Micro Finance Industry Assessment

Microfinance
Industry Assessment:
A Report on Pakistan
September 2008
CITI NETWORK STRENGTHENING PROGRAM
Published by Pakistan Microfinance Network
in collaboration with the SEEP Network
Funded by the Citi Foundation
ABOUT PMN
Pakistan Microfinance Network is a network of organizations engaged in
microfinance and dedicated to improving the outreach and sustainability of
microfinance services in Pakistan through knowledge management,
capacity building, transparency and advocacy.
ABOUT THE CITI NETWORK STRENGTHENING PROGRAM

The Citi Network Strengthening Program - an initiative of Citi Foundation in
collaboration with the SEEP Network - aims to strengthen national and
regional microfinance networks' ability to positively impact the
microfinance sector. Participating networks will have access to a range of
support instruments including high quality technical assistance, operational
support, local expert advice and peer learning opportunities. As a result of
this support, participating networks will be able to further promote growth
and development of local microfinance industries, to strengthen their
strategic focus on providing value to members, and contribute to
international innovations in the field.
Microfinance Industry Assessment: A Report on Pakistan

First printed in 2008 in Pakistan
Copyright 2008 Pakistan Microfinance Network (PMN)
38-B, Street 33, F-8/1, Islamabad, Pakistan
Tel: +92 51 2816139-41
Fax: +92 51 2854702
Email: info@pmn.org.pk
Website: www.pmn.org.pk
Authored by Aban Haq
Edited by Minerva John
Designed and printed at Channel 7 Communications Pvt. Limited.
PMN does not guarantee the accuracy of the data included in this
document and accepts no responsibility for any outcome of their use.
Microfinance
Industry Assessment:
A Report on Pakistan
ACRONYMS
MICROFINANCE PROVIDERS
AKAM
AKRSP
CFI
CGAP
BRAC
CIB
DFI
DFID
FIP
FMiA
FY
GDP
GLP
GoP
HDI
IFAD
MFB
MFI
MFP
MIFF
MoF
NBFI
NSO
OSS
PMN
PPAF
PPSB
PRSP
ROA
ROE
Rs.
RSP
SBP
SECP
SEEP
SME
SPV
ZTBL
Aga Khan Agency for Microfinance

Aga Khan Rural Support Programme
Commercial Financial Institution
Consultative Group to Assist the
Poor
Credit Information Bureau
Development Finance Institution
Department for International
Development
Financial Inclusion Programme
First Microinsurance Agency
Fiscal Year
Gross Domestic Product
Gross Loan Portfolio
Government of Pakistan
Human Development Index
International Fund for Agricultural
Development
Microfinance Bank
Microfinance Institution
Microfinance Provider
Microfinance Industry Funding
Facility
Ministry of Finance
Non-Bank Financial Institution
National Savings Organization
Operational Self Sufficiency
Pakistan Microfinance Network
Pakistan Poverty Alleviation Fund
Pakistan Post Savings Bank
Poverty Reduction Strategy Paper
Return on Assets
Return on Equity
Pakistani Rupees
Rural Support Programme
State Bank of Pakistan
Securities and Exchange Commission
of Pakistan
Small Enterprise Education and
Promotion
Small and Medium-sized Enterprise
Special Purpose Vehicle
Zarai Taraqiati Bank Limited.
Bangladesh Rural Advancement

Committee
CSC
Community Support Concern
CWCD
Centre for Women
Cooperative Development
DAMEN Development Action for
Mobilization & Emancipation
FMFB
First MicroFinanceBank Ltd.
KB
Khushhali Bank
NMFB
Network MicroFinance Bank
Ltd.
NRSP
National Rural Support Programme
OPP
Orangi Pilot Project
P-O MFB Pak-Oman Micro Finance Bank
PRSP
Punjab Rural Support Programme
RMFB
Rozgar Microfinance Bank Ltd.
SAFWCO Sindh Agricultural & Forestry
Workers Coordinating Organization
SRSP
Sarhad Rural Support Programme
TF
Taraqee Foundation
TMFB
Tameer Microfinance Bank Ltd.
TRDP
Thardeep Rural Support Programme
Notes: Exchange rate in June 2008: 1 US Dollar

(US$ 1) = 67.7 Pakistan Rupees (Rs.)
Source: www.exchange-rates.org
Contents
Foreword
vii
Country Overview
01
1.1
Macroeconomic Situation
01
1.2
Demographic Profile
01
Financial Sector Overview

2.1
Financial Service Providers
05
05
2.1.1
Commercial Banks
05
2.1.2
Non-Bank Financial Institutions
06
2.1.3
Microfinance Providers
07
2.1.4
Other Financial Service Providers
07
The Role of Informal Financial Markets
08
2.1.5
2.2
Access to Financial Services
08
2.2.1
Financial Penetration
08
2.2.2
Barriers to Access for Low-Income

Population
09
Regulations and Government Initiatives
11
2.3
2.3.1
Financial sector reforms
11
2.3.2
Key Strategies for Financial Inclusion and

Poverty Reduction
11
2.3.3
Regulatory & Supervisory Framework
15
Microfinance Sector in Pakistan
17
3.1
History
17
3.2
The Retail Level Players
18
3.2.1
Microfinance Banks
19
3.2.2
Microfinance Institutions
20
3.2.3
NGOs and RSPs
20
3.2.4
Commercial Financial Institutions
21
3.2.5
MFPs in Pakistan compared across Asia
21
3.3
Meso-level Organizations
3.3.1
21
Networks and Associations
21
3.3.2
Technical Assistance and Training
22
3.3.3
Rating Services
22
Credit Bureaus
22
3.3.4
3.4
Funding
23
3.5
Impact
25
3.6
Challenges & Opportunities
26
References
29
Further Readings and Resources
31
List of Tables, Boxes & Figures

Table 1:
Key Macroeconomic Indicators
Table 2:
Social Development Indicators: Regional Comparison
Table 3:
Poverty Profile of Pakistan
Table 4:
Financial Penetration Rural vs. Urban (December 2006)
Table 5:
Key Statistics for MFBs in Pakistan
Table 6:
Key Statistics for MFIs in Pakistan
Table 7:
Key Statistics for some NGOs and RSPs in Pakistan
Box 1:
Employment Profile
Box 2:
Micro-Insurance in Pakistan
Box 3:
Financial Inclusion Programme (FIP)
Box 4:
Microfinance Sector Development Programme
Box 5:
Pakistan Poverty Alleviation Fund (PPAF)
Figure 1:
Differentiating between Access and Use
Figure 2:
Average Deposit & Loan Sizes of Different Financial Service Providers

June 2007
Figure 3:
Origin of Microfinance Providers in Pakistan
Figure 4:
Active Borrowers by Peer Group (March 2008)
Figure 5:
Projected Capital Structure of Microfinance Consolidated MFI/MFB

Assets
Figure 6:
Composition of Debt in 2010 (Rs. billions)
Figure 7:
Top 5 MFPs in terms of Outreach and their Sustainability
Foreword
Although a number of reports and publications are available
on the microfinance sector in Pakistan, there is no one
comprehensive document that provides an overview of the
sector with a historical and futuristic approach. This
Industry Assessment is designed to provide such an outlook
while meeting certain other objectives which include, but
are not limited to:
i.
Contextualizing the microfinance sector within the

country's financial sector landscape and access to
financial services
ii. Providing a snap-shot of where the industry stands
today, the important trends at the retail and meso level,
and the gaps in the market in the medium term.
iii. Identifying the challenges for the sector and providing
an outlook on the expected future developments, at
least in the medium term.
iv. Serving as a resource to support strategic planning for
networks, network members and external audiences
such as donors, investors, policymakers, etc.
Given the scope and objectives of the assessment, this
report has been structured into the following sections:
i.
Section I gives a brief description of Pakistan's socioeconomic situation, with a focus on the demographics
and social indicators in comparison to other countries,
so as to put the country's development status in context
for the reader.
ii. Section II provides an overview of the financial sector in
the country with a focus on issues most relevant to the
development of an inclusive financial sector, along with
taking a look at the regulations and government
initiatives aimed at expanding access to financial
services. This discussion will look at the overall financial
sector reforms, as well as developments with respect to
the microfinance sector.
iii. Section III takes an in-depth look at the microfinance
sector: its history, major players (at the retail and meso
levels), funding sources, the impact of the microfinance
activities to-date as well as challenges and
opportunities for the sector.
To facilitate readers interested in more information on the
sector, a reading list has been included at the end of the
report. The report draws heavily upon existing research and
publications along with some primary research based on
interviews with sector stakeholders.
Pakistan Microfinance Network (PMN) is indebted to all who
contributed towards this effort, especially the Small
Enterprise Education and Promotion (SEEP) Network and Citi
Foundation USA, and hopes this report will prove valuable
for all audiences.
Country Overview
Pakistan's political and economic history has
been a turbulent one, with periods of stability
and growth often followed by instability and
economic slowdowns. It is thus important to
understand the economic and social
environment of the country in order to fully
understand the context of the microfinance
sector in Pakistan.
1.1
Macroeconomic Situation
1.2
Demographic Profile
Pakistan's socio-economic history reflects the

country's constant struggle with sustaining
growth and improving the living standards of
its people. Periods of high growth have not
always translated into an improvement in the
social indicators and even today, Pakistan fares
poorly in comparison to other developing
countries of the region on various social
indicators, particularly those related to gender
and literacy (see Table 2 on next page).
Microfinance Industry Assessment
The last few years have been a period of high

growth for Pakistan with an average GDP
growth rate of 7.0 percent during the last five
years. Increasing investment, wide-ranging
reforms, macroeconomic stability and
reduction of poverty have been cited as major
accomplishments for the economic managers
during this period. According to government
statistics, per capita incomes rose from US$
586 in 2002-3 to US$ 1,085 by 2007-8.
However, inflationary pressures and an
expanding twin deficit have emerged as a
threat to the economy over the past year. Some

of the biggest challenges for the policy makers
today include double-digit food inflation that
can push an increasing number of people
below the poverty line, an energy shortage
resulting in a slowdown in production and
investment, increasing international fuel prices
and poverty reduction (see Table 1 for a
snapshot of macroeconomic indicators over the
past five years).
Table 1: Key Macroeconomic Indicators
FY04
FY05
FY06
FY07
FY08*
Real GDP growth rate (%)
7.5
9.0
5.8
6.8
5.8
Per capita income (US$)
669
733
836
926
1,085
Inflation rate (%)
4.6
9.3
7.9
7.8
10.3
Current Account Balance (% of GDP)
1.9
-1.4
-3.9
-4.9
-6.9
Fiscal Deficit (as % of GDP)
2.4
3.3
4.3
4.3
6.5
Foreign Direct Investment (US$ million)
949
1,524
3,521
5,140
3,482
Average exchange rate (Rs./ 1 US$)
57.6
59.4
59.9
60.6
61.6
Unemployment rate (%)
7.69
6.20
5.32
* Data for FY08 pertains to July April.

Source: Pakistan Economic Survey 2007-08, Finance Division, Ministry of Finance and Annual Report 2006-07, State Bank of Pakistan.
01
Table 2: Social Development Indicators: Regional Comparison

PAKISTAN
INDIA
SRI LANKA
BANGLADESH
CHINA
HDI Rank*
136
128
99
140
81
Adult illiteracy rate (%)
50.1
39.0
9.3
52.5
9.1
79
56
12
54
23
64
63
71
62
72
125
113
89
121
73
Infant mortality rate (per

1000 births)
Life expectancy at birth
(years)
Gender-related
development index rank*
* Out of 177 countries: a higher rank implies a lower level of development.

Source: Human Development Report 2007/08, UNDP.
According to official statistics, 22.3 percent of

the country's total population (approximately
160 million) currently lives below the poverty
line1 with another 20.5 percent living in
vulnerable conditions (see Table 3 for the
poverty profile of Pakistan for 2007-08). A large
proportion approximately 79 percent of
these poor reside in rural areas. One of the
challenges for Pakistan has been its rapidly
increasing population, which has exerted
pressure on domestic resources and labor
markets. These pressures are expected to
increase, as currently 40 percent of the
population is under the age of 14 years. Job
creation to absorb the entry of potential
employment seekers is thus one of the top

priorities of the government.
In addition to job creation, poverty alleviation
and provision of basic services are important
issues for the policymakers. Education and
health facilities, sanitation, access to safe
drinking water and infrastructure development
in peri-urban and rural locations require
targeted interventions. The lack of such
facilities in these areas and little focus on
development of agricultural value chains has
prompted urban migration, which has created
pressures on urban infrastructure and job
markets.
Table 3: Poverty Profile of Pakistan
Poverty Band
Extremely poor
[<50% of poverty line]
Ultra poor
[>50% and <75% of poverty line]
Poor
Vulnerable
Quasi Non-poor
Non-poor
[> 200% of poverty line]
Total Population
Percentage of
Population
Estimated
Head Count
(million)
Estimated
Adult
Population
(million)
0.5
0.81
0.4
5.4
8.69
3.8
16.4
26.39
12.3
20.5
32.99
16.9
36.3
58.41
33.1
20.9
33.63
21.9
100
160.9
88.4
Source: Pakistan Economic Survey 2007-08, Finance Division, Ministry of Finance and PMN estimates.
02
1
The national poverty line, according to the Government of Pakistan stands at Rs. 944.47 per month (for the year 2005-06), which is based on the conversion of a calorie intake of
2350 (adult equivalent) per person per day into Rupee terms.
Box 1: Employment Profile

Approximately 73 million people are part of Pakistan's labor force, of which 72 percent are male.
The official unemployment rate in 2007 was estimated to be 6.2 percent, although youth
unemployment (between 15-19 years) was higher at 7.6 percent and urban unemployment at
10.1 percent.
Trends in the labor market show that employment indicators have changed in line with the
economy's performance and structure in recent years. Agriculture is the largest sector with 43
percent of total employed people being related to this sector, although its share has been
declining. This is followed by services (35.9 percent) of which wholesale and retail is the largest
sub-sector, and then industry, of which manufacturing and construction are the largest subsectors.
The country's informal economy has also grown in recent years. The highest proportion of
informal employment is estimated to be in the agriculture sector, followed by wholesale and
retail, and industry. The majority of these informal workers are female.
Source: Pakistan Employment Report 2007, Government of Pakistan
03
Financial Sector Overview

This section provides an overview of the
financial sector of the country, beginning with
a description of the financial service providers
including banks and non-bank financial
institutions. Given the detailed discussion on
microfinance providers (MFPs) that follows in
the subsequent section, this sector is only
discussed briefly here. A short discussion on the
role of informal financial markets is also
included. In addition, we also take a look at the
regulations and government initiatives aimed at
expanding access to financial services, including
the financial sector reforms as well as the
developments with respect to the microfinance
sector.
2.1
Financial Service Providers
2.1.1 Commercial Banks

The structure of the banking system in Pakistan
has changed considerably in the last 17 years.
While in 1990 five state-owned commercial
banks dominated the system, by the end of
2004 only one of these large banks, National
By the end of September 2007, there were 36

commercial banks operating in the country,
which included four public sector commercial
banks, 26 domestic private banks (including
five Islamic banks), and six foreign banks. In
addition to these institutions, there are four
3
specialized banks providing financial services
to the public. Together, these banks have over
7,500 branches across Pakistan.
All commercial banks are full-fledged financial
service providers, offering products and services
including credit, savings, investment and
corporate banking, payment transfers, etc. One
of the important trends in the banking sector in
recent years has been the banks' aggressive
movement into consumer finance including
credit cards, financing of cars and consumer
durables, and personal loans. Given the low
interest rate scenario that existed until a couple
of years ago, this led to fast expansion in the
proportion of bank's credit portfolios tied up in
consumer finance (increased from 2.2 percent
in 2002 to 14.6 percent by 2007). On the
liability side, high liquidity and stagnant low
deposit rates meant banks earned huge profits,
with the overall banking sector posting some of
the highest returns in its history (2.1 percent
return on assets (ROA) and 24.2 percent return
on equity (ROE) for the year 2006). Although
competition has increased in the wake of
privatization, such high profitability means that
there is little incentive for banks to move down
Pakistan's financial sector has undergone

significant reforms in the past decade, which
has resulted in the transfer of a large share of
the sector from public to private hands.
Although there are other players in the
financial system of the country, including NonBank Financial Institutions (NBFIs), Insurance
2
Companies and MFPs, commercial banks
dominate in terms of institutional composition
with a share of over 70 percent in the financial
sector's assets.
Bank of Pakistan, remained in public hands,

leaving only 20 percent of the banking system's
assets in the public sector.
05
2
3
Namely National Bank of Pakistan (NBP), Habib Bank Limited (HBL), United Bank Limited (UBL), Muslim Commercial Bank Limited (MCB) and Allied Bank Limited (ABL).
These are Zarai Taraqiati Bank Ltd. (ZTBL), Industrial Development Bank of Pakistan (IDBP), Punjab Provincial Co-operative Bank Ltd. (PPCBL), and SME Bank Ltd.
market or into the rural areas. Currently, only

33 percent of the banking sector's branches are
in the rural areas where 67 percent of the
population lives. This number itself should be
carefully interpreted since nearly all of the rural
branches belong either to the five large banks
or specialized banks, and are a legacy of the
pre-reform period rather than a post-reform
development.
Another major development in the banking
sector in recent years has been the introduction
of the parallel Islamic banking system. The
current regulatory structure allows for banks to
offer Islamic banking services through a)
setting up a full-fledged Islamic bank, b)
establishing a subsidiary that provides Islamic
banking services, or c) setting up a separate
Islamic banking branch. Giving people the
option of Islamic banking has important
implication for access since there are a number
of people who are hesitant to avail traditional
banking services on account of religious beliefs.
Although assets of the Islamic banks still make
up a small part of the banking system, growth
has been rapid (increased from 0.5 percent in
2003 to 3.8 percent in 2007). Unfortunately,
like traditional banks, Islamic banks have also
restricted themselves to urban areas and do not
really target the low-income population.
Currently, the State Bank of Pakistan (SBP), the

country's central bank, is encouraging
consolidation in the banking sector and has
imposed a moratorium on issuance of new
commercial banking licences [except for setting
up an Islamic bank or a Microfinance Bank
(MFB)]. All commercial banks are expected to
raise their minimum paid-up capital to Rs. 6
billion by the end of the year 2009 under the
new Basel II regime that SBP plans to launch in
the coming year. This is expected to drive
smaller banks into mergers with larger
institutions, leaving a few strong players in the
market.
06
2.1.2 Non-Bank Financial Institutions

(NBFIs)
There are a number of NBFIs in the country
providing a range of financial services to the
public. These include investment banks, leasing
companies, mutual funds, housing finance
companies and Islamic financial institutions
4
such as Modarabas . Some of these are
discussed below.
Mutual Funds is a growing industry in the
country, with a number of new entrants in
recent years and holding the largest asset base
within the non-bank financial sector. By June
2007, there were 67 such funds in operation of
5
which 21 were close-ended and the rest
6
openended , with combined assets of Rs.310
billion. Half of these were either equity funds or
income funds.
Of the 23 licensed leasing companies, only 13
were classified as active by end June 2007 with
total assets of Rs. 65.8 billion. Nearly 80
percent of the sector's disbursements are in
plant and machinery, and vehicle leases.
The insurance sector in Pakistan is relatively
7
small with insurance penetration of only 0.7
percent. Of the 54 companies in the sector, 47
are engaged in non-life insurance business with
only five in the life insurance business and two
offering Islamic insurance (called Takaful).
Micro-insurance has also begun to take root in
Pakistan, although on the back of credit
services within the microfinance sector. Box 2
on next page summarizes the developments in
micro-insurance in Pakistan.
Like commercial banks, these institutions do
not target the lower end of the market and
their operations are concentrated in the larger
urban centres of the country.
The Modaraba Companies and Modarabas (Floatation and Control) Ordinance, 1980 defines a Modaraba as a business in which a person participates with his money and
another with his efforts or skill or both his efforts and skill shall include Unit Trust and Mutual Funds by whatever name called and a Modaraba Company as a company engaged
in the business of floating and managing modaraba
5
A collective investment scheme with a limited number of shares.
6
A fund that raises money by selling shares of the fund to the public.
7
Defined as 'gross premium as percentage of GDP'. This can be compared to India: 3.1 percent, Malaysia; 5.3 percent and the U.S.: 9.4 percent. Source: Financial Sector
Assessment 2005. SBP.
Box 2: Micro-Insurance in Pakistan

Given the sector's credit focus in the past, developments in micro-insurance have been limited
and slow in terms of product development and diversification. By end March 2008, there were
approximately 1.4 million policy holders in the microfinance sector, of which 70 percent are
covered by life insurance (or more precisely, credit-life) and the rest by health. Kashf Foundation
has the largest number of clients with insurance (approximately 600,000), followed by National
Rural Support Programme (NRSP), which offers both life and health insurance.
Establishment of the First Microinsurance Agency (FMiA), as an affiliate of the Aga Khan Agency
for Microfinance (AKAM), is the first concerted effort to promote micro-insurance in the sector.
FMiA is currently working with a number of MFPs such as First MicroFinanceBank (FMFB), Tameer
MFB, Khushhali Bank (KB) and Kashf to develop and offer credit-life and health insurance
products. It also plans to extend its product range to livestock and crop insurance in the future.
At the moment, the target market for FMiA and its partners are their credit clients. The extension
of stand-alone insurance products will take a few years. FMiA's back office functions are handled
by New Jubliee Life Insurance Company Limited.
In addition to this, NRSP has also partnered with Adamjee Insurance Company Ltd. to provide
health insurance to its clients.
Source: PMN and interview with Marketing Manager, FMiA Pakistan.
2.1.3 Microfinance Providers
In March 2008, the sector's outreach stood at

approximately 1.6 million active borrowers and
1.7 million active savers, with a gross loan
portfolio of Rs. 16.5 billion and Rs. 4.2 billion in
savings respectively. Pakistan's microfinance
sector was amongst one of the fastest growing
globally, with an expansion of nearly 47
percent during 2007. Most of this growth was
driven by a few institutions belonging to
different peer groups (section 3 provides
details on the microfinance sector in Pakistan).
2.1.4 Other Financial Service

Providers
Although not considered mainstream
institutions, some public sector organizations
The NSO acts as an agent for the Ministry of

Finance (MoF) and mobilizes savings through
various types of deposits and savings
instruments. Its products are available through
its own network of 368 centers, as well as in
post offices and branches of commercial banks
across the country. Some of the products
offered by the organization are of interest to
small depositors, as the minimum deposit is
low (Rs. 100 for a savings account, Rs. 500 for
some savings certificates and the special
savings account). Prize Bonds sold by the NSO
also come in small denominations and are
relatively popular with the urban poor.
Besides its core function of handling mail,
Pakistan Post performs various agency
functions for the government, including
providing deposit services to the general public
through half of the 13,000 PPSB branches.
According to estimates, the PPSB holds
deposits worth Rs. 56.6 billion in approximately
3.8 million accounts, of which an estimated 70
percent are below Rs. 10,000. In October
2007, Pakistan Post entered into a publicprivate partnership with FMFB which will allow
FMFB to use 4000 of the Post's sub-offices for
expanding its own microfinance operations.
FMFB expects to serve a million clients and
disburse Rs. 15 billion over the next three to
five years through this wide network.
A variety of institution types make up the retail

landscape of the microfinance sector: MFBs,
which are regulated by the central bank and
are relatively new entrants into the market with
an average age of 2-3 years; specialized
microfinance institutions (MFIs), which are
NGOs providing microfinance services only; and
multi-dimensional NGOs and rural support
programmes (RSPs), which provide
microfinance as a part of integrated
programmes. Of these, only MFBs can
intermediate deposits, although many nonbank MFPs mobilize deposits from their credit
clients. Some also offer insurance services
bundled with credit.
also provide financial services to the public.

Amongst these are the National Savings
Organization (NSO) and Pakistan Post Savings
Bank (PPSB).
07
2.1.5 The Role of Informal Financial

Markets8
Any discussion of the country's financial sector
must also take into account the large role
played by the informal financial markets, which
have a history predating formal markets and
where contracts and agreements are
undertaken without any official regulation or
monitoring. Pakistan's urban, and particularly
rural, areas are served by a wide variety of
informal agents, including moneylenders and
aartis, or commission agents, who favor
interlinked transactions providing, for example,
inputs to farmers and undertaking to sell their
harvests9. Suppliers' credit is common in
established markets such as textile, and
informal finance is common in the transport
sector as well as in the shoemaking, dairy and
livestock industries among others. Generally,
these credit markets are stand-alone markets,
not interlinked or linked to formal systems,
although one study (Irfan et. al. 1999) found
that as much as one-third of the credit
distributed through these systems originated in
formal sources.
Informal financial systems provide services

where formal financial markets are not
available, and may also provide services
unavailable in the formal markets or a cost
advantage or convenience unmatched by
10
formal counterparts . They are very common in
Pakistan's Small and Medium-sized Enterprise
(SME) sector. To a degree, their popularity may
also be linked to the underground economy
and to a desire to avoid taxation. Carried on as
they are without formal contracts, these
systems are characterized by speed, ease and
flexibility, as well as the dense network of
personal relationships and dependencies in
which they are embedded. Thus, it is not only a
lack of access to formal systems which allows
them to flourish; they are also used because
they are quick, simple, and simultaneously
provide a way of expressing social debts,
loyalties and responsibilities, thereby providing
non-financial as well as financial value. While
the formal financial sector may face some
difficulty competing with the non-financial
aspect of such economic relationships, the
transparency, efficiency, customer
confidentiality and security, as well as the
competitive financial terms which can be
offered by formal institutions, do provide
8
2.2
Access to financial services
There is mounting empirical evidence that

financial development contributes towards
economic growth and thus, an increase in the
incomes of the people. It is also widely
accepted that financial services not only matter
in the context of overall economic growth, but
also for the general well-being of the people,
by helping smoothen consumption and
mitigate risks. However, more often than not,
and especially in the developing/emerging
economies, financial systems tend to be
skewed towards the relatively better-off
segments of the society.
2.2.1 Financial Penetration

The financial sector has grown considerably
over the last few years but this expansion has
not reached all segments of the population or
all regions of the country. Estimations and
choice of indicators to measure financial
penetration vary due to data limitations and
lack of international consensus on how best to
quantify access, or lack thereof. World Bank
(2007) uses a composite measure of access
based on the percentage of adult population
with access to an account with a financial
intermediary. In case of Pakistan, this is
estimated to be 12 percent, compared to 48
percent in India, 59 percent in Sri Lanka and 32
percent in Bangladesh. On the other hand, SBP
estimates that 37 percent of adults have bank
accounts. Given the realistic assumption that
one individual may have more than one
account, the actual percentage is likely to be
lower.
Other widely used indicators of financial
penetration include population per bank
branch and borrowers as a percentage of
population. In Pakistan's case, per bank branch
population is one of the highest in the region
with 20,450 persons per branch whereas the
number of borrowers (including the 1.5 million
borrowers in the microfinance sector) stood at
6.7 million, or 4.2 percent of the population in
2007.
Financial exclusion is also estimated to be more
severe in rural areas compared to urban as
shown in Table 4 on next page. Although 67
This section comes from PMN's publication Country-Level Savings Assessment Pakistan, April 2008.
Under such financing agreements, farmers are obliged to sell at a substantial discount. See Qadir (2005) for a discussion of informal credit markets.
As indicated in a study by the Punjab Economic Research Institute (2005), informal financial systems are often equated with unscrupulous moneylenders but are extremely
complex, involving a number of different actors providing different sets of products and services at varying rates, and the characteristics of such systems are attuned to the sectors
they serve. Costs to the user vary substantially depending on the sector and whether, for example, farmers borrow in cash or in kind. In one study, carried out in the Liaqatpur
tehsil of the Raheem Yar Khan district, there was no difference in costs to farmers when borrowing from formal or informal sources (Hussain and Demaine 1992). It is also pointed
out by Qadir (2005) that sometimes illegal practices by banks can make formal credit at least as expensive as informal sources.
11
For an overview of informal finance in Pakistan including case studies of a number of sectors, see Qadir (2005).
9
10
08
11
strong incentives for their use .
percent of the population lives in rural areas,

only 33 percent of the bank branches are
located in rural regions. Only 14 percent of
rural adults have bank accounts compared to
Oxford Policy Management (2006) estimates,

based on the Pakistan Socio-Economic Survey
2001-02, show that approximately 41 percent
of total households were receiving credit but
Table 4: Financial Penetration Rural vs. Urban (December 2006)
% of Population
Poverty Incidence
% of Bank Branches
% of total population having bank accounts
% of adult population (+19 years) having bank
accounts
% of deposits (number)
% of deposits (amount)
% of advances (number)
% of advances (amount)
Rural
67.0
28.1
33.0
Urban
33.0
14.9
67.0
Total
100.0
23.9
100.0
6.0
14.0
37.0
75.0
17.0
37.0
25.0
9.9
17.0
7.1
75.0
90.1
83.0
92.9
100.0
100.0
100.0
100.0
Source: SBP Governor's speech, Financial Inclusion Conference, London, 19 June 2007
75 percent of urban adults.

Estimates suggest that a large proportion of
the low-income population of the country does
not use formal financial services. According to
Nimal A. Fernando's 2007 report for the Asian
Development Bank on low-income households'
access to financial services, formal and semiformal financial institutions reach no more than
10 percent of the potential market at the low
end in Pakistan. The paper goes on to say that
the financial access problem is a bigger
challenge in large countries such as China,
India and Pakistan and [a]s a result, vast
numbers of poor and low-income people in the
region are unable to take advantage of
economic opportunities and gainfully employ
themselves and their family members, and
create employment opportunities for others;
unable to build assets that increase their
income-earning capacity and quality of life;
unable to ensure that their children get basic
primary and secondary education; and unable
to manage the risks of vulnerabilities resulting
from various types of external shocks that
adversely affect their already low living
standards.
The discussion on access must take into

account the difference between 'access' and
'use of financial services': whereas the former
refers to the supply of financial services, the
latter refers to the result of the interaction
between demand and supply of these services.
Stijn Classens's paper Access to Financial
Services: A Review of the Issues and Public
Policy Objectives for the World Bank in 2006
offers an interesting discussion on the
difference between the two: availability of
services is a necessary, but not sufficient,
condition for use. Even in the presence of
service providers, barriers such as high costs,
information asymmetries, regulatory
requirements or low financial literacy may
result in low access.
Other studies have also indicated that the use

of formal institutions to meet financial needs is
quite low, especially amongst the low-income
groups. For example, in his study on informal
finance markets in Pakistan in 2005, Adnan
Qadir cites that the percentage of farmers
using institutional agricultural credit is only 15
percent, but that this number may also be
inflated due to the common practice of large
land owners borrowing in the name of their
haris12, servants and family members. The
Institutional (or supply) barriers to access may

be classified into two categories: those related
to individual financial institutions and those
related to the institutional environment. In
terms of problems related to individual
institutions, these could range from high
minimum deposit requirements or high service
charges, inappropriate products or collateral
requirements to simply attitudes of the bank
staff or financial literacy requirements. At the
environment level, it has been seen that the
2.2.2 Barriers to Access for LowIncome Population
In the Sindhi language, hari refers to the landless peasant hired by landlords to work on their land.
12
only 3.3 percent of these loans were received

from formal or semi-formal financial
institutions (these included the Agricultural
Development Bank of Pakistan, commercial
banks, cooperatives and NGOs).
09
Figure 1: Differentiating between Access and Use

With Access
Current
Consumers
of Financial
Services
Without Access
Voluntary Exclusion
No need
Assumed
rejection
No
awareness?
Inability to
use due to
income/
price
Involuntary Exclusion
Rejected:
high risk/bad
credit = No
access
Rejected:
Discrimination
= No access
Excluded due
to price,
product,
income or
respondent
feature = No
access
Source: Claessens (2006)
quality of legal systems, property rights, credit

information availability, technological
development and regulatory requirements all
influence access.
The SBP also recognizes barriers to access and
13
classifies them as :
1.
Geographical constraints: a large

proportion of population lives in rural
areas and there are pockets of areas with
low population density and difficult
remote terrain.
Provincial-level environment weaknesses:
lack of an enabling environment at the
provincial level due to poor land records
and weak law enforcement.
Banking practices: banking sector's
stagnation in terms of target market,
traditional modes and products, and high
transaction costs.
Illiteracy and/or poverty of clients: low
financial literacy of clients or cultural and
linguistic barriers due to which the
awareness and understanding of financial
services is low.
Regulatory barriers: regulatory
2.
3.
4.
5.
requirements such as money laundering

guidelines require proof of identification
that the poor may not have.
There is reluctance on part of commercial banks
to enter into new markets and they do not
have the appetite to gauge market demand.
Inadequate information about clients in the
absence of a comprehensive credit
bureau/credit history records, lack of alternative
delivery channels and financial innovation are
all hurdles in the goal of financial inclusion.
Figure 2 below uses the average deposit and
loan balances to proxy current markets for
different financial service providers. The
average deposit size clearly shows nearly all
commercial banks are targeting larger
depositors whereas the MFBs, NSO and PPSB
are currently reaching smaller depositors. The
average loan size of the banking sector also
shows the same trend except that, unlike in
deposits, average loan sizes for foreign banks
are relatively small compared to other banks.
This is largely because these banks hold a large
portion of consumer finance and credit card
portfolios of the sector.
Figure 2: Average Deposit & Loan Sizes of Different Financial Service Providers June 2007
Average Deposit Size
Average Loan Size

700
700
584
600
500
(Rs. 000)
400
300
163
134
22
12
15
100
11
Source: SBP Governor's speech, Financial Inclusion Conference, London, 19th June 2007
Microfinance
Banks
Foreign
Banks
Domestic
Private Banks
Public Sector
Banks
Pak Post
Bank
NSO
Microfinance
Banks
Foreign
Banks
Domestic
Private Banks
Public Sector
Banks
All Banks
Source: Statistical Bulletin, State Bank of Pakistan
13
280
300
10
412
200
71
100
460
400
All Banks
(Rs. 000)
500
200
628
600
2.3
Regulations and Government

Initiatives
2.3.1 Financial sector reforms

Financial sector reforms were initiated in the
1990s in Pakistan with the objective to:
'create a level playing field for financial
institutions and markets for instilling
competition, strengthening their governance
and supervision, and adopting a market-based
indirect system of monetary, exchange and
credit management for better allocation of
financial resources.' (SBP Annual Report, 2002).
In addition to the above, reforms were brought

about in the debt management process by
developing a primary market for treasury bills
to replace the on-tap system. The foreign
exchange regime was liberalized and indirect
mechanisms for monetary policy management
were put in place.
The reform process had very positive
consequences not only for the health and
stability of the banking sector, but also the
whole economy. The cost of borrowing for the
government decreased, with positive
implications for the fiscal deficit. Cleaning up
the banks' balance sheets along with market-
14
Source: SBP Governor Speech, 28th March 2008, Islamabad.
Despite the success of the reform process, its

impact on access to financial services for lowincome people remains questionable. As the
privatized banks rationalized their operations,
they closed down a number of branches in the
rural areas (over 700 branches were closed
between 1997 and 2000, of which over 330
were located in unbanked areas). Although
competition has increased, it has not resulted
in the down-market movement of commercial
banks to target the low-income segments nor is
there any apparent interest to do so in the near
future. The policy makers thus feel that there is
a need to have focused strategies to increase
access. These are summarized in Section 2.3.2.
2.3.2 Key Strategies for Financial

Inclusion and Poverty
Reduction
I.
STATE BANKS POLICY FOR

14
FINANCIAL INCLUSION
SBP believes that financial inclusion should

focus on:
Provision of full range of financial services

i.e. going beyond credit to deposit and
payment services
Meeting requirements of individuals

ranging from consumption to basic
education, health and other services
Catering to the requirements of small and

new firms, and
Markets excluded by gender or

[geographical] remoteness
Given this objective, a number of reforms were

initiated within the banking sector. Private
ownership of financial institutions was
encouraged and four of the five large stateowned commercial banks were privatized.
Credit ceilings were abolished and banks were
free to establish market-based rates. Higher
minimum capital requirements, use of
technological platforms and standards of
corporate governance were institutionalized
and external ratings were made compulsory.
The central bank also underwent a number of
changes in order to develop its capacity to
effectively supervise and regulate the changing
banking environment in accordance with
international standards. Not only was SBP given
greater autonomy but extensive capacity
building of its staff and technological base was
undertaken. Banking laws (including the SBP
Act, 1956; the Banking Companies Ordinance,
1962; the Banks (Nationalization) Act, 1974;
the Banking Companies (Recovery of Loans)
Ordinance, 1979 and the Banking Tribunals
Ordinance, 1984) were also amended in order
to allow the reform process to move ahead
smoothly.
based lending practices improved their

profitability as the sector's ROA and ROE rose
from -0.5 percent and -12.6 percent in 2001 to
2.1 percent and 23.8 percent respectively by
2006. The sector's stability indicators have
shown considerable improvement. Aggregate
number of borrowers has increased as banks
have diversified into consumer finance and SME
lending.
One of the key objectives of the financial

inclusion strategy of SBP is 'to support the
government's target of halving the income
poverty headcount by 2015, and to eventually
reduce poverty to a single digit'. Major
elements of the strategy include:
1.
2.
The national level microfinance strategy

(see section below for more).
The Annual Branch Licensing policy: all
11
3.
4.
5.
commercial banks with 100 branches or

more are required to open at least 20
percent of their branches outside big cities
15
and set up branches in tehsil
headquarters where no branch of any bank
exists. Sub-branches, booths and service
centers may be established in places where
it is unfeasible to open a full-fledged
branch.
The Basic Accounts policy: Since November
2005, all commercial banks are required to
offer a 'Basic Banking Account (BBA),'
which can be opened with a minimum
deposit of Rs. 1000 and carries no fee, no
minimum balance requirement and full
ATM facility. This account is targeted at the
low-income people.
Promotion of the Post Office network:
explore possible collaboration between
Pakistan Post and MFPs.
The prudential regulatory framework:
development of dedicated prudential
requirements for the different sectors such
as the Microfinance Ordinance 2001 and
its supporting prudential regulations,
prudential regulations for Agricultural
Financing and Livestock Financing, etc.
6.
The SME financing strategy: to encourage

lending to small businesses.
7. Promotion of Islamic banking: availability
of Shariah compliant products would allow
the financial sector to serve those who do
not currently avail its services due to
religious reasons.
8. Development of commercially viable credit
enhancement mechanisms
9. Promotion of insurance products to
support micro and small lending:
proactively help develop Islamic insurance
products and work with private sector
companies to develop non-collateralized
lending and crop insurance products.
10. Promotion of electronic banking and use
of technology.
Some of these initiatives are already underway.
SBP has also partnered with Department for
International Development (DFID) for the
implementation of a Financial Inclusion
Programme to enhance access of financial
services to the poor in the microfinance, SME,
rural and the low income housing sectors.
Please refer to Box 3 for more on this
partnership.
Box 3: Financial Inclusion Programme (FIP)
State Bank of Pakistan, with support from DFID, launched the Financial Inclusion Programme (FIP)
in January 2008. With an estimated cost of 50 million over five years, the programme's purpose
is to transform the level and quality of access to formal financial services in Pakistan, with a focus
on increasing access for the poor and marginalized groups. FIP will focus on microfinance and
small and medium enterprise finance in the first two years of the programme, whereas strategies
for low income housing finance and rural finance will come into focus over the subsequent years,
with Islamic banking and formalizing remittances being cross-cutting themes. Programme
components include:
Development and management of a cohesive financial inclusion policy based on research and
review.
Encouragement of financial innovation through funds to meet start-up and scaling costs.
Improving delivery mechanisms through capacity building of human resources and

Institutional Strengthening Fund.
Development of a financial literacy strategy.
Management, monitoring and evaluation of FIP

Source: IP Programme Office, State Bank of Pakistan.
12
15
A 'tehsil' (called a 'taluka' in Sindh) is the second-lowest tier of local government in Pakistan. Each tehsil is part of a larger 'district' and each tehsil is sub-divided into a number of
'union councils'.
II
NATIONAL MICROFINANCE
STRATEGY
The national level strategy for the microfinance

sector was prepared by the SBP in consultation
with PMN, Consultative Group to Assist the
Poor (CGAP) and other international agencies,
and was approved by the Prime Minister of
Pakistan in February 2007. The strategy focuses
on expanding the outreach of the sector and
sets a target of three million active borrowers
by the year 2010.
The goals and objectives of the strategy thus
are:
I.
Commercialization of microfinance is
critical to enhancing the outreach and
scale of the microfinance industry, and to
blending effectively both financial and
social sustainability in the operations. This
requires:
Treating microfinance as a viable

business that requires the market to
determine its pricing, aligning it to the
cost of delivery and risk perceptions.
This, in turn, underscores the need for
an eventual phasing out of across-theboard reliance on subsidized lending,
which creates distortions and serves as
a deterrent to growth and the
graduation of MFIs, and also renders
commercially viable institutions
unprofitable.
Multiple players to infuse competition,

which will be the principle element of
offering clients competitive interest
rates and service delivery.
The strategy stresses that the three things

which are essential for the sector to achieve its
target include:
a. Sustainable Operations: At the time of the
preparation of the strategy, average lending
rates in Pakistan's microfinance sector were
around 18 percent, well below regional levels,
and leading to financial unsustainability (on
average, the sector's financial self-sufficiency
16
stood at 62 percent) . This financially
16
The strategy proposes that Pakistan Poverty

Alleviation Fund (PPAF) should thus, define
specific eligibility criteria for concessional
financing to MFIs, and restrict such funding to
the following:
MFIs willing to enter into contractual

obligations to eventually graduate to
adopting financially sustainable models.
Poorer/resource deficit regions where

exceptionally high transactional costs
render it difficult to operate in a socially
sustainable manner.
Other recommendations for PPAF include:

Develop capacities and expertise to
issue bonds and guarantees with
supportive government credit
enhancement to raise the required
domestic liquidity for
MFBs/MFIs/NGOs.
Set up a center of excellence for

training microfinance providers and
clients with the support of PMN.
Offer rating services that gauges MFIs'

default risk with regard to its overall as
well as client obligations.
Focus on product innovation and best

practices.
ii. Notwithstanding the above, geographical

complexities make it difficult to deliver
commercially viable programmes to start with
in the poorer and resource deficit
regions/districts so: recommend confining
subsidized lending to these poorer and
resource deficit regions/districts.
unsustainable model will hinder the growth

prospects of the microfinance sector.
Sustainability comes through effective cost
recovery that calls for pricing loans in line with
the transaction costs, which could vary from
client to client and from one region to another.
Thus, subsidies should be restricted only for
poorer and resource deficit regions, capacity
enhancement, innovation and growth rather
than regular operational costs.
Other recommendations of the strategy to

promote sustainable institutions include the
transformation of NRSP into a nationwide MFB
to facilitate its development on a financially
and socially sustainable basis, as well as to
bring KB under MFI Ordinance 2001 in order to
offer a level playing field to all MFBs and sell
off the government's share in the bank to a
strategic partner.
b. Private Domestic Capital: Achieving the
three million active borrowers mark by 2010
implies that additional funds amounting to US$
700 million would be required. It is impossible
for donor or public resources to meet this gap,
and thus the sector will have to mobilize
private domestic capital. Sources for these
funds are forecast as:
Currently the sector's financial self sufficiency stands at 74 percent and the average lending rate is approximately 26.1 percent. Source: Pakistan Microfinance Review 2007, PMN.
13
Equity will make up 15 percent of the
total. SBP recommends facilitation of

private investors and allowance of
subordinated debt as Tier II capital for
MFBs.
Savings banks should increase savings

from five percent to 25 percent of their
assets. MFBs and the meso level players
like PMN should thus undertake market
research for designing the saving products
for their customers, and the government
would assist their capacity building
through the PPAF. Procedures to access
wholesale deposit windows of the
commercial banks should be developed.
However, mobilizing savings would require
sustainable institutions.
Debt raise debt from domestic private

sources such as commercial banks and
bond markets. The strategy recommends
encouraging credit enhancement
mechanisms and guarantee funds.
c. Building the Human Resource Base:

Expanding outreach would create great
pressure on existing human resources in the
sector and the strategy forecasts that trained
manpower of 20,000 (composition of which
will be: one percent senior management, 15
percent middle management and 84 percent
field staff) would be required by 2010. Of
these, training and capacity building needs are
minimal at the senior level. Most of the field
staff will be trained in-house and on-the-job.
For this, organizations would need to build
stronger internal recruitment, training and
retention plans. The real challenge lies at the
middle management level, which typically is the
bottleneck for growth. This level needs
generalized management training.
Recommendations include: ensuring
organizations build strong in-house training,
and developing a management training track at
recognized centers such as academic and
professional training institutions.
14
this defined segment of population that

tend to be in local communities within
well-defined, geographical areas.
Technology: Adopt innovative and

appropriate technologies that are designed
for helping upscale microfinance
operations.
Introduction of Credit Bureau for

Microfinance Borrowers: SBP, in
collaboration with international experts, is
developing an appropriate model for a
Credit Information Bureau (CIB) in
partnership with PMN, MFBs, MFIs and
NGOs in order to pool information on
borrowers and to facilitate prudent lending
decisions about micro borrowers.
Effective and synergistic use of Pakistan

Post Office (PPO) resources: The
government, SBP and PPO to reach
consensus on their capacity to facilitate
access to financial services.
Other policy and regulatory initiatives:

These include recommendations such as
the incorporation of the requirement of
public disclosure of social performance
(e.g. outreach to women, rural areas) by
MFIs and NGOs, disclosure requirements to
ensure transparent lending practices and
formulation of consumer protection laws,
removal of tax disincentives for MFBs,
encourage Islamic microfinance, and
setting up of criterion for membership of
clearing house for MFBs, etc.
III.
NATIONAL POVERTY REDUCTION

STRATEGIES
Accelerating growth beyond the 3 million

mark -
Poverty reduction remains a challenge for the

Government of Pakistan. Recognizing the need
for a strategy that ensures pro-poor growth
and coordinated efforts to tackle this
challenge, the government began a
consultative process in 1999 to develop a
comprehensive poverty reduction strategy. This
process resulted in an Interim Poverty
Reduction Strategy Paper (I-PRSP) in November
2001 and a full-fledged Poverty Reduction
Strategy Paper (PRSP) in December 2003.
Efforts in six additional areas could yield large

scale dividends past 2010:
The four pillars of the strategy as highlighted in

the PRSP included:
New Players: Government to facilitate entry
i.
of international MFPs with proven track

record in achieving large scale outreach.
Credit Union Models: Explore potential for

setting up of credit unions (CUs) in Pakistan
that are not-for-profit cooperative finance
institutions, owned and controlled by its
members catering to the requirements of
Achieving high and broad-based economic

growth focusing particularly on the rural
economy, while maintaining
macroeconomic stability. This pillar set the
agenda for macroeconomic management,
building supportive infrastructure,
developing a rural development strategy
and supporting housing finance.
ii.
Improving governance and consolidating

devolution, both as a means of delivering
better development results and ensuring
social and economic justice. This pillar
summarized the way forward for reforms
in core government services such as the
police and civil service, increasing access to
justice, devolution of power to local
governments, freedom of information and
media etc.
iii. Investing in human capital with a renewed
emphasis on effective delivery of basic
social services: This pillar put forth the
framework for development of education,
special education, health, provision of
drinking water and sanitation facilities, and
population welfare.
iv. Bringing the poor and vulnerable and
backward regions into mainstream
development, and to make marked
progress in reducing existing inequalities:
This pillar focused on targeted
interventions for the poor and vulnerable
including specific programmes (such as the
Khushhal Pakistan Program), social safety
nets and provision of microfinance
facilities.
The GoP sees microfinance as a viable tool for
poverty reduction and thus supported the
creation of the Microfinance Sector
Development Program with the assistance of
the ADB (see Box 4 for more on the MSDP).
Given the changing economic environment and
global context, the government is currently
working on PRSP-II. A summary draft of the
paper has been recently shared with
stakeholders for feedback. Like the previous
strategy paper, there are several pillars built

into the framework including i) acceleration of
growth and macroeconomic stability, ii)
crafting a competitive edge in global markets,
iii) harnessing the potential of the people, iv)
financial sector deepening, v) developing world
class infrastructure, vi) effective governance
and management, and vii) targeting the poor
and vulnerable. Once again, microfinance
figures prominently in the government's
poverty reduction strategy.
2.3.3
Regulatory & Supervisory

Framework
The financial sector is largely regulated by the

central bank i.e. SBP and the Securities and
Exchange Commission of Pakistan (SECP).
Although all banks are required to register with
the SECP, the sector is regulated and supervised
by SBP. NBFIs including Development Finance
Institutions (DFIs), leasing companies and
housing finance companies fall under the
supervision of SECP, as do the country's capital
markets.
With respect to the microfinance sector, MFBs
are licensed, supervised and regulated by SBP
under the Microfinance Institutions Ordinance
2001, whereas non-bank MFPs, which are
mostly registered under the Companies
Ordinance 1984 as non-profit companies, or
under legislation for societies or cooperatives,
fall under the domain of SECP.
The Microfinance Institutions Ordinance 2001
largely provides the regulatory framework for
the microfinance sector in Pakistan17. The
Ordinance defines the scope of business for a
Box 4: Microfinance Sector Development Programme

As part of its poverty alleviation strategy, the Government of Pakistan in collaboration with Asian
Development Bank (ADB), launched its Microfinance Sector Development Program (MSDP) in
2000. The objective of the programme was development of the microfinance sector in order to
provide sustainable and affordable financial services to the low-income groups through formal
financial institutions. Two loans were approved by ADB under the program: a policy loan of US$
70 million to support the reform program and an investment loan of US$ 80 million to provide
microfinance services and institutional strengthening. The first initiative under the program was
the establishment of KB in August 2000. Other initiatives included the setting up of endowment
funds with the SBP such as the Microfinance Social Development Fund for providing credit, the
Community Investment Fund (CIF) to provide credit for small infrastructure projects, the Risk
Mitigation Fund (RMF) to protect borrowers against natural calamities and the Depositors'
Protection Fund (DPF) to protect borrowers in case of liquidation of KB.
Source: ADB. Finance for the Poor. Vol 2. No. 4. December 2001 http://microfinancegateway.com/files/3308_file_03308.pdf
15
17
The full text of the Ordinance can be viewed on SBP's website http://www.sbp.org.pk/l_frame/index2.asp
microfinance institution, the paid-up capital

and liquidity requirements, licensing policies for
such institutions, the basic structure of its
management and administration, and SBP's
powers for supervision purposes, etc. A number
of amendments have been made to the
Ordinance since 2001 in consultation with the
sector stakeholders to make the framework
more conducive and rational.
The enactment of the MFI Ordinance has had
positive effects on the microfinance sector in
the country. It has helped re-define
microfinance as a core financial sector activity
with not only social implications but also
18
commercial opportunities. To date, six MFBs
have been established in the private sector
under this Ordinance with their collective
outreach accounting for approximately 32
percent of the sector's active borrowers in
December 2007.
Since the promulgation of the MFI Ordinance, a
number of supportive regulations have also
been issued by the central bank including:
1.
2.
3.
4.
5.
6.
7.
Prudential Regulations for Micro Finance

Banks (2003)
Guidelines for Mobile Banking Operations
(2003)
Guidelines for NGOs Transformation (2005)
Fit and Proper Criterion for CEOs/member
of Boards of MFBs (2005)
Prudential Regulations for Commercial
Banks to undertake Micro Finance Business
(2006)
Guidelines for Commercial Banks to
undertake Micro Finance Business (2006)
Branchless Banking Regulations (2008)
The non-bank MFPs largely remain unregulated

and for this reason are prohibited from
providing a full range of financial services. The
central bank has encouraged these institutions
to transform into MFBs if they wish to offer
services such as savings to their clients and
other market segments. Currently, two of the
largest MFPs are in the process of setting up
their microfinance banks.
16
18
Khushhali Bank was originally established under the Micro Finance Bank Ordinance 2000 but was recently converted into a public limited company and brought under the MFI
Ordinance 2001. This had been one of the proposals made under the national MF strategy 2007 to provide a level playing field.
Microfinance Sector in Pakistan

This section takes an in-depth look at the
microfinance sector in Pakistan, starting from a
historical perspective. The sector's landscape at
the micro/retail and meso level is also discussed
in terms of the various players, their roles and
the important trends. A discussion on the
documented impact and the various
opportunities and challenges that lie ahead for
microfinance in Pakistan are also discussed.
3.1
History
The year 1996 is viewed as a turning point in

the history of the microfinance sector of
Pakistan. This was the year that, for the first
time, microfinance was recognized as a
specialized activity and not just a part of multidimensional poverty alleviation programmes.
Establishment of the first specialized
microfinance NGO (Kashf Foundation), the
spin-off of AKRSP's microfinance operations
into a separate unit to track financial
performance, and the establishment of the first
urban microfinance programme the Urban
At the government level, concerted efforts for

the promotion of the sector began in the year
2000 when an apex funding body, the Pakistan
Poverty Alleviation Fund (PPAF), started
extending funds to partner organizations for
microfinance, and the SBP set up a separate
microfinance division (which evolved into a full
fledged microfinance department in 2007).
Legislation for setting up MFBs soon followed
in 2001 in the form of the Microfinance
Institutions Ordinance 2001, considered to be
another turning point for the sector. This
heralded the beginning of the 'commercial' era
for microfinance when microfinance was not
viewed as just a 'social' service but rather a
sustainable financial enterprise as well.
Although an MFB, Khushhali Bank, had already
been established in 2000 by the government
under a separate ordinance, the first private
sector MFB, the First MicroFinanceBank Ltd.,
was established in 2002 through the
transformation of AKRSP's microfinance
operations. To date, six MFBs have been
established in Pakistan (with two more
expected as NRSP and Kashf are in the process
of setting up their affiliated banks), and several
specialized microfinance NGOs are operating in
The presence of microfinance in Pakistan dates

back to the 1960s when initiatives such as Dr.
Akhtar Hameed Khan's Comilla Project
experimented with microcredit. Although there
were a number of initiatives during the
following decades including the Orangi Pilot
Project in Karachi, the Aga Khan Rural Support
Programme (AKRSP) rural credit and savings
projects in the country's Northern Areas and
Chitral, and the Agricultural Development Bank
of Pakistan (now ZTBL) set up by the
government to lend to poor farmers, it was not
until the late 1990s that the sector gained
momentum.
Poverty Alleviation Programme (UPAP) were

some of the highlights of the year. Another
milestone for the sector was the establishment
of a national association for microfinance
providers in Pakistan in 1998, called the
Microfinance Group-Pakistan, which later
evolved into a formal organization in 2001 in
the form of the PMN. The establishment of
PMN spurred a focus on transparency,
performance reporting, capacity building and
tracking progress in the microfinance sector.
17
the country (see Figure 3 for a timeline of

origin of microfinance providers in Pakistan).
Thus, despite having a historical presence that
dates back to the 1960s, Pakistan's
microfinance sector did not have a significant
presence until recently. Previously, the sector
was characterized by small players that relied
on donor and government funding; pricing that
passed on subsidies to the clients and resulted
in unsustainability of institutions, and was
entirely socially driven. The creation of a
network of institutions engaged in
government support (such as the tax

exemption given to MFBs for five years, starting
from 2007) have been crucial in catalyzing the
growth of the sector in Pakistan.
3.2
The Retail Level Players
The evolution of microfinance in Pakistan has

led to different 'types' of organizations
providing microfinance services across the
country (see Figure 4 below for their respective
share in the sector). They can largely be
separated into institutions that are regulated
Figure 3: Origin of Microfinance Providers in Pakistan
MULTI - DIMENSIONAL
SPECIALIZED
Akhuwat
SUNGI
Network MFB
Rozgar MFB
SAFWCO
NRSP
TF
FMFB
PRSP
OPP
DAMEN
Kashf
KB
TRDP
SRSP
1990
1995
Tameer MFB
Asasah
2000
2005
Source: Pakistan Microfinance Network
microfinance in Pakistan, PMN, proved

undeniably useful in promoting international
best practices and policies, emphasizing the
importance of transparency and moving
microfinance towards sustainability. In addition
to this, macro-level initiatives like separate
legislation and regulatory framework for the
sector, development of a national level
microfinance strategy and other forms of
and those that are unregulated. MFBs would

fall in the former whereas NGOs and RSPs, etc.
would fall in the latter category. As discussed
above, all microfinance providers are required
to be registered either with the SECP, SBP or
their respective provincial authority. However,
the only significant regulatory oversight in the
sector is provided by the SBP.
Figure 4: Active Borrowers by Peer Group (March 2008)

CFIs: 18,290
NGOs: 75,932
18
RSPs: 621,054
MFBs: 489,499
MFIs: 386,351
Although the range of financial services that an

institution can offer is dependent on its legal
status, most MFPs are currently providing
similar products and targeting similar markets.
As in most countries, the sector is dominated
by a few players in terms of market share and
growth, and these big players belong to various
peer groups/types of MFPs. These peer groups
are discussed below.
3.2.1
Microfinance Banks
Microfinance banks are relatively new players in

the microfinance market in Pakistan, but have
gained importance relatively quickly. All MFBs
are established under the Microfinance
Institutions Ordinance 2001 and are regulated
by the central bank. The Ordinance allows for
setting up of four types of MFBs:
a.
b.
c.
A district level MFB, licensed to operate

only within the prescribed district. The
minimum paid-up capital requirement to
set up such a bank is Rs. 100 million.
A regional level MFB, licensed to operate
within five adjacent districts within the
same province. The minimum paid-up
capital requirement to set up such a bank
19
is Rs. 150 million .
A provincial level MFB, licensed to operate
only within the prescribed province. The
d.
minimum paid-up capital required to set

up such a bank is Rs. 250 million.
A national level MFB, licensed to operate
anywhere in the country. The minimum
paid-up capital required to set up such a
bank is Rs. 500 million.
Other than the difference in capital

requirement, all types of banks face the same
prudential regulations and can offer the same
range of services to their clients. To date, six
MFBs - four national level and two district level
(in Karachi district) - are operating in the
country. The largest, in terms of market share
and geographic network, being KB (see Table 5
for key statistics of MFBs).
Although banks can offer their clients services
other than credit, these products remain under
developed, and with the exception of one or
two institutions, not a lot of focus is placed on
developing deposit or insurance services. Most
of the banks are currently using the same
group-based lending methodology as non-bank
MFPs, except for Tameer MFB, which deals with
individual clients and offers larger loans
compared to the market average. However,
MFBs such as First MicroFinanceBank Ltd. are
also diversifying into individual loans.
Table 5: Key Statistics for MFBs in Pakistan

KB
FMFB
TMFB
P-O MFB
NMFB
RMFB
Type of license
National
National
National
National
2006
District
(Karachi)
2004
District
(Karachi)
2005
Year Founded
2000
2002
2005
Outreach Indicators (December 2007)

Active Borrowers
Active Savers
Gross Loan
Portfolio (Rs.
Million)
Value of Savings
(Rs. Million)
330,952
0
102,604
81,158
26,029
44,560
15,008
15,762
2,305
2,891
2,316
4,565
2,911
1,234
427
97
60
34
2,048
649
23
90
32
Financial Performance Indicators (December 2007)

Operational Self
Sufficiency (%)
Advances to
Deposit ratio (%)
Portfolio at Risk - at
90 days (%)
Return on Assets
(%)
Yield on GLP nominal (%)
80.1
89.7
47.3
60.4
46.0
49.0
79.2
63.1
403.2
55.0
103.9
0.7
0.8
4.6
5.9
8.2
13.9
-9.3
-4.3
-21.4
-15.2
-17.4
-21.4
21.7
27.4
28.8
24.2
28.4
27.0
19
19
There was no provision to set up a regional level MFB in the original MFI Ordinance 2001. This regulatory change was introduced through the Finance Bill 2006, Section 18,
Amendment 4 Clause (aa) and Amendment 5, Clause (a). For a look at other changes in the MFI Ordinance 2001, please refer to Ahmed and Shah (2007).
3.2.2
(RSPs) are multi-dimensional organizations,

which provide microfinance services along with
other interventions such as education, health or
infrastructure development to the poor.
Microfinance Institutions
Microfinance Institutions (MFIs) are non-bank

microfinance providers that specialize in
provision of microfinance services. Currently,
five MFIs are operating in Pakistan and
collectively, they reach 386,000 active
borrowers. These organizations are registered
with the SECP under the Companies Ordinance
1984 as non-profit associations or under the
Societies Registration Act 1860, or as trusts
under the Trusts Act 1882, which fall under
provincial governments' jurisdiction. Given their
non-bank status, they cannot 'intermediate'
deposits, although some do 'mobilize' savings
from their clients. Table 6 provides a snapshot
of MFIs in terms of their outreach and financial
performance.
Institutions such as Development Action for

Mobilization and Emancipation (DAMEN),
Sungi Development Foundation and Centre for
Women Cooperative Development (CWCD) fall
in the NGO category. This peer group
collectively accounts for a small percentage of
the microfinance outreach with a five percent
share of active borrowers in December 2007.
Their services, usually limited to one or two
basic products, include credit and some basic
insurance. International NGOs have also
entered the sector, with Bangladesh Rural
Advancement Committee (BRAC) beginning
operations in 2007, and ASA expected to start
this year.
Currently, five major MFIs are operating in the

country. With the exception of one (SAFWCO),
all others originated in Punjab and most of
their operations are concentrated in this
province. The flagship service of these
institutions is microcredit but some basic
insurance services (mostly credit-life) are also
provided to the credit clients. Group lending
remains the dominant lending methodology
but some of the MFIs, such as Kashf and
Asasah who are diversifying into larger loan
sizes, are beginning to deal with individual
clients as well.
Rural Support Programmes originated in

Pakistan during the 1980s when the first RSP the AKRSP - was established in the Northern
Areas of Pakistan. In subsequent years, the RSP
model based on community-organization and
mobilization was replicated across the country,
and currently there are over 10 RSPs operating
across Pakistan. These programmes are
registered similar to microfinance institutions
and NGOs. The RSP mandate is primarily to
work in rural areas and their services include
Table 6: Key Statistics for MFIs in Pakistan
Year Founded
Asasah
Kashf
SAFWCO
Akhuwat
OPP
2003
1996
1986
2001
1987

Active Borrowers
24,692
295,275
16,742
10,194
22,129
Active Savers
24,692
192
3,046
103
58
153
Gross Loan Portfolio

(Rs. Million)
Value of Savings
(Rs. Million)
Financial Performance Indicators (2007)

Operational Self
Sufficiency (%)
Advances to Deposit
ratio (%)
Portfolio at Risk - at 90
days (%)
64.7
164.0
90.4
64.8
224.7
-12.8
9.3
-7.0
-11.9
12.6
0.0
0.1
3.6
0.4
0.3
Return on Assets (%)
37.0
36.2
15.7
11.1
19.7
20
3.2.3
NGOs and RSPs
Both NGOs and Rural Support Programme
not only microfinance but also infrastructure

development, education and health. With
respect to microfinance, they are the largest
peer group, accounting for 36 percent of active

borrowers in December 2007. However, this
large share can mostly be attributed to the
National Rural Support Programme (NRSP),
which accounts for 80 percent of this peer
group's outreach. Again, due to their
multidimensional nature, the microfinance
services offered by most RSPs are limited to one
or two basic credit products. RSPs also mobilize
savings from their members but these are
deposited in commercial banks in the name of
the community organizations. Health, along
with life (or more precisely credit-life)
insurance, has also been recently introduced for
members.
Microfinance Institutions, released by the Asian

Development Bank in April 2008, ranks
individual MFPs across Asia along nine
performance parameters including outreach
(borrowers and depositors), scale, market
penetration, growth, profitability, efficiency,
productivity and portfolio quality. Of the 392
institutions included in the analysis, the only
microfinance provider who managed to be
ranked in eight of the nine categories was from
Pakistan Kashf. Institutions that figured
amongst the top 20 within different categories
included Khushhali Bank in terms of outreach,
FMFB in terms of growth, and Thardeep Rural
Development Programme (TRDP) and Orangi
20
Pilot Project (OPP) in terms of productivity .
See Table 7 for some headline statistics for

these two types of MFPs.
Table 7: Key Statistics for some NGOs and RSPs in Pakistan
Year Founded
NRSP
PRSP
DAMEN
CSC
1991
1998
1992
1989

Active Borrowers
407,641
69,361
32,627
15,525
Active Savers
760,425
333,714
4,711
552
250
114
969
82
101.2
65.8
108.7
85.1
Advances to Deposit ratio (%)
-1.8
-12.0
0.6
-8.3
Portfolio at Risk - at 90 days (%)
0.5
19.1
1.7
1.0
21.7
13.6
34.8
12.1
Gross Loan Portfolio (Rs.

Million)
Value of Savings
(Rs. Million)
Financial Performance Indicators (2007)

Operational Self Sufficiency (%)
Return on Assets (%)

3.2.4
Commercial Financial
Institutions
To date, there has been limited interest of

commercial financial institutions in the
microfinance sector, especially as far as direct
provision of these services is concerned. At the
moment, only two CFIs, namely Bank of Khyber
(BOK) and Orix Leasing Pakistan Ltd. are
involved in this business and their share in
outreach is only a small one percent.
3.2.5
MFPs in Pakistan compared

across Asia
The 2007 MIX Asia 100 Ranking of

20
3.3
Meso-level Organizations
The meso level players have an important role

within the financial sector. They make up the
financial sector infrastructure, providing
support services such as technical assistance,
training and access to information. Within the
microfinance sector in Pakistan, a number of
organizations make up the meso level.
3.3.1
Networks and Associations
Pakistan Microfinance Network (PMN) is the

only national level network for microfinance
practitioners in the country. It emerged after
the first Microcredit Summit held in 1997 as an
informal effort by some practitioners, and was
To see the complete rankings, please refer to the ADB's 2007 MIX Asia 100 Ranking of Microfinance Institutions
21
formally registered with the SECP as a nonprofit company in 2001. Its membership
currently includes 20 organizations from the
various MFP peer groups who collectively
account for over 95 percent of the sector. The
network's vision and mission revolve around
expanding access of formal financial services
and supporting retail institutions in achieving
this objective through its services including
research, capacity building, promotion of best
practices and transparency, networking with
policymakers and stakeholders, and knowledge
management. Its efforts towards promoting
transparency and creating an enabling
environment for microfinance in Pakistan have
been widely recognized.
A few provincial level networks are also
operating in the country but except for the
Sindh Microfinance Network that was
established through the efforts of the local
NGOs, others have failed to move forward.
Microfinance banks are also members of the
Pakistan Bankers' Association (PBA), which was
established in 1953 to coordinate the efforts of
the banking industry in Pakistan.
3.3.2
Technical Assistance and

21
Training
Training needs of MFPs vary for each level of

management. It is widely accepted that most
organizations prefer to set up in-house training
facilities that can provide customized trainings
to their field staff tailored to their own product
features, procedures and policies. The middle
and senior management, on the other hand,
require more generic tools and these can be
provided through sector-wide training
programs.
One of the major roles for PMN in its initial
years was to provide training services to the
microfinance sector. However, its major
functions have evolved away from training over
recent years, and its strategy is to promote the
private sector to step in and fill this gap.
Currently, PMN provides only two trainings per
year, mostly aimed at middle management and
open for both members and non-members.
Along with this, it offers a number of
international training courses to the senior
management of its members.
Although Pakistan's microfinance sector has
bridged the experience and technical know-
how gap through the services of international

microfinance consultancy organizations (like
Women's World Banking, ACCION, Mennonite
Economic Development Associates and
Development Innovations Group), these
organizations lack a local presence. ShoreBank
International (SBI) is currently the primary
microfinance advisory and capacity building
service provider with a long-term local
presence, offering a combination of
international expertise and an understanding of
the local context through a team of
international and country-based consultants.
Usually, SBI provides technical assistance to
individual institutions but it has also
undertaken sector-wide initiatives. For example,
in 2007, SBI launched a Human Resource
Development Initiative with the objective of
improving the quality of human resources
available to the microfinance sector in Pakistan.
The initiative targets the middle management
through generic, sector-wide trainings;
customized training delivery to individual MFPs;
and development/advice on institutional human
resource strategy and policies.
3.3.3
22
Rating Services
The JCR-VIS Credit Rating Company is one of

23
two local companies providing ratings for
financial institutions in Pakistan. It is also the
only company that provides ratings for MFBs
and MFIs. MFBs are required to be rated
annually as per SBP's requirements, but some
MFIs have also had themselves rated in order to
ascertain 'where they stand,' or as part of their
strategies to access commercial funding in the
future.
3.3.4
Credit Bureaus
Currently, there is no credit bureau in Pakistan

that covers the entire microfinance sector. The
largest credit bureau is the CIB, housed in and
run by the central bank, and all banks are
required to submit information on all
outstanding loans to the CIB. Microfinance
banks are also required to report to the CIB. In
addition to SBP's CIB, a few private sector credit
bureaus also exist but they mainly serve the
banking sector.
However, efforts are underway to establish a
credit bureau for the microfinance sector. Due
to the strong interest of its members, PMN has
begun working on setting up a pilot credit
bureau in Lahore, covering all MFPs working in
22
21
22
23
Parts of this section come from PMN's publication Country-Level Savings Assessment Pakistan, April 2008
This section comes from PMN's publication Country-Level Savings Assessment Pakistan, April 2008.
The other company is the Pakistan Credit Rating Agency Limited (PACRA). Foreign banks are rated by international rating agencies such as Moody's and Standard & Poor's.
the district. Initially, this will house negative

information only and is mostly intended to be a
test run for a full fledged, country-wide CIB for
the sector. In addition to the PMN, the ADB has
also undertaken a feasibility study for the
establishment of a CIB for the sector and their
report is expected soon.
3.4
24
Funding
The changing landscape of the microfinance

sector in Pakistan also translates into changes
in the sources of funds for the sector. Given
that NGOs have dominated the sector in the
past, donor money and apex lending (see Box 5
for an overview of the apex funding body in
Pakistan) have played an important role in
funding the microcredit market. However, as
more commercially oriented players begin to
take the lead and the sector moves along a fast

growth trajectory, these sources will prove
insufficient.
PMN projections show that by 2010, the sector
will experience a seven-fold increase in gross
outstanding loans and a six-fold increase in its
asset base. In 2007, assets available in the
sector stood at roughly Rs. 30 billion (23 billion
already on the balance sheets of MFIs/MFBs,
and another additional Rs. 7 billion of available
funds with PPAF), which implies that there will
be an incremental additional requirement of Rs.
40 billion by 2010. The expansion is projected
to proceed as per Figure 5 below, which breaks
funding sources into four broad categories.
This raises some important issues related to
factors driving capital structures:
Box 5: Pakistan Poverty Alleviation Fund (PPAF)

Currently, the only significant wholesale funding agency for microfinance is the PPAF, which was
established in 2000 as a not-for-profit private company sponsored by the GoP and funded by the
GoP and the World Bank. It was inspired by the success of Palli Karma-Sahayak Foundation (PKSF)
in Bangladesh, which has a more narrow focus on microfinance. The PPAF was established to help
the poor by enabling them to gain access to resources for their productive self-employment, to
encourage them to undertake activities of income generation and poverty alleviation, and for
enhancing their quality of life. As an Apex fund, PPAF disburses soft loans to a myriad of
microfinance institutions in Pakistan. It cannot provide loans to MFBs since PPAF requires
MFI/MFBs to give a charge on their loan book, and as per the prudential regulations for MFBs,
they cannot give such a charge unless approved by the central bank. It also provides grants on a
cost-sharing basis for development of small-scale community infrastructure, and strengthens
development and MFIs by supporting their capacity building activities. The resource base of PPAF
consists of an endowment from the GoP of Rs. 500 million and a World Bank credit of US$ 180
million.
Source: Oxford Policy Management (2006) 'Poverty & Social Impact Assessment: Pakistan Microfinance Policy'. Pp 37.
Figure 5: Projected Capital Structure of Microfinance Consolidated MFI/MFB Assets

80
70
10
PKR billions
60
50
40
7
30
20
10
0
5
3
3
1 0
2004
4
5
11
2005
Savings
5
6
10
3
3
2006
2007
PPAF Debt
24
This section draws heavily upon PMN's concept note on Microfinance Industry Funding Facility 2007.
34
25
10
17
8
5
6
2008
Debt
9
2009
15
2010
Equity
23
Savings are a priority for most MFBs, but
volumes are likely to lag:
become more pressing by 2009-10

onwards in the projections.
Most MFBs prioritize savings as a more stable,

low cost source of funds but savings deposits
will take some time to accumulate, even with
major investments in market research and
product development. MFBs are still relatively
new to their markets (on the whole). Clients
are becoming more aware gradually and the
internal systems for savings product delivery
are being refined. Therefore, the near term
pressure will be on alternative forms of
funding.
Debt will be the major initial source for

growth funding:
By 2007, the overall industry remained underleveraged against its equity base, with just
under one quarter of assets financed by equity.
There is room to grow by leveraging liabilities
in the near term. The deployment of additional
available funds of PPAF would be an important
contribution to the growth projections but
even this would not be sufficient. Additional
debt would need to be raised from a
combination of sources:
The likely expansion scenario shows early

reliance on debt but later, the leverage will
begin to push against available equity and the
priority will shift to equity capital, particularly
to meet capital requirements in the later years
of these projections. The capital adequacy
requirement for MFBs is 15 percent, and
projections show that this will be a constraint
as early as 2009. Similarly, for NGO MFIs, the
capital constraint is much higher since they are
considered as manufacturing concerns by the
banks and not as financial institutions, and
hence cannot leverage their balance sheet more
than four times. There will be the need for
more equity capital by this point, which could
partly be met by retained earnings (if
MFIs/MFBs sustantially improve their financial
performance over this time period), and would
be further enhanced through share capital or
possibly mezzanine financing (such as
subordinated debt), and may be through
unrestricted funds from donors or social
investors/foundations.
Different options and efforts are being
considered, both at the public and private level,
to meet these funding needs of the industry.
These include:
Commercial Bank Loans
Debt from Capital Market
Funds from specialized microfinance

investment vehicles (MIVs)
Program for Increasing Sustainable
Figure 6 projects the breakdown of new debt

sources by 2010, though this scenario is subject
to certain contextual factors, particularly with
respect to pledging of assets by microfinance
banks and the restrictions on borrowing in
foreign currency. These various sources of
additional debt financing are easy substitutes
for one another and therefore, the important
figure is the total projected debt funding
requirement of Rs. 34 billion.
The need for more equity capital will
Microfinance (PRISM): This is a five-year

program managed by the PPAF and
financed through a long-term
concessionary loan to the GoP of
approximately US$ 35 million from IFAD,
and supplemented by US$ 11.6 million
from local sources (commercial financial
institutions, PPAF and PPAF partner
organizations). The program will have five
components: credit enhancement, equity
fund, technical assistance, knowledge
Figure 6: Composition of Debt in 2010 (PKR billions)

2.04
6.2
21.1
4.74
24
Commercial Bank Loans

Other Concessional Funding
Capital Markets
MIVs
management and policy dialogue, and

program management, and will largely
focus on Tier II institutions in the sector.
PRISM was launched in early July 2008.
Setting up a Funding Window at SBP:

The central bank has set up a task force to
look at possible options to meet the short
term liquidity requirements of the sector
(both MFBs and MFIs). Based on the
recommendations, some initiative is
expected to be launched during this year.
SBP is also looking at options for setting up
a refinancing window that can provide
commercial finance through risk
participation, and can also help in lowering
the cost of borrowing for the MFI/MFBs.
Fund Structure with Credit Enhancement

through Subordination: This is a more
long term option being explored by PMN
and KfW, which would ideally synergize
with SBP. It would be similar to the KfWsponsored European Fund for Southeast
Europe (EFSE), using differently priced risk
tranches for credit enhancement, and
would include an equity tier to absorb first
losses.
3.5
Impact
Determining the impact of microfinance is a

difficult and challenging task. As Heather
Montgomery explains in her 2005 impact
assessment of KB: a perfect impact evaluation
really needs to answer a counterfactual
question: how does the status of participants in
the program compare with how those same
individuals would have fared in the absence of
Poverty & Social Impact Assessment:

Pakistan Microfinance Policy, May 2006
This assessment, carried out by Oxford Policy
Management for DFID in 2006, aimed at
understanding how access to microfinance
services has changed, and how financial
services may have impacted the poor and other
socioeconomic groups (e.g. the rural
26
population, women) . To achieve this objective,
the paper employed a two-pronged analysis:
i.
ii.
Analysis of the national datasets (Pakistan

Integrated Household Survey and Pakistan
Socio-Economic Survey) undertaken prior
to the reforms in microfinance policy to
get a baseline scenario and changes over
time.
Small mixed-methods method survey of
approximately 100 households to get
insights into changes in access and their
impact.
The first component of analysis showed that

the poor had very limited access to formal and
semi-formal financial services in 2000, and that
most of the loans were directed towards
consumption. Large loans were generally
provided by formal and semi-formal credit
providers. In terms of impact on the poor,
evidence suggested that availability of credit
had significantly cushioned the poverty impact
of the drought in the NWFP and Punjab.
PMN's Capital Markets Initiative:

Realizing the importance of long term
financing for growth capital, PMN is
following a three-pronged strategy: a)
Hiring a Manager who can run its Capital
Markets Initiative with an aim of
developing a road map for PMN's role, b)
Being actively involved with KfW in setting
up an apex fund (as discussed above)
through an effort that synergizes with the
SBP initiative, and c) Continuing to raise
this issue and be directly involved in
discussions with the relevant stakeholders
to develop policy instruments and improve
the regulatory framework that helps in
providing commercial finance to the
industry.
the program? Or, alternatively, how would nonparticipants have fared in the presence of a
program? Nevertheless, given the amount of
funding flowing into the sector and the
government's focus on microfinance, it is
important to look at evidence of its impact.
This impact has often been looked at in terms
of poverty alleviation alone, whereas impact
can also be seen in the context of access to
financial services, decreasing vulnerabilities
and/or empowerment of the marginalized. In
this section, we summarize the findings of a
few major impact assessments that have been
25
conducted within the sector in Pakistan .
The second component, although limited in its

scope and methodology, produced some
interesting results. MFP loans emerged as the
only source of funding available for investment
purposes, although there was some evidence of
loan misuse. The study concludes that given the
level of reported profits from MFP financed
businesses, the impact on income was positive
and substantial. Another finding was that MFPs
25
25
For references to other studies, please see the reading list in the annexure.
The other objectives of the study included looking at the evolution of microfinance services and financial sustainability of the sector, as well as discussing the issues that need to
be addressed through policy developments in the future. Since this section relates to impact, our discussion on the report does not cover these aspects of the study.
26
tend to target the relatively better off in a

community due to their lower risk of default
and thus, were not reaching the poorest.
However, benefit to the extreme poor could
trickle through the informal support
mechanisms the relatively better off are often
seen lending to the needy in times of
emergency and thus, an increase in their
incomes would indirectly benefit the relatively
worse off. Another issue highlighted is that
there is immense potential for improvement:
many clients of MFPs expressed the need for
savings schemes and other financial products.
Social Impact Assessment of
Microfinance Programs, April 2007
This study was commissioned by the European

Union-Pakistan Financial Services Sector Reform
Program and undertaken by an independent
consultant. The objective of the study was an
assessment of the social impact of microfinance
programs (group and individual lending) of
Microfinance Institutions/NGOs/Microfinance
Banks on borrowers, communities and on the
institutions themselves, and whether these
MFIs are achieving their social missions. Six
MFPs were selected for the study on the basis
of work experience, number of borrowers,
ownership pattern, funding sources,
methodology and area of operation, etc. to
ensure that a diverse range of institutions were
covered. The study was designed to establish a
connection between change and participation
in a microfinance program, and employed the
difference-in-difference approach. The use of
Mixed Methodology allowed the researchers to
capture not only quantitative data but also
qualitative findings based on focus group
discussions.
Major conclusions of the paper were:
i.
26
The social and economic impact on the

lives of those who take credit, for the most
part, is limited. Although improvements
were observed, they were not significant.
ii. Both the timing (duration and frequency)
and size of loan affect impact a longer
relationship with microfinance and/or
higher amounts of credit have greater
impact.
iii. Very few only 23 percent of the urban
borrowers were below the poverty line
(using the Pakistan Official Poverty Line of
Rs.1000 per capita), whereas 50 percent of
non-agricultural and 61 percent of
agricultural borrowers were below the
poverty line.
iv. There was no significant positive impact on
the aspects of women's empowerment.
Based on these conclusions, the authors

recommended that institutions should develop
longer term relationships with clients and raise
the loan sizes sooner. MFPs also need to clarify
their definition of poverty if they claim to be
targeting the poor. Given that not much impact
on health and education was observed, these
require specific interventions and microfinance
alone cannot create the change.
Assessments by MFPs: Khushhali Bank

and Kashf Foundation
Although a number of institutions have carried
out impact assessments for their programs, it is
not feasible to discuss all (some are referred to
in the reading list in the annexure). Two
studies, the first of KB and the second of Kashf
Foundation, are discussed here.
Khushhali Bank: This assessment was carried
out by the ADB in 2005 to empirically evaluate
whether KB was meetings its dual objectives:
financial and social. The study, using
prospective clients who had not yet accessed
loans as the control group, drew conclusions
related to the impact of the overall program of
the bank, as well as the impact of the different
lending methodologies i.e. lending in urban
areas, to women, and to groups formed by
partner NGOs. It was found that access to and
participation in KBs microcredit program has
positive impacts on both economic and social
indicators of welfare, as well as employment
and income generating activities.
Kashf Foundation: This assessment in 2005
compared mature Kashf clients (who had been
with the program for more than three years) to
new clients (who were in their first loan cycle)
through using focus groups as well as personal
surveys. Conclusions were drawn on various
aspects of the MFIs operations: i) targeting
effectiveness - it was found that 90 percent of
clients lived on less than $1 a day, ii) poverty
alleviation - it was found that income of
mature clients was 51 percent higher than that
of new clients on average, and iii)
empowerment - over 75 percent of clients in
both groups were involved in household
decisions and had some control on the
household income.
3.6
Challenges & Opportunities
Collectively, Pakistan's microfinance sector has

shown impressive growth over the past two
years. Supported by a favorable policy
environment, practitioners have focused on
expanding outreach and have begun
experimentation with new products and
services such as savings and insurance.

However, several challenges still remain:
Funding Gap: All estimates suggest that one of
the factors that may stall the growth
momentum this sector has achieved over the
last few years could be non-availability of debt
fund now and equity investment by the middle
of 2009. It is estimated that in order to achieve
the 3 million target as set out by the industry
under the leadership of the SBP an incremental
US$600-700M is required in debt, deposit and
equity to achieve the set target. This also clearly
indicates the fact that though we do need a
credit enhancement facility in the short to
medium term the real strength of the sector
will rest on the fact that we need MFBs to start
mobilizing deposits as that will lead to both
availability of a permanent and stable source of
financing which is also cost effective given the
current volatile interest rate market
Need for Strong Retail Institutions: A look at
the micro level shows significant gaps within
the microfinance service providers in terms of
internal systems and controls, institutional
capacity, financial sustainability and risk
management. Amongst market leaders, most
remain unsustainable (see Figure 7). If growth
is driven by financially weak institutions, it may
become unsustainable in the long run. Other
issues that arise from weak institutions include
microfinance banks that have the regulatory

cover to offer services other than credit to their
clients. Efforts on the savings and insurance
side have been limited to the MFPs' credit
clients and need to be extended beyond this
market. Most service providers offer similar
products (in terms of loan size and terms of the
loan), although some have experimented with
different market segments through individual
loans (e.g. Kashf and Tameer MFB). It is
anticipated that going forward, microfinance
banks will focus on enterprise lending and
smaller NGOs will find a niche with the
relatively poorer groups.
Human Resources: The sector's expansion and
an increase in competition have brought forth
the challenge of training and retaining the
human resource base. As institutions diversify
into different markets and services, the need
for staff trained in these business lines will
increase. According to SBP and PMN estimates,
nearly 20,000 personnel (84 percent at field
level, 15 percent at middle management and
one percent as senior management) will be
employed by the sector by 2010. In addition to
this, qualified trainers and technical assistance
providers will also be required to meet this
demand.
Regulatory Challenges: Although the
regulatory framework for microfinance in
Figure 7: Top 5 MFPs in terms of Outreach and their Sustainability

180
160
500
140
120
100
300
80
200
OSS (%)
400
Active Borrowers ('000)
600
60
40
100
20
0
NRSP
KB
KASHF
Outreach
FMFB
PRSP
Sustainability
limited ability to tap into commercial sources

for funds, staff retention and even the ability to
attract deposits, especially from institutional
depositors.
Product Diversification & Market
Segmentation: The sector remains heavily
focused on credit despite the entry of
Pakistan is regarded as highly favorable, some

challenges and issues remain. These include:
Caps on loan size.
Scheduled bank status for MFBs.
MFIs treated as manufacturing concern by

CBs, limiting their ability to leverage debt
27
up to four times vs six time leverage if

treated as a financial concern.
Bar on accessing foreign funds.
MFBs cannot access commercial debt by

pledging their assets or loan book without
prior permission of the central bank. On
the other hand, commercial banks cannot
do clean lending beyond Rs. 2 million. This
has resulted in a regulatory paradox that
reduces the ability of MFBs to raise debt.
Notwithstanding these challenges, there are a
number of opportunities that can positively
affect the sector's growth and performance in
the future.
Social Transparency: There is an increasing

recognition at an international level that
microfinance practitioners need to start
thinking about transparency in terms of the
'double bottom line' not only report on their
financial performance but also their social
performance. In this context, PMN has begun
focusing on social transparency and plans to
actively work with its members to
institutionalize reporting of social indicators, as
they currently do on financial indicators. This
again would be an opportunity for MFPs to not
only review their management and internal
systems to better achieve their social mission
but also to attract social investors and social
funds.
Scale and Sustainability: The size of Pakistan's

population and number of poor imply that
there is a large potential market for
microfinance in Pakistan. According to PMN
estimates, this is close to 27 million
individuals27. This can allow retail organizations
to achieve scale and sustainability. Naturally,
some areas and regions will be penetrated first
(low-hanging fruit principle), and it can be
anticipated that competition would increase
here. Some evidence of this has already been
seen in districts like Lahore. Such an
environment has its own challenges but the
sector can covert these challenges into
opportunities to behave responsibly and adhere
to standards of consumer protection to
maintain healthy competition.
Using Technology: There are currently an

estimated 80 million mobile telephone
subscribers in Pakistan. The fact that use of
mobile phones and branchless banking in
expanding microfinance outreach is being
tested internationally, coupled with the
regulators' interest in this area, can be a great
opportunity for the microfinance sector in the
country.
28
27
PMN's quarterly publication 'MicroWATCH' provides estimates of potential microfinance clients at the district level.
References
Ahmed, S. Mohsin and Mehr Shah. 2007. Amendments to the Microfinance Institutions Ordinance,
2001: Implications for the Sector. Essays on Regulation and Supervision. CGAP.
http://microfinancegateway.com/content/article/detail/44639
Akhtar, Shamshad. 2007. Expanding Microfinance Outreach in Pakistan: Presentation to Prime
Minister. State Bank of Pakistan.
http://www.sbp.org.pk/about/speech/governors/dr.shamshad/2007/MF-PM-17-Apr-07.pdf
Asian Development Bank. 2008. 2007 MIX Asia Ranking 100 Microfinance Institutions.
Asian Development Bank. 2007. List of On-going Microfinance Loans, Equity Investments and
Grants. http://www.adb.org/Documents/Microfinance/Ongoing-Microfinance-Projects.pdf
Asian Development Bank. 2007. Asian Development Outlook 2007 Update.
Classens, Stijn. 2006. Access to Financial Services: A Review of the Issues and Public Policy
Objectives. The World Bank.
Duflos, Eric, Alexia Latortue, and Rochus Mommartz, et. al. 2007. Country-Level Effectiveness and
Accountability Review (CLEAR) with a Policy Diagnostic, CGAP.
Fernando, A. Nimal. 2007. Low Income Households' Access to Financial Services International
Experience, Measures for Improvement, and the Future. Asian Development Bank.
Finance Division. 2008. Pakistan Economic Survey 2007-08. Government of Pakistan.
Finance Division. 2007. Pakistan Economic Survey 2006-07. Government of Pakistan.
Finance Division and Planning Commission. 2001. Interim Poverty Reduction Strategy Paper.
Government of Pakistan.
Government of Pakistan. 2003. Accelerating Economic Growth and Reducing Poverty: The Road
Ahead (Poverty Reduction Strategy Paper).
Hussain, I. and H. Demaine. 1992. How Informal Credit offers Greater Benefit to Farmers: An
Inquiry into Rural Credit Markets in Pakistan. Bangkok, Thailand: Division of Human Settlements
Development, Asian Institute of Technology
29
Ministry of Finance. 2007. Ensuring a Demographic Dividend: Unleashing Human Potential in a

Globalized World - Draft Summary of the Poverty Reduction Strategy Paper-II. Government of
Pakistan
Ministry of Labor, Manpower and Overseas Pakistanis. 2007. Pakistan Employment Trends.
Government of Pakistan.
Montgomery, Heather. 2005. Meeting the Double Bottom Line - The Impact of Khushhali Bank's
Microfinance Program in Pakistan. Asian Development Bank Institute.
Nielson Company. 2007. Unearthing Consumer Insights about Access to Financial Services in
Pakistan Presentation. http://www.pmn.org.pk/link.php?goto=a2fs
Pakistan Microfinance Network. 2007. Microfinance Industry Funding Facility Concept Note.
Qadir, Adnan. 2005. A Study of Informal Finance Markets in Pakistan. Pakistan Microfinance
Network. http://www.pmn.org.pk/link.php?goto=res
Securities and Exchange Commission of Pakistan. 2007. Annual Report 2006-07.
State Bank of Pakistan. 2007. Annual Report 2006-07.
State Bank of Pakistan. 2008. Statistical Bulletin. Various issues.
http://www.sbp.org.pk/reports/stat_reviews/Bulletin/2008/index.htm
United Nations Development Fund. 2008. Human Development Report 2007/08.
http://hdr.undp.org/en/reports/global/hdr2007-2008/
World Bank. 2007a. Finance for All? Policies and Pitfalls in Expanding Access. A World Bank Policy
Research Report.
http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTRESEARCH/EXTPRRS/EXTFINFORALL/0,,me
nuPK:4099731~pagePK:64168092~piPK:64168088~theSitePK:4099598,00
30
Further Readings and Resources

I.
The Economy & Financial Sector of Pakistan
State Bank of Pakistan:
Banking System Review. Various Issues

http://www.sbp.org.pk/publications/index2.asp
Financial Sector Assessments. Various Issues
http://www.sbp.org.pk/publications/index2.asp
SBP Annual and Quarterly Reports (The State of Pakistan's Economy)
Finance Division, Ministry of Finance:
Pakistan Economic Survey 2007-08

http://www.finance.gov.pk/finance_economic_survey.aspx
Others:
Husain, I. 2000. Pakistan: The Economy of an Elitist State. Oxford University Press
Zaidi, S. Akbar. 2006. Issues in Pakistan's Economy. 2nd Edition. Oxford University Press
Websites:
II.
State Bank of Pakistan: www.sbp.org.pk

Finance Division, Ministry of Finance: www.finance.gov.pk
Securities & Exchange Commission of Pakistan: www.secp.gov.pk
Microfinance Sector
Regulations:
Microfinance Institutions Ordinance 2001

Prudential Regulations for Microfinance Banks/Institutions
These and other policy documents for the sector can be accessed through:
http://www.sbp.org.pk/l_frame/index2.asp
http://www.sbp.org.pk/about/micro/index.htm
Market Demand and Supply:
Access to Finance Study - Presentation on Focus Group Discussions
http://www.pmn.org.pk/link.php?goto=a2fs
Burki, H. and Mehr Shah. 2007. The Dynamics of Microfinance Expansion in Lahore.
31
Pakistan Microfinance Network.
Burki, H. and Shama Mohammed. 2008. Mobilizing Savings from the Urban Poor in
Montoya, M. and Aban Haq. 2008. Pakistan - Country Level Savings Assessment. Pakistan
McGuinness, E. and Volodymyr Tounytsky. 2006. The Demand for Micro Insurance in
Pakistan - An Initial Inquiry. ShoreBank International.

Microfinance Network
Pakistan. Pakistan Microfinance Network.
Sector Performance:
III.
Impact Assessments
-
32
Pakistan Microfinance Network. 2007. Pakistan Microfinance Review 2006.

http://www.pmn.org.pk/link.php?goto=pir
Pakistan Microfinance Network. MicroWATCH. Various Issues
http://www.pmn.org.pk/link.php?goto=mv
Rehman, N. 2000. Social Impacts and Constraints of Micro-Credit in the Alleviation of

Poverty. A qualitative Study of the Micro-credit Program OPP Orangi Charitable Trust.
Hussain, A. et.al. 2003. National Human Development Report. PIDE
Khan, S.A. 2001. The Impact Assessment Study: Analysis of Kashfs Micro-finance and
Dastkaari Program on Clients' Socio-Economic Lives. Kashf Foundation.
Gallup Pakistan. 2002. The PPAF Micro-Credit Financing: Assessment of Outcomes Study.
PPAF
Aga Khan Foundation. 2002. Reaching the Poor through Social Intermediation: Microfinance and the Building of Social Capital. Aga Khan Foundation, Canada.
Zaidi, S.A. 2003. Orangi Charitable Trust (OCT)
Pakistan Microfinance Network Secretariat

38-B, Street 33, F-8/1
Islamabad, Pakistan
Tel: +92-51-2816139-41
Fax: +92-51-2854702
E-mail: info@pmn.org.pk
Website: www.pmn.org.pk

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Microfinance

Funded by the Citi Foundation

ABOUT THE CITI NETWORK STRENGTHENING PROGRAM

Microfinance Industry Assessment: A Report on Pakistan

Aga Khan Agency for Microfinance

Bangladesh Rural Advancement

Notes: Exchange rate in June 2008: 1 US Dollar

Financial Sector Overview

Financial Service Providers

Non-Bank Financial Institutions

Other Financial Service Providers

The Role of Informal Financial Markets

Access to Financial Services

Barriers to Access for Low-Income

Regulations and Government Initiatives

Financial sector reforms

Key Strategies for Financial Inclusion and

Regulatory & Supervisory Framework

Microfinance Sector in Pakistan

The Retail Level Players

NGOs and RSPs

Commercial Financial Institutions

MFPs in Pakistan compared across Asia

Networks and Associations

Technical Assistance and Training

Challenges & Opportunities

Further Readings and Resources

List of Tables, Boxes & Figures

Key Macroeconomic Indicators

Social Development Indicators: Regional Comparison

Poverty Profile of Pakistan

Financial Penetration Rural vs. Urban (December 2006)

Key Statistics for MFBs in Pakistan

Key Statistics for MFIs in Pakistan

Key Statistics for some NGOs and RSPs in Pakistan

Financial Inclusion Programme (FIP)

Microfinance Sector Development Programme

Pakistan Poverty Alleviation Fund (PPAF)

Differentiating between Access and Use

Average Deposit & Loan Sizes of Different Financial Service Providers

Origin of Microfinance Providers in Pakistan

Active Borrowers by Peer Group (March 2008)

Projected Capital Structure of Microfinance Consolidated MFI/MFB

Composition of Debt in 2010 (Rs. billions)

Top 5 MFPs in terms of Outreach and their Sustainability

Contextualizing the microfinance sector within the

Pakistan's socio-economic history reflects the

Microfinance Industry Assessment

The last few years have been a period of high

threat to the economy over the past year. Some

Table 1: Key Macroeconomic Indicators

Real GDP growth rate (%)

Per capita income (US$)

Inflation rate (%)

Current Account Balance (% of GDP)

Fiscal Deficit (as % of GDP)

Foreign Direct Investment (US$ million)

Average exchange rate (Rs./ 1 US$)

Unemployment rate (%)

* Data for FY08 pertains to July April.

Table 2: Social Development Indicators: Regional Comparison

Adult illiteracy rate (%)

Infant mortality rate (per