owned retail institutions

Government other (incl. PIUs) x

Apexes/wholesale facilities x


Loans for capital to/throughRetail institutions (NGO or private) x x x

Government, other (incl. PIUs) x

Apexes/wholesale facilities x x


Equity to/throughRetail institutions (NGO or private) x

Guarantees to/throughRetail institutions (NGO or private)

ANNEX 8—DONOR FUNDING IN MICROFINANCE


45

__________________________53 All figures are rounded to the next hundred.54 All the money budgeted for microfinance for this period of time (2000–2005).55 The average exchange rate for six years was used (2000–2005).56 Average exchange rate 2005.57 That is: “How much money does your agency plan to spend after 31 December 2005 for microfinance?”58 Current exchange rate (February 2007).59 US$ 1 = 0.662 GBP.60 US$ 1 = 0.550 GBP.61 US$ 1 = 0.513 GBP, amount depending on Access to Finance Programme (£30–40 million).62 US$ 1 = 0.959 EUR (average exchange rate 2000–2005).63 Exchange rate for 2005 (all disbursements in 2005): US$ 1 = 0.804 EUR. 64 EC has an upcoming programming exercise in 2007. US$ 1 = 0.768 EUR.65 US$ 3,700,000 have already been disbursed in 2006. 66 US$ 1 = 1.460 CH.67 US$ 1 = 1.245 CHF.68 Future commitments depend on the outcome of planned external reviews of all projects in 2007. US$ 1 = 1.236 CHF.69 1.23 billion PRs for Area Development Programmes in NWFP not included in this figure.70 This is money disbursed by ADB to the government, but much of it is still sitting somewhere (i.e., no disbursements yet fromNew Bank Fund).


Microfinance funding per donor (in US$)(Stand-alone microfinance projects and microfinance components of integrated projects)53

Commitments for microfinance2000–200554

Microfinancedisbursements

2000–200555

Disbursed funding for microfinance in fiscal year

200556

Projected Microfinancecommitments 2006–201057

(approved or not)58

WB 169,000,000 148,000,000 24,000,000 45,000,000

IFAD 0 0 0 13,200,000

UNDP 1,680,100 1,344,000 170,600 396,000

DFID 7,125,600 7,109,20059 442,90060 80,385,90061

EC 1,501,60062 174,100 174,10063 1,619,20064

IFC 4,353,000 4,353,000 1,453,000 8,800,000–13,800,00065

SDC 4,166,400 4,020,30066 1,427,40067 3,966,10068

ADB 330,000,00069 223,000,00070 5,373,000 82,000,000

USAID 9,000,000 8,600,000 3,800,000 13,300,000

Total 526,826,700 396,600,600 36,841,000 248,667,200–253,667,200

ANNEX 9—LIST OF DOCUMENTS CONSULTED

Macro

- Asian Development Bank. 1957 33271. “Strengthening Regulation, Enforcement, andGovernance of Nonbank Financial Markets Loan Pakistan Finance.” 3,000,000. Islamabad,Pakistan, 5 December 2002.

- Asian Development Bank. 3650 34329. “Institutional Strengthening of the State Bank of PakistanTechnical Assistance Pakistan Finance.” 450,000. Islamabad, Pakistan 23 April 2001.

- Asian Development Bank. “Pakistan 2005 Earthquake: Preliminary Damage and NeedsAssessment.” Asian Development Bank and World Bank, Islamabad, Pakistan, November 2005.

- Asian Development Bank. “Pakistan: Country Strategy and Program Update 2006–2008.”Islamabad, Pakistan, August 2005.

- Awais Butt, M. “European Commission Study on the Pakistan Financial Sector Reform.”Islamabad, Pakistan: European Commission, November 2003.

- Business and Finance Consulting Services. “Pakistan Financial Sector Study.” Islamabad,Pakistan: KFW Bank, June 2005.

- Government of Pakistan Finance Division Director General (Debt Office)/ E.A. “Highlights ofthe Economy and Federal Budget 2006–7.” Islamabad, Pakistan, 2006. Unpublished document.

- Government of Pakistan. “Terms of Reference for a Study on the Potential Social and PovertyImpacts of Microfinance Policies in Pakistan.” Islamabad, Pakistan, 2005.

- International Fund for Agriculture Development. “Microfinance Innovation and OutreachProgramme: Report and Recommendation of the President.” Rome, December 2005.

- International Fund for Agriculture Development. “Microfinance Innovation and OutreachProgramme: Design Document—Formulation, Main Report and Appendices.” Islamabad,Pakistan, June 2005.

- International Fund for Agriculture Development. “Microfinance Innovation and OutreachProgramme: Inception Report, Main Report and Appendices.” Islamabad, Pakistan, March 2005.

- Ahmad, Jameel. “Fit & Proper Criteria for Board Members and President/Chief Executive ofMicrofinance Banks.” Karachi, Pakistan: State Bank of Pakistan, 2005.

- Ledgerwood, J., and Victoria White. “Transforming Microfinance Institutions: Providing FullFinancial Services to the Poor.” Washington, D.C.: World Bank and MicroFinance Network,August 2006.

- Llanto, Gilberto M., et al., eds. “The Role of Central Banks in Microfinance in Asia and thePacific.” Manila, the Philippines: Asian Development Bank, 2002.

- Ministry of Economic Affairs and Statistic. “Donor Conference Pakistan 2005: Reports and otherdocuments.” Islamabad, Pakistan, 2005.

- Ministry of Economic Affairs and Statistic. “Pakistan Development Forums.” Islamabad,Pakistan, 2005–06.

- Ministry of Finance. “Accelerating Economic Growth and Reducing Poverty: The Road Ahead.”Poverty Reduction Strategy Paper. Karachi, Pakistan: Ministry of Finance, Poverty ReductionStrategy Paper Secretariat, December 2003.

- Moser, Lauren. “ShoreBank Advisory Services. Technical Proposal.” Widening HarmonizedAccess to Microfinance. Islamabad, Pakistan: United States Agency for InternationalDevelopment, February 2005.

- Pakistan Informal Microfinance Donor Group—Meetings Minutes. Islamabad, Pakistan.November 2006. Unpublished document.

- Rosenberg, Richard. Presentations of microfinance training for SBP staff. Karachi, Pakistan,2005. Unpublished document.

PAKISTAN

46

- ShoreBank Advisory Services. “3rd Quarterly Report, Widening Harmonized Access toMicrofinance.” Islamabad, Pakistan: United States Agency for International Development,January 2006.

- State Bank of Pakistan. “Application for Establishing Microfinance Banks/Institutions underMicrofinance Ordinance 2001.” Karachi, Pakistan, 2001.

- State Bank of Pakistan. “Criteria And Conditions for Grant of License for EstablishingMicrofinance Banks/Institutions.” Karachi, Pakistan, 2006.

- State Bank of Pakistan. “Forms / Documents for Accessing the New Bank Fund.” Karachi,Pakistan, 2006.

- State Bank of Pakistan. “Guidelines for Commercial Banks to Undertake MicrofinanceBusiness.” Karachi, Pakistan, 2006.

- State Bank of Pakistan. “Guidelines for Livestock Financing.” Karachi, Pakistan, August 2006.- State Bank of Pakistan. “Guidelines for Mobile Banking Operations of Microfinance Banks/

Institutions.” Karachi, Pakistan, 2003.- State Bank of Pakistan. “Guidelines for Reviewing Credit Portfolio of NGO-MFPs Interested in

Transformation into MFBs.” Karachi, Pakistan, 2006.- State Bank of Pakistan. “NGO Transformation Guidelines.” Karachi, Pakistan, 2005.- State Bank of Pakistan. “Prudential Regulations for Microfinance Banks/Institutions.” Karachi,

Pakistan, 2006.- State Bank of Pakistan. “Implications of Liberalizing Trade and Investment with India.” Karachi,

Pakistan: Research and Economic Policy Departments, 2004.- Stephens, B., et al. “Performance and Transparency: A Survey of Microfinance in South Asia.”

Washington, D.C.: Microfinance Information eXchange, Inc., January 2006.- Swiss Agency for Development and Cooperation. “Project Document: State Bank Partnership for

Microfinance 2003–06 for Building Microfinance Related Capacity.” Islamabad, Pakistan, 2002. - Wijesiriwardana, Indrajith, Rabia Khan, and Hansruedi Pfeiffer. “External Review of Financial

Sector Strengthening Programme, Phase I.” Berne, Switzerland, Swiss Agency for Developmentand Cooperation, May 2005.

- World Bank Group. “Pakistan at a Glance.” Washington, D.C., 15 September 2006. Unpublisheddocument.

- World Bank. “Pakistan—Banking Sector Development Policy Program—ImplementationCompletion Report.” Islamabad, Pakistan, January 2006.

- World Bank. “Pakistan—Country Assistance Strategy Progress Report.” Washington, D.C., April2004.

- World Bank. “Pakistan—Financial Sector Assessment.” Washington, D.C., March 2005.

Laws, Regulations, and Guidelines

- Banking Act (draft), 2006.- Banking Companies Ordinance, 1962.- Branch Licensing Policy for Banks and DFIs, 2001.- Branch Licensing Policy for Microfinance Institutions, 2002.- Companies Ordinance, 1984.- Guidelines for Commercial Banks to Undertake Microfinance Business, 2006.- Guidelines for Mobile Banking Operations of Microfinance Banks/Institutions.- Micro-Finance Bank Ordinance, 2000.- Microfinance Institutions Ordinance, 2001 (as amended in 2006).- NGO/RSPs/Cooperatives Transformation Guidelines.- Prudential Regulations for Microfinance Banks / Institutions.- State Bank of Pakistan Act, 1956.- The Non-Banking Finance Companies (Establishment and Regulation) Rules, 2003.


47

Meso

- Pakistan Microfinance Network. “Performance Indicators Report.” Islamabad, Pakistan, 2005.- PPAF. PPAF Annual Report 2005. Islamabad, Pakistan, 2005. - World Bank. “PPAF Project Appraisal.” Report No. 27176. Washington, D.C., October 2003.- World Bank. “PPAF, Updated Project Information Document.” Report No. 34261. Washington,

D.C., July 2005.

Micro

- ACCION International. “Kashf Foundation-Institutional Assessment and Transformation Plan.”Islamabad, Pakistan: Financial Sector Strengthening Programme, Swiss Agency for Developmentand Cooperation, October 2005.

- Asian Development Bank. 0954. “Study of the Federal Bank for Cooperatives TechnicalAssistance Pakistan Finance.” 350,000. Islamabad, Pakistan, February 1988.

- Asian Development Bank.1805 29229. “Microfinance Sector Development Program—ProgramLoan, Pakistan Finance.” 70,000,000. Islamabad, Pakistan, December 2000.

- Asian Development Bank. 1806 29229. “Microfinance Sector Development Program—ProjectLoan, Pakistan Finance.” 80,000,000. Islamabad, Pakistan, December 2000.

- Asian Development Bank. 1987 36075. “Rural Finance Sector Development Program—ProjectLoan, Pakistan Finance.” 225,000,000. Islamabad, Pakistan, December 2002.

- Asian Development Bank. 1988 36075. “Rural Finance Sector Development Program—ProjectLoan, Pakistan Finance.” 25,000,000. Islamabad, Pakistan, December 2002.

- Ford Rhodes Sidat Hyder & Co. “National Rural Support Programme: Final Report—Institutional Assessment Study for the Proposed Microfinance Bank, Financial Sector.Strengthening Programme.” Islamabad, Pakistan: Swiss Agency for Development andCooperation, June 2005.

- Ford Rhodes Sidat Hyder & Co. “National Rural Support Programme: Business Plan—FinancialProjections, Financial Sector Strengthening Programme.” Islamabad, Pakistan: Swiss Agency forDevelopment and Cooperation, June 2005.

- Japan Fund for Poverty Reduction. “Microfinance for the Poorest in Pakistan—Grant.” Manila,the Philippines: Asian Development Bank, 2006.

- K-Rep Advisory Services. Africa Limited. “National Rural Support Programme—Assessment ofthe Governance Structure and Human Resources, Financial Sector Strengthening Programme.”Islamabad, Pakistan: Swiss Agency for Development and Cooperation, June 2005.

- Qadir, A. “A Study of Informal Finance Markets in Pakistan.” Islamabad, Pakistan: PakistanMicrofinance Network, November 2005.

- Sihna, Sanjay. “Micro-Credit Ratings International Ltd. Development Action for Mobilizationand Emancipation.” Lahore, Pakistan: Pakistan Microfinance Network, Department forInternational Development, April 2006.

- Sihna, Sanjay. “Micro-Credit Ratings International Ltd. Thardeep Rural DevelopmentProgramme.” Mithi, Tharparker, Pakistan: Pakistan Microfinance Network, Department forInternational Development, April 2006.

- Swiss Agency for Development and Cooperation. “Pakistan Financial Sector StrengtheningProgramme.” Bern/Islamabad, 6 December 2005.

- Swiss Agency for Development and Cooperation. “Financial Sector Strengthening Programme,Project Document-Phase II, January 2006–December 2008.” Islamabad, Pakistan, November2005.

- Swiss Agency for Development and Cooperation. “Financial Sector Strengthening Programme,Logical Framework Matrix—Phase II, January 2006–December 2008.” Islamabad, Pakistan,October 2005.

PAKISTAN

48

- Swiss Agency for Development and Cooperation. “Pakistan: Leasing to Micro and SmallEnterprises, Credit Proposal—Phase III (1st October 2003 to 30th September 2007).” Islamabad,Pakistan, August 2003.

- Swiss Agency for Development and Cooperation. “Pakistan: Leasing to Micro and SmallEnterprises, Logical Framework—Phase III (1st October 2003 to 30th September 2007).Islamabad, Pakistan, August 2003.

- United Nations Development Programme. MoU for the “Women Access to Capital andTechnology Project” with the First Microfinance Bank Limited and Orix Leasing PakistanLimited, March 24, 2005–March 23, 2006. Islamabad, Pakistan, March 2005.

- United Nations Development Programme. “Project Document: Women Access to Capital andTechnology 1997–2006, Sub-Substantive Revision, NEX: First Women Bank Limited.”Islamabad, Pakistan, January 2003.

Aid Effectiveness

- CGAP. Good Practice Guidelines for Funders of Microfinance, 2nd edition. Washington, D.C.,October 2006.

- Duflos, Eric, Brigit Helms, Alexia Latortue, and Hannah Siedek. “Global Results: Analysis andLessons.” CGAP Aid Effectiveness Initiative. Washington, D.C.: CGAP, 2004.

- Flaming, M. “Guaranteed Loans to Microfinance Institutions: How Do They Add Value?” FocusNote 40. Washington, D.C.: CGAP, January 2007.

- Helms, Brigit, and Alexia Latortue. “Elements of Donor Effectiveness in Microfinance: PolicyImplications.” Aid Effectiveness Initiative. Washington, D.C.: CGAP, 2004.

- Cook, Tamara, with input from CGAP staff. “Maximizing Aid Effectiveness in Microfinance.”Donor Brief 22. Washington, D.C.: CGAP, February 2005.

General

- Christen, Robert Peck, Richard Rosenberg, and Veena Jayadeva. “Financial Institutions with aDouble Bottom Line: Implications for the Future of Microfinance.” Occasional Paper 8.Washington, D.C.: CGAP, July 2004.

- Franco-Rodriguez, Susana, Olivier Morrissey, and Mark McGillivray. “Aid and the Public Sectorin Pakistan: Evidence with Endogenous Aid.” World Development, 26 (7):1241–50, 1998.

- Government of Pakistan Planning Commission. “The MTDF 2005-10: An Overview.” Islamabad,Pakistan, 2005.

- Kemal, A. R. “Structural Adjustment, Macroeconomic Policies, and Poverty Trends in Pakistan,Asia and Pacific Forum on Poverty: Reforming Policies and Institutions for Poverty Reduction.”Manila, the Philippines: Asian Development Bank, 5–9 February 2001.

- World Bank and Independent Evaluation Group. “Pakistan: An Evaluation of the World Bank’sAssistance.” Washington, D.C., 2006.

Research Studies/Surveys

- Asian Development Bank. “Microfinance in Pakistan: A Poverty Impact Study of the KhushhaliBank.” Islamabad, Pakistan, 2005.

- Center of Excellence in Microfinance/Institute of Management Sciences, Peshawar. “Causes ofDelinquency.” Peshawar, Pakistan: Financial Services Sector Reform Programme and FinancialSector Strengthening Programme, 2006.

- Hussien, Maliha, and Sazreh Hussain. “The Impact of Micro Finance on Poverty and GenderEquity; Approaches and Evidence.” Islamabad, Pakistan: Pakistan Microfinance Network,December 2003.


49

- Kashf Foundation. “Market of Microfinance; Analysis of the Punjab.” Lahore, Pakistan: KashfFoundation, May 2006.

- Noor, Fazal. “Civil Society Human and Institutional Development Programme. Causes of HighRate of Drop-out amongst MicroFinance Borrowers, Pakistan Financial Services Sector ReformProgramm.” Islamabad, Pakistan: European Commission, 2006.

- Oxford Policy. “Poverty and Social Impact Assessment: Pakistan Microfinance Policy.”Management Inception Report. London, United Kingdom: DFID, January 2006.

- Pakistan Microfinance Network. “The Microfinance Spotlight.” Islamabad, Pakistan, July 2006. - Pakistan Microfinance Network. “The Demand for Microinsurance in Pakistan.” Islamabad,

Pakistan, March 2006. - Pakistan Microfinance Network. “A Recent Analysis on Amendments to MFI Ordinance 2001.”

Islamabad, Pakistan, 2006.- Pakistan Microfinance Network. “Microfinance Performance in Pakistan 1999–2005: Growth but

a Structural Flaw Persists.” Islamabad, Pakistan: Pakistan Microfinance Network and ShoreBankInt., 2006.

- Pakistan Microfinance Network. “Position Paper # 1: Regulating Microfinance.” Islamabad,Pakistan, November 2002.

- Rasmussen, Stephen, and Greg Chen. “Emerging Issues for National Microfinance Associations.”Islamabad, Pakistan: Pakistan Microfinance Network and ShoreBank Int., August 2005.

- Seible, Hans Dieter. “Islamic Microfinance in Indonesia.” Eshborn, Germany: DeutscheGesellschaft für Technische Zusammenarbeit GmbH, 2005.

- ShoreBank Int. “How Big Is the Microfinance Market in Pakistan: Estimates of Demand.”Islamabad, Pakistan, 2006.

- ShoreBank International. “10 Years of Microfinance.” Islamabad, Pakistan, 2006.- The Central Bank of the Republic of Indonesia. “The Blueprint of Islamic Banking Development

in Indonesia.” Jakarta, Indonesia, September 2002.- Timberg, Thomas. “A Case Study. Risk Management: Islamic Financial Policies; Islamic Banking

and Its Potential Impact.” Washington D.C., Nathan Associates, Inc., USAID, 2002.- Zaidi, S. Akbar. “Microcredit for Development Orangi Pilot Project.” Karachi, Pakistan: OPP-

RTI, 2003.

PAKISTAN

50

ANNEX 10—LIST OF PERSONS CONSULTED


51

Organization Last Name First Name Title Email

Government

Earthquake Reconstruction and Rehabilitation Authority Chaudary Liaqat Chairman Not available

Ministry of Finance Shah Salman Advisor to Prime Minister [email protected]

Ministry of Finance Hussain MuhammadIqbal

Senior Joint Secretary [email protected]

Ministry of Women Development Mahmood Salim Secretary Not available

Securities & Exchange Commission of Pakistan Shaheen Nazir Executive Director Not available

Securities & Exchange Commission of Pakistan Chaudary Naveed Director [email protected]

Securities & Exchange Commission of Pakistan Saeed Akif Executive Director [email protected]

Securities & Exchange Commission of Pakistan Sufi Shoaib Director [email protected]

State Bank of Pakistan Akhtar Shamshad Governor Not available

State Bank of Pakistan Ahmed Jameel Executive Director [email protected]

State Bank of Pakistan Ashraf Khan Muhammad Director, SMED Not available

State Bank of Pakistan Siddique Saeed Project Manager [email protected]

State Bank of Pakistan Iqbal Amjad Joint Director [email protected]

State Bank of Pakistan Ali Syed Mansoor Joint Director [email protected]

State Bank of Pakistan Said Pervaiz Advisor toGovernor [email protected]

State Bank of Pakistan Shafqat Mufti Mahmood Joint Director [email protected]

State Bank of Pakistan Nawaz Qasim Director [email protected]

State Bank of Pakistan Ali Syed Irfan Director [email protected]

State Bank of Pakistan Ahmad Qazi Shoaib Junior Joint Director [email protected]

State Bank of Pakistan Hussain Inayat Director [email protected]

State Bank of Pakistan Khokhar Zulfiqar Joint Director [email protected]

State Bank of Pakistan Kureshi Azhar Advisor to the Governor [email protected]

State Bank of Pakistan Khan Mahmood-ul-Quddus Assistant Director [email protected]

State Bank of Pakistan Akram Bakshi Kamaran Joint Director [email protected]

State Bank of Pakistan Rahim Abdul Junior Joint Director Not available

PAKISTAN

52


Donors

Asian Development Bank Rogers Julie Principal Financial Sector Specialist [email protected]

Asian Development Bank Lewis Sukanda Financial Economist [email protected]

Asian Development Bank Hashimi AzimProjectImplementationOfficer

[email protected]

Department for International Development Sharif Haroon Economic Adviser [email protected]

European Commission Benz Balthasar Head of Delegation (Acting) [email protected]

European Commission Ara Roshan Program Officer [email protected]

International Finance Corporation Muzaffar Ayesha Senior Investment

Officer [email protected]

International Fund for Agriculture Development Brett Nigel Country Program

Manager [email protected]

International Fund for Agriculture Development Johanson Horward Consultant [email protected]

International Fund for Agriculture Development Hussain Maliha Consultant Not available

International Labour Organization Li Donglin Director [email protected]

International Labour Organization Shah Dr. Tauqir

HussienNational Project Coordinator [email protected]

Japan Bank for International Cooperation Chiyo Mamiya Consultant [email protected]

Swiss Agency for Development & Cooperation Kohli Richard Deputy Country

Director [email protected]

Swiss Agency for Development & Cooperation Bugnard Denis Country Director [email protected]

Swiss Agency for Development & Cooperation Bokharey Kanwal Program Officer [email protected]

United Nations Development Programme Effendi Faiza

Assistant Resident Representative/Chief Poverty Reduction and Gender Unit

[email protected]

United Nations Development Programme Xu Haoliang Country Director [email protected]

United Nations Development Programme Khattak Rabia Program Officer [email protected]

United States Agency for International Development Meyer Amy Economic Growth

Office Director [email protected]

United States Agency for International Development Qazi Farid Economic Growth

Specialist [email protected]


53


World Bank Rasmussen Stephen F. Lead Specialist Social Development [email protected]

World Bank Wall John Country Director [email protected]

World Bank Isa Qazi AzmatSenior Community DevelopmentSpecialist

[email protected]

World Bank Khan IsfandyarPrivate Sector DevelopmentSpecialist

[email protected]

Projects (Supported by Donors)

Financial Sector StrengtheningProgramme, SDC

Nawaz Khalid Project Director [email protected]

Pakistan Financial Services Sector Reform Programme, EC

Butt MohammadAwais

MicrofinanceExpert

[email protected] / [email protected]

INGOs

Agency for Technical Cooperation & Development

Yaqobi M. Mahir Deputy Country Director [email protected]

Bangladesh Rural AdvancementCommission

Chowdhury Md. Mahfuzul Bari

ProgramCoordinator - Social DevelopmentProgram

[email protected]

Islamic Relief Hasan Shazia Senior Program, Officer Microfinance [email protected]

Islamic Relief Jedrashv Shpend Program Officer Not available

Islamic Relief Ghaffar Abdul Assistant Program Officer Not available

Plan International -Pakistan Office Sherin Nasim Microfinance

Advisornasim.sherin@plan- international.org

Save the Children, USA Gillani Kashif Asst. Manager Grants Compliance [email protected]

Save the Children, USA Aziz BabarDeputy Country Director Finance & Admin

[email protected]

Development Banks/ Commercial Banks/ Leasing Companies

Adamjee Insurance Company Limited Hussain Shaila Joint Senior shaila.hussain@

adamjeeinsurance.com

Adamjee Insurance Company Limited Jabbar Asif Deputy General

Manager [email protected]

Adamjee Insurance Company Limited Naseem Imran Deputy Manager [email protected]

Adamjee Insurance Company Limited Sultan Captain

MahmoodSenior General Manager [email protected]

PAKISTAN

54


Crescent Leasing Corporation Limited Rizvi Shah Nawaz Senior Vice

President [email protected]

First Microfinance Bank Ltd. Nawaz Inshan Ali Chief Executive


First Women Bank Limited Awan Suhail Head of

Microfinance [email protected]

Khushhali Bank Nishtar Ghalib President [email protected]

Khushhali Bank Hassan Amina Area Sales Manager [email protected]

National Bank of Pakistan Rabbani Kamran

AVP/ProductManager-SMERetail Banking Group

[email protected]

Network Microfinance Bank Limited Tariq Sohail Branch Manager [email protected]

Orix Leasing Pakistan Ltd. Qasim Aseya Head of Microfinance

[email protected],[email protected]

Orix Leasing Pakistan Ltd. Din GhiasGeneral Manager,E-BusinessDivision

[email protected]

Orix Leasing Pakistan Ltd. Subhan Nasir Accounts manager (eBusiness) [email protected]

Pak-Oman MicrofinanceBank Bilgrami Sajjad Head of Risk

Management [email protected]

Shorebank Chen Gregory Chief of Party, WHAM Pakistan [email protected]

Shorebank Burki Hussan Bano MicrofinanceConsultant Not available

SME Bank LTD Ghazali Marghoob Chief financial Officer [email protected]

Tameer Microfinance Bank Ltd Mustafa Shahid Group Executive


Tameer Microfinance Bank Ltd Sikander Ali Abbass Group Executive


Zarai Taraqiati Bank Limited (ZTBL) Chohan Nadeem

Executive Vice President -Operations

[email protected]

Zarai Taraqiati Bank Limited (ZTBL) Hussain Matloob In charge Project

Implementation Unit [email protected]

MFPs (NGOs & non bank financial institutions)

Development Action for Mobilization and Emancipation

Rashid Nagma Chief Executive [email protected]

Jinnah Welfare Society Shoaib Qazi Executive Director [email protected]

Kashf Foundation Kabeer Khalid Chief financial Officer [email protected]


55


Kashf Foundation Azim Kamran ManagerOperations [email protected]

National Rural Support Programme Bajwa Rashid Chief Executive


National Rural Support Programme Javad Ahga Ali General Manager [email protected]

Orangi Pilot Project Rashid Anwar Director [email protected]

Orangi Pilot Project Baig Javed Joint Director [email protected]

Organization for Participatory Development Halib Aliya Program Manager [email protected]

Punjab Rural Support Programme Tetly Khalil Chief Operating


Punjab Rural Support Programme Mahmood Nasire General Manager [email protected]

Sarhad Rural Support Programme ul-Malik Masood Chief Executive

[email protected];[email protected]

Training and Technical Service Providers (Auditors)

Agha Khan Agency for Microfinance/Independent Jiwani Salim Technical Advisor [email protected]

Anjum Asim Shahid Associates (Pvt). Ltd Khan Shahid Partner [email protected]

Center of Excellence in Microfinance /Institute of Management Sciences

Khan Dr. Mohsin Joint Director [email protected]

FACET BV Loeff Adriaan Managing Director [email protected]

Independent consultant Spareboom Pete Consultant [email protected]

Institute of Bankers of Pakistan Ali Johar Director [email protected]

International Islamic University Zaman Khaleeq Head of School of

Banking and Finance [email protected]

Lahore University of Management Sciences Abdul Ghani Dr. Jawaid Dean [email protected]

Leasing Association of Pakistan Haider Tahira Program

Coordinator [email protected]

National Institute of Banking & Finance Muqtadir Qazi Chief Executive [email protected]

Pakistan Microfinance Network Ahmed Mohsin General Manager [email protected]

Pakistan Microfinance Network Shah Mehr Capacity Building

Specialist [email protected]

Rural Support Programmes Network Khan Shandana Chief Executive


Sindh Microfinance Network Nizamani Muhammad

AliNetworkCoordinator [email protected]

PAKISTAN

56


Wholesalers

Orangi Charitable Trust Rashid Anwar Director [email protected]

Orangi Charitable Trust Baig Javed Joint Director [email protected]

Pakistan Poverty Alleviation Fund Hayat Kamal Chief Executive [email protected]

Pakistan Poverty Alleviation Fund Jamal Ahmad Chief Operating


Pakistan Poverty Alleviation Fund Baluch Tariq Khan

General Manager, Credit & Enterprise Development

[email protected]

Pakistan Poverty Alleviation Fund Akbar Kamran

General Manager, Human & InstitutionalDevelopment

[email protected]

Pakistan Poverty Alleviation Fund Iqbal Khalid General Manager [email protected]

Pakistan Poverty Alleviation Fund Nadeem Mohammad Manager CPI [email protected]

Pakistan Poverty Alleviation Fund Sabir Farid Manager Credit [email protected]

Pakistan Poverty Alleviation Fund Afridi Kanwal Manager PMG kanwal.afridi.org.pk

Pakistan Poverty Alleviation Fund Siddique Saqib SME- CED [email protected]

Pakistan Poverty Alleviation Fund Arif Umbreen General Manager

Education & Health [email protected]

Others

Access Group Ali Abbas Head of Technology [email protected]

Akhuwat Saqib MuhammadAmjad Executive Director [email protected]

Akhuwat Ranjha Saleem Director [email protected]

Vellani & Vellani Vellani Badruddin Partner [email protected] & [email protected]

Vellani & Vellani Bhadha Ferzeen Not available [email protected]

The Consultative Group to Assist the Poor1818 H Street, NW, MSN P3-300, Washington, DC 20433 USA

Tel: 202 475 9594 Fax: 202 522 3744

Paris Office66, Avenue d’Iena

75116 ParisTel: 33 (0) 1 40 69 32 73 Fax: 33 (0) 1 40 69 32 76

www.cgap.org

For more information on CLEARs contact: Eric Duflos ([email protected]) or Alexia Latortue ([email protected])

[email protected]