Evolution of microfinance in Pakistan

Evolution of microfinance in Pakistan

By Amer Saleem Khan and Stefan Platteau

The microfinance movement in Pakistan followed a unique evolutionary path over the last decades. In the proceeding paragraphs we present the three development phases of the sector. Each phase represents entry of new institutional forms and structures in the Pakistani microfinance sector. The adjacent diagram shows some of the highlights of this 30 year old history.

Phase-1: 1970s

Government directed credit

The use of finance (mostly credit) as a development tool has a history in Pakistan in the form of government directed/subsidised credit schemes particularly in rural areas. In recent years Small Business Finance Corporation (SBFC), Youth Investment Promotion Society (YIPS), Self Employment Scheme (SES) and Yellow Cab Scheme are typical examples. While SBFC and YIPS represent a direct institutional intervention through use of public funds and institutional structures, SES and Yellow Cab schemes represent indirect government pressures on financial institutions, both public and private, to engage in politically motivated directed credit. In the last two initiatives, the government literally forced commercial financial institutions (mostly public sector) to provide concessionary financing especially to unemployed youth and business start-ups. The loan defaults associated with these schemes affecting the financial institutions profitability has been extensively reported in the popular press.

Phase – 2: early 1980’s to mid 1990’s – philanthropy of finance

The emergence of the Pakistani microfinance sector is usually traced to two pioneering development institutions – The Aga Khan Rural Support Program (AKRSP) and the Orangi Pilot Project (OPP).

The early pioneers

Established in 1982 by the Aga Khan Foundation (http:// http://www.akdn.org/), AKRSP was the first Integrated Rural Development Program of its kind, outside the government domain. It has focused its development interventions on the Northern Areas of Pakistan. The later day Rural Support Programs (RSPs), initiated by the government, were inspired by the AKRSP model of rural development. The first large scale practical implementation and conceptualisation of development frameworks such as “social mobilisation” and “group lending methodology” can be traced to AKRSP’s microfinance model initiated in 1982.

While AKRSP pioneered development service provision in the rural, agrarian frontiers of north Pakistan, OPP took up the challenge of tackling urban poverty in the biggest slum settlement in Pakistan’s port city and commercial capital – Karachi. OPP was established by Akhtar Hameed Khan, considered to be the father of rural development in Pakistan. OPP was established in 1987 and its development services include housing, sanitation and education.

The RSP model

AKRSP formulated and implemented integrated development approach whereby rural population was organised into Village Organisations (VOs) and the needs prioritised by these community organisations were provided for through a broad range of development services such as education, health, sanitation as well as financial services (microfinance). AKRSP endeavoured to develop human, social and financial capital of the communities it worked with. This integrated approach was replicated by government initiated development organisations called Rural Support Programs (RSPs). By 2004, RSPs were working with more than 43,000 community organisations comprising of more than 1,000,000 households.

Sarhad Rural Support Program (SRSP) was the first RSP to be established in 1989 as a replication of AKRSP model in the North-West Frontier Province of Pakistan. In the same year a Pak German development project was restructured as an RSP and renamed as Balochistan Rural Support Program (BRSP). Later on Punjab Rural Support Program (PRSP) was also launched by the Government of the Punjab province.

The establishment of National Rural Support Program (NRSP) (www.nrsp.org.pk) in 1992 has a special significance. While SRSP and BRSP had provincial focus, NRSP was meant to be the largest national RSP with development interventions including a very ambitious microfinance program all over Pakistan.

The rural focused microfinance operations of NRSP have expanded into urban areas as well under its Urban Poverty Alleviation Program (UPAP).

With the above mentioned perspective, the microfinance strategy during the early 1990’s has certain common elements; the word “microcredit” was used instead of microfinance symbolising provision of only loans (and compulsory savings) as a social service equivalent to other development needs such as education, health, sanitation etc. Microfinance best practices as we know them today were still in their formative stages and had not crystallised into a coherent set of principles and frameworks even at the international level.

The involvement of the leasing sector

Till the early 1990’s microfinance remained mostly an “NGO Activity”. Pioneers such as AKRSP and OPP had set the stage further taken forward by other RSPs. But essentially, microfinance involves financial intermediation. Some NGOs had taken up one side of this intermediation – loans. While a few, including AKRSP, not only provided loans but also mobilised savings from its clients to be deposited in commercial banks.

The first foray into microfinance by a regulated financial institution was made by a leasing company – Network Leasing Corporation (NLCL), established in 1995, specifically for providing microleasing services to small businesses throughout Pakistan. The latest annual report of NLCL shows credit lines from Deutsche Bank Microfinance Fund, Swiss Agency for Development and Cooperation (SDC), and Pakistan Poverty Alleviation Fund (PPAF).

OLP is a leading financial service company with an array of products. Established in 1986, OLP is a listed Pakistani leasing company sponsored by ORIX Corporation Japan – an integrated financial service company with over $50 billion assets spread over 23 countries.

By mid 1990’s microfinance attracts tremendous interest from the donor community as a tool for poverty alleviation with a unique promise of financial sustainability, hence a “double bottom line”. The global microfinance industry started gaining momentum and best practices started taking shape.

Phase-3: late 1990’s till the present – entry of the specialist MFI

The later part of 1990’s saw the entry of regulated financial institutions such as commercial banks and leasing companies in the microfinance arena. Mostly urban based microfinance – only programs also came up in major cities of Pakistan. Regulatory structures started taking shape, spawning a new microfinance institutional structure – The Microfinance Bank (MFB).

Entry of commercial banks

Commercial banks did not fail to join the microfinance bandwagon. Their social finance initiatives took two shapes:

— Banks providing credit lines to NGO MFIs for on-lending as microfinance loans

— Banks providing direct/retail finance to poor people.

Habib Bank can be considered a pioneer in the indirect lending strategy. It had provided a credit lines to NRSP for on-lending as microfinance loans to rural communities in 1999 – 2000 period. However, the role of commercial banks as wholesalers of funds to MFIs have somewhat waned due to the emergence of the Pakistan Poverty Fund. (PPAF) in 2000, which provides concessionary funding to MFIs for a variety of development interventions including microfinance.

The Bank of Khyber (BOK) and the First Women Bank (FWBL), both public sector banks with a development mandate, established direct microfinance windows. In terms of outreach, expansion and institutional development, BOK was the most aggressive achieving successful linkages with major donors and their multisectoral Area Development Programs such as the Asian Development Bank (ADB) and IFAD.

FWBL has a “unique charter” as a commercial bank with a development mandate for the uplift of the women in Pakistan. Its shareholding includes not only all major banks in Pakistan but also The Ministry of Women Development. This shareholder has always been particularly keen on prodding the bank towards taking up social finance activities.

The Microfinance Banks (MFB)

While those familiar with the financial sector see limited success of commercial banks in the MF arena, five Microfinance Banks, almost similar in the basic business model to commercial banks, have been established under the new SBP Microfinance Regulatory environment. Apart from Khushhali Bank and First Microfinance Bank, established under the patronage of Asian Development Bank (ADB) and Aga Khan Fund for Economic Development (AKFED) respectively, two more MF banks are noteworthy – Network Bank and Rozgar Bank. Network Bank’s sponsor, Network Leasing, has an established microleasing program since 1995 and has a presence throughout Pakistan. Rozgar Bank also represents “purely commercial” capital going into the MF sector. While Network Bank and Rozgar Bank have operations restricted to specific districts (i.e. Karachi), Khushhali Bank and First Microfinance Bank are working nationwide.

The fifth MF Bank, Tameer Bank, also having equity contributions by International Finance Corporation (IFC) is the last one to enter the market through its Karachi operations. It will expand operations nationally and is reportedly planning to introduce latest technology and automation such as Digital PDAs and ATMs.

The start of the millennium saw maturing of the microfinance initiative of a pioneer Rural Support Program – AKRSP. It brought a major shift in its microfinance strategy through spinning off its microfinance operations into First Microfinance Bank (FMFB)- a formal, regulated financial institution established under the new Microfinance Ordinance of the State Bank of Pakistan. AKRSP is FMFB’s major shareholder with 45 per cent stake with the remaining shares are held by Aga Khan Fund for Economic Development (AKFED) (30 per cent) and International Finance Corporation (IFC) (25 per cent). FMFB has not limited its operations to the Northern Area but has expanded to major urban areas of Pakistan such as Lahore and Karachi.

The urban “miracles”

Second half of the 90’s also saw the establishment of a specialist MFI, KASHF (meaning “miracle” in Arabic).

It focused on urban/sub – urban target markets in the metropolitan city of Lahore, the provincial capital of Pakistan’s Punjab province. It applied a business – like approach to microfinance loosely following the Grameen style group lending methodology and focusing exclusively on women. In December 2004, KASHF had more than 60,000 clients. The founder of KASHF, a Harvard graduate, seems to have realised the fact at that time that the urban areas of Punjab, buzzing with economic activity, lacked a grass roots financial intervention. Karachi, the biggest industrial city of Pakistan already had OPP.

OPP and KASHF present an interesting comparison. Both OPP and KASHF realised early the specialist nature of microfinance. Accordingly, OPP established a separate sister entity, Orangi Charitable Trust (OCT) to conduct its microfinance operations while KASHF focused exclusively on microfinance.

ASASAH (meaning “asset” in Urdu), although a late entrant (year of establishment: 2003) has quickly established its market as a specialist MFI based mostly in urban areas of Punjab province including cities such as Lahore. Till the end of 2004, its funding came exclusively from commercial sources and hence no funding was obtained from donors.

Stringent compliance rules such as provision of securities and high interest rates put constraints on “commercial” funding resources such as commercial bank credit lines for microfinance NGOs. In this situation, PPAF came up to fulfil the funding need of MFIs by coming up as a whole seller of finance for not only microfinance activities but also for social service provision such as physical infrastructure, health and education.

The variety of initiatives and institutions that were presented are proof to the increasing dynamics of the sector. The future development of micro finance in Pakistan will be influenced by a combination of institutional, political and financial factors. But probably the most important force for growth and improvement will be the demand from millions of poor Pakistanis including micro entrepreneurs, urban dwellers and rural families. Like everywhere in the world, their interest in getting access to financial services will be the basis for growth and innovation and for increasingly making micro finance into a fully respected part of the country’s financial sector.

— (Amer Saleem Khan is a Financial Markets Researcher associated with Centre of Excellence in Microfinance (CMF), Institute of Management Sciences, Peshawar [www.imsciences.edu.pk] . Stefan Platteau is Financial Sector Development Specialist associated with FACET BV(www.facetbv.nl) The views expressed in this write-up are those of the authors only and may not reflect the views of the institutions they are associated with.)

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