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  2. 2. Microfinance objective Microfinance Features Microfinance Clients List of Microfinance Institutions MFI and Commercial banks Microfinance Globally and in Recession Funding of Microfinance Shortcoming of Microfinance SBP initiatives for Pakistani MFI Actions for Pakistani MFI
  3. 3. Microfinance 0bjectives… <ul><li>low-income households‘: permanent access high quality financial services </li></ul><ul><li>to finance their income-producing activities, build assets </li></ul><ul><li>stabilize consumption </li></ul><ul><li>protect against risks </li></ul><ul><li>not limited to credit, but include savings, insurance, and money transfers. </li></ul>
  4. 4. Microfinance Features… <ul><li>financial services : poor & low-income clients. </li></ul><ul><li>very small loan : unsalaried borrowers-collateral </li></ul><ul><li>include group lending and liability </li></ul><ul><li>pre-loan savings requirements </li></ul><ul><li>gradually increasing loan sizes </li></ul>
  5. 5. Examples OF Microfinance Features… <ul><li>Micro Business Loan </li></ul><ul><li>Micro Agri Loan </li></ul><ul><li>Micro Assets Loan </li></ul><ul><li>Livestock Loan </li></ul><ul><li>New Micro Business Loan </li></ul><ul><li>Loan Amount : 10,000 - 40,000 </li></ul><ul><li>Loan Tenure :3 – 24 Months </li></ul><ul><li>Loan Amount3, 000 – 5,000 Loan Tenure3 – 6 Months </li></ul>PAK OMAN MICROFINANCE BANK
  6. 6. Microfinance clients… <ul><li>Poor & low-income people </li></ul><ul><li>usually self-employed </li></ul><ul><li>Micro-entrepreneurs </li></ul><ul><li>near the poverty line, both above and below </li></ul><ul><li>Women : majority of clients. </li></ul>
  7. 7. Example of Microfinance clients TAMEER MICROFINANCE BANK
  8. 8. Institutions delivering microfinance? <ul><li>MFIs started as not-for-profit organizations </li></ul><ul><li>MFIs are now organized as for-profit entities </li></ul><ul><li>Because: license from banking authorities to offer savings services. </li></ul>
  9. 9. Examples of Institutions delivering microfinance ? <ul><li>Pakistan : Khushali Bank </li></ul><ul><li>India : SEWA Bank </li></ul><ul><li>Chile : BancoEstado </li></ul><ul><li>Mexico : CompartamosBanco </li></ul>
  10. 10. MFIs, Interest rates are highest? <ul><li>administrative cost : making tiny loans is much higher in percentage terms than the cost of making a large loan. </li></ul><ul><li>Credit decisions for borrowers who have neither collateral nor a salary cannot be based on automated scoring </li></ul><ul><li>Microcredit market matures in a given country, administrative costs usually drop </li></ul>
  11. 12. Recession hits Microfinance GLOBAL FACTS, 20 TH MARCH 09 <ul><li>25% MFIs decreased lending </li></ul><ul><li>20% MFI reduced staff </li></ul><ul><li>37% MFI have reduced their growth plans </li></ul><ul><li>41% MFI have began charging higher interest rates </li></ul><ul><li>Cambodia, loan growth from 61% to 10% </li></ul>
  12. 13. Recession hits Microfinance <ul><li>East Asia and the Pacific </li></ul><ul><li>KOREA </li></ul><ul><li>US$73 million in direct loans and guarantees to MFIs </li></ul><ul><li>MFIs in Korea should experience relatively lower liquidity </li></ul>
  13. 14. Recession hits Microfinance <ul><li>Eastern Europe and Central Asia </li></ul><ul><li>Mongolia </li></ul><ul><li>larger MFIs, successfully met the new requirements </li></ul><ul><li>less well-established MFIs may find this challenging </li></ul>
  14. 15. Recession hits Microfinance <ul><li>Latin America and the Caribbean </li></ul><ul><li>Colombia </li></ul><ul><li>region lags in terms of deposit-taking </li></ul><ul><li>removing restrictions on foreign lending and lowering interest rates </li></ul>
  15. 16. Recession hits Microfinance <ul><li>Middle East and North Africa </li></ul><ul><li>operate in highly regulated & insulated financial markets </li></ul><ul><li>we can expect less of an impact from the global financial crisis </li></ul>
  16. 17. Recession hits Microfinance <ul><li>South Asia </li></ul><ul><li>India </li></ul><ul><li>MFI , foreign lending restrictions to non-bank financial companies </li></ul><ul><li>Rupee depreciate to slow the outflow of capital </li></ul>
  17. 18. Recession hits Microfinance South Asia India
  18. 19. MFI funded by? <ul><li>Debt </li></ul><ul><li>Deposits, </li></ul><ul><li>Equity </li></ul>
  19. 20. MFI funded by? <ul><li>DEBT based: </li></ul><ul><li>depend upon fixed-income investment - greatest risk </li></ul><ul><li>less available debt capital & offered at higher interest rates </li></ul><ul><li>Foreign loans, requiring repayment in hard currency at a moment of devalued domestic currencies </li></ul><ul><li>leaving MFIs to bear the foreign exchange risk </li></ul>
  20. 21. MFI funded by? <ul><li>DEPOSIT based: </li></ul><ul><li>Challenged by inflation, food and fuel price volatility </li></ul><ul><li>decrease in remittance flows </li></ul><ul><li>local currencies in developing countries lose value, clients will find it increasingly difficult to maintain savings levels </li></ul><ul><li>Deposits declines and non-performing loans increases - clients require additional capital to cover basic needs.    </li></ul>
  21. 22. MFI funded by? <ul><li>Equity-based </li></ul><ul><li>Initially , low default rates and strong profit margins </li></ul><ul><li>MFIs enjoyed higher net interest margins </li></ul><ul><li>Now , compressed NIMs & higher lending rates </li></ul><ul><li>Impact - pressure on profit margins and make microfinance less attractive to equity investors </li></ul>
  22. 23. Shortcomings of Micro financing <ul><li># 1 </li></ul>move toward deposit mobilization to increase funds for on-lending MFIs On donor assistance to grow, which though necessary at infancy stage is an unsustainable approach to long-term development. Dependent Is still young industry
  23. 24. Shortcomings of Micro financing <ul><li># 2 </li></ul>will eventually impact cost of lending for MFIs and MFBs as they move towards commercial funding cost of borrowing is especially important in the current environment of the global financial crisis cost-efficiency
  24. 25. Shortcomings of Micro financing <ul><li># 2 </li></ul>
  25. 26. Shortcomings of Micro financing <ul><li># 3 </li></ul>must also be strengthened to provide quality microfinance services. Human resource capacity deficiency exists for microfinance not only in the form offunding Resource
  26. 27. Shortcomings of Micro financing <ul><li># 3 </li></ul>
  27. 28. Shortcomings of Micro financing <ul><li># 4 </li></ul>will have to be critically examined and addressed in order to make microfinance’s ability to fight poverty more meaningful. concerns over gender
  28. 29. Shortcomings of Micro financing
  29. 30. Shortcomings of Micro financing <ul><li># 5 </li></ul>Mexican banks are charging anyway from 50% to 120% annual interest on loans. lack of regulations
  30. 31. Shortcomings of Micro financing <ul><li># 6 </li></ul>due to limited infrastructure and the complications of religious and political pressure; reaching remote areas
  31. 32. Facts about Pakistan till december 2008 <ul><li>MFI has 1.8 million customers </li></ul><ul><li>microfinance borrowers: 3 million by 2010 & 10 million by 2015. </li></ul><ul><li>Pakistan , leader in the Asian region in commercialized microfinance </li></ul><ul><li>first country - to introduce a comprehensive legal, regulatory, and supervisory framework for formal microfinance in Asia. </li></ul>
  32. 33. SBP initiatives for the Promotion of Microfinance <ul><li>Sustainable cost-covering operating/business model; </li></ul><ul><li>2) Mobilize private domestic capital; </li></ul><ul><li>3) Build human resource systems. </li></ul>
  33. 34. SBP initiatives for the Promotion of Microfinance <ul><li>4) </li></ul><ul><li>Financial Inclusion Program </li></ul><ul><li>aimed at eliminating market failures. </li></ul><ul><li>A £50 million program funded by the UK </li></ul><ul><li>for financial services for poor ,marginalized groups and for small enterprises </li></ul>
  34. 35. SBP initiatives for the Promotion of Microfinance <ul><li>5 ) Branchless Banking Regulations -promote banking in remote areas using technology. </li></ul><ul><li>6 ) SBP encouraged microfinance institutions to transform into regulated entities </li></ul>
  35. 36. SBP initiatives for the Promotion of Microfinance <ul><li>7) </li></ul><ul><li>SBP encouraged partnerships between the post office (PO) network and MFI </li></ul><ul><li>Post Offices, manages 4 million savings accounts </li></ul><ul><li>small accounts below Rs 10,000, through more than 12,000 branches. </li></ul><ul><li>There is scope for the Post Office and MF providers to join forces </li></ul><ul><li>with the MFI acting as intermediaries for funds raised by POs </li></ul>
  36. 37. SBP initiatives for the Promotion of Microfinance <ul><li>8) International players including BRAC and ASA who have already started microfinance operations in Pakistan </li></ul><ul><li>9) Micro finance focal group - with an independent head and qualified staff </li></ul>
  37. 38. SBP ACTIONS FOR Microfinance <ul><li>SBP in December’08 launched : </li></ul><ul><li>1) The Microfinance Credit Guarantee Facility </li></ul><ul><li>2) The Institutional Strengthening Fund; and </li></ul><ul><li>3) The Improving Access to Finance Services Fund </li></ul>
  38. 39. SBP ACTIONS FOR Microfinance <ul><li>The Microfinance Credit Guarantee Facility </li></ul><ul><li>expected to increase the flow of credit to microfinance sector </li></ul><ul><li>Commercial banks are allowed options to undertake microfinance business directly and in partnership with MFIs by providing wholesale funds to them </li></ul>
  39. 40. SBP ACTIONS FOR Microfinance <ul><li>The Microfinance Credit Guarantee Facility </li></ul><ul><li>standalone MF Branches, establishment of independent subsidiary MFB &linkage with NGO </li></ul><ul><li>build links between micro borrowers and formal financial institutions. </li></ul><ul><li>provide partial Guarantee to minimize the perceived risk premium by covering part of the losses incurred on funds made available to MFIs </li></ul>
  40. 41. SBP ACTIONS FOR Microfinance <ul><li>The Institutional Strengthening Fund </li></ul><ul><li>build capacity of the microfinance sector </li></ul><ul><li>improving human resource quality, service delivery and increasing service availability to potential microfinance clients. </li></ul><ul><li>fund is established at the State Bank under the UK Government’s Financial Inclusion Program </li></ul>
  41. 42. SBP ACTIONS FOR Microfinance <ul><li>The Institutional Strengthening Fund </li></ul><ul><li>generate on-lending resources through commercial sources, equity investments or deposit mobilization strategy </li></ul><ul><li>provide grants for employing cost reduction mechanisms </li></ul>
  42. 43. SBP ACTIONS FOR Microfinance <ul><li>Improving Access to Financial Services </li></ul><ul><li>promote financial literacy </li></ul><ul><li>Capacity building and training of Government and regulatory authorities </li></ul><ul><li>training of financial services providers to promote expansion into rural areas; product and service innovation </li></ul>
  43. 44. <ul><li>Globally , according to a survey, still 80% of the investors have their money in MFIs. </li></ul><ul><li>Finally… </li></ul><ul><li>In Pakistan , SBP initiatives have strong </li></ul><ul><li>support of the industry simply because of the partnership we have with the Pakistan Micro Finance industry and network . </li></ul>