The Microfinance Sector in Pakistan

Group Members: IJAZ SALEEM ABASS KHAN SHEHZAD AHEMAD

Presentation Outline

1. 2. 3. 4.

Pakistan and its Macro Economy The Microfinance Landscape Performance Trends Challenges

Macro Economy
Ultimate Objective: 7.5% GDP 4.2% Fiscal Deficit Public debt 53.4% External Liab. 27.1% Per Capita Income US$ 925. Investments: 23% Trade gone up from $20 to $ 46b Stable exchange rate:.7% dep. last year Forex covers almost 6 months of imports Raising capital both debt and equity from international markets
Economic Survey of Pakistan 2009-10

1) Create jobs, 2) Raise incomes and 3) Reduce poverty 7.9% Inflation Tax-GDP ratio:10.5% 158.2 million population Saving: 18% Banking spread:6.47.8% Trade deficit: 9% Current account: 5% 20 million banking clients with less then 6m borrowers Low level of investments in the social sector

Macro Economy

23.9% live below the poverty line

28.1% Rural 14.9% Urban Poverty

54% adult literacy 2.4% & 0.6% of GDP on education and health Bigger challenge
equitable distribution of resources Passing on benefits to the poor

The Sector Landscape

Outreach
No. of Active Clients
1,200,000 1,000,000 800,000 600,000 400,000 200,000 1999 2000 2001 2002 2003 2004 2005 2006 2007

Specialized

Mult i-Dimensional

The Microfinance Potential

2004-5 HIES Households (Millions) Estimated Adult Population (Millions)
21.7 32.2 17.1 12.4 4.6 0.8 29.5 Million Adults

Non-Poor Transitory Non-Poor Transitory Vulnerable Poverty Line Transitory Poor Chronic Poor Extremely Poor

6.4 9.0 4.8 3.5 1.2 0.2

Market for Microfinance

30 25 20 15 10 5 0 Potential Target (2010) Actual

Active Borrowers

Market Penetration by Province

Reforms in the Microfinance Industry

1 2 3

Policy

Regulatory

Institutional

3 Microfinance Banks 6 Specialized NGOs 1 Rural Support Programme 1 Leasing Company

Exponential Growth to 3M Microfinance is a sustainable commercial activity to be run by private sector Government to Provide an enabling environment with a level playing field

2.5

3M Capacity of Existing Providers

SBP to play a stewardship role Tax incentives Branchless Banking policy

200 0

2006

2010

Product innovation Using technology and other innovative avenues as delivery channels

Reforms in the Microfinance Industry

1 2 3

Policy

Regulatory

Institutional

Viability of MFPs is essential SBP role as a supervisor strengthened MFBs are allowed to invest surplus funds in debt instruments other that government securities
Rs. 86 Billion
25%
Savings (22)

Recognition of the need for a diverse microfinance sector A continuum that allows transformation of MFIs to become MFBs and commercial banks entry in to microfinance 4 tiers of setting up MFBs with varied capital requirements

Rs. 14 Billion
5%
65% 30% Savings
(1) Debt (9) Equity (4)

55%

Debt (47)

20%

Equity (17)

Facilitator to attract private risk capital

Reforms in the Microfinance Industry

1 2 3

Policy

Regulatory

Institutional

Privatization of KHB strategic ownership Transformation of NRSP as a national level MFB PPAF to encourage linkage with banks and capital markets to draw in private sector investment 6 MFBs 7 MFIs
Pakistan, 62%

120 100
FSS (%)

South / East Asia, 109%` Sub Saharan Africa, 101%

80 60 40 20 2002 Pakistan Africa 2003 Year Asia ECA LAC MENA 2004 2005

4 RSPs and 1 leasing Company Definite move towards product diversification (insurance and deposits) Focus on client satisfaction: (SPM, Consumer protection and education, Credit Bureau etc)

Performance Trends

40% growth puts Pakistan in the top quartile globally

ACTIVE BORROWERS
Active Borrowers
1, 2 0 0 , 0 0 0 1, 0 0 0 , 0 0 0 800,000 600,000 400,000 200,000 19 9 9 2000 2001 2002 2003 2004 2005 2006 M a r c h07
Above 40% annual growth rate

Years

Growth is evenly spread across peer groups

Market Share By Peer Groups (Based on Institution Type)
100 90 4 1 5 5 5 6 10 8 11 14 10 16 12 14 5 24 5 25

% of Total Active Borrowers

80 70 60 50 40 30 20 10 0 0 1999 0 2000 28 16 2001 2002 73 95 90 54

45

35

34

34

35

39 30

40

37

35

2003 Year

2004

2005

2006

2007

MFB

RSPs

Specialized NGO MFIs

Others

MFBs and RSPs lead the sector

450,000 400,000

350,000

396,828

399,572

300,000

250,000 280,806 200,000

150,000

100,000

50,000 52,829 0 MFBs RSPs MFIs Others

Growth is spread across Pakistan

1,130,000

Except for Balochistan

Portfolio Yield inches up

Figure 5 : Trends in Portfolio Yield 40 30 20 10 0 MFB MFI RSP Pakistan 2004 2005 2006
1. Entry of new players with higher yields 2. Improved pricing by existing institutions 3. Change in accounting policy to effective yield method

Yields however are below global benchmarks

Figure 6: Global Benchmarks for yield on Gross Loan Portfolio Portfolio Yields Pakistan Nominal 21.3 Africa 32.8 Asia 30.7 ECA 30.5 LAC 33.6 MENA 31.8

Real

11.4

19.8

21.9

23.2

26.6

19.8

Sustainability remains flat

Figure 7 : Profitability Trends in Pakistan 90 80 70 60 50 40 30 20 10 0 2004 OSS 2005 FSS 2006

Regional Benchmarks-FSS (2005)

Africa : 91% Asia: 116% Middle East and North Africa:125% Latin America and Caribbean: 111%

East Europe and Central Asia: 117%

3.

1. Low Portfolio Yields 2. Asset Utilization Growth phase, high upfront costs

Portfolio at risk remains low

Regional benchmarks (2005) Asia: 2.4%

Repayment Risk of Individual Providers

%age of Outstanding Loans Overdue for More than 30 Days

Africa : 4.7% Middle East & North Africa: .5% Latin America & Caribbean: 2.1%

100 90 80 70 60

East Europe & Central Asia: 1.1%

1. Clearer vision of mf

2. Improved systems and internal controls

3. Training of staff, especially loan officers

50 40 30 20 10

4. High growth rate

5. Newer players 6. High write offs

Benchmark 5%

2003 2004 2005 2006

MFB adds capital but Debt continues to finance growth

Figure 14 : Incremental Growth in Balance Sheet

Pakistan RSPs MFIs MFBs

-2,000,000 0 2,000,000 4,000,000 6,000,000 8,000,000 Equity Commercial Debt Subsidized debt Deposits 10,000,000

Sector however is over capitalizedexcept for RSPs

100 90 80 70 60 50 40 30 20 10 0 Pakistan Equity MFB Subsidized Debt RSP Commercial Debt MFIs Deposits 35 36 30 40 49 43 60 48 8 8 14 7 0 10 1 11

Delivery Costs continues to grow

Figure 17a : Cost per Borrow er
3,500 3,000 2,500 2,000 1,500 1,000 500 2004 M FBs M FIs 2005 RSPs Paki stan 2006

1. 6 new institutions over the last 2 years,4 MFBs 2. High upfront investments in developing branch infrastructure and hiring and training human resources

Costs are however globally competitive

Figure 18 : Cost continues to be competitive 250 200 150 100 50 0
P akistan A frica A sia ECA LA C M ENA

Cost per Borrow er

P akistan Specialized

Industry continues to targets the lower end of market

Figure 19: Average Loan Balances
1,200 1,000 800 600 400 200 0 MFBs MFIs RSPs
ALB

100.0% 80.0% 60.0% 40.0% 20.0% 0.0% Pakistan Africa Asia ECA LAC MENA

ALB-to-Per Capita Income

Industry continues to target rural poor

Proportion of Urban & Rural Borrow ers

Pakistan
2

MFBs RSPs
RSPs

Proportion of Urban & Rural Borrow ers

NRSP-RP

KFMFI/MFB

FMFBL- TRDP-RP TFPRSP-RP* MFI/MFB NGO/MFI

MFIs

BOK-CB ZTBL-CB

OLP-CB

MFIs

Others

Others 0%

0% #REF! #REF!

20%

40% Urban

60% Rural

80%

100%

20%

40% Urban

60% Rural

80%

100%

FI

ASASAHMFI/MFB

FWBL-CB*

SAFWCONGO/MFI

DAMENGO/MFI

RCDCNGO/MFI

SRSP-RP

OPDNGO/MFI

LPRPNGO/MFI

IRCSNGO/MFI

.and percentage of women borrowers have increased

Figure 21: Gender Targeting 1 0.8 0.6 0.4 0.2 0 MFBs MFIs RSPs Pakistan Africa Asia ECA LAC MENA

Percentage of Women Borrowers

Challenges

Scale
3 Microfinance Banks 6 Specialized NGOs 1 Rural Support Programme 1 Leasing Company

2.5

3M Capacity of Existing Providers

2000

2006

2010

Financing
Rs. 86 Billion
Savings (22)

25%

55%

Debt (47)

Rs. 14 Billion
5% 65% 30%
Savings (1) Debt (9)

Average Loan: Rs. 20,000

20%
Equity (4)

Equity (17)

Human Resources

Total Staff 20,000 200

1%

Senior Management

15%

Middle Management

3,000

Field Staff

16,800

84%

Policy and Regulation

Public disclosure of social performance (e.g. outreach to women, rural areas) Provisioning requirement for MFBs Limit on loan sizes Pursue Truth in Lending and Consumer protection steps Capital Adequacy issues will soon crop up Set performance criteria for Microfinance Banks to gain access to clearing house or schedule bank status Clarity on forex rules for MFPs

Credit Information System

Credit information on borrowers will greatly reduce risks and transaction costs as market expands.

Advantages: reduces risks as competition increases in unsecured lending, can bring entry of commercial players
Ensure that NGOs and Banks are part of the system

SBP to take initiative for establishment

Ownership and management Pricing should be subsidized in early years

Technology
Importance of back office technology

Expansion of mobile phone network presents enormous opportunity for exponential expansion of lower cost finance services
Roughly 35 million users; many are urban poor

Explore models in branchless banking: G-Cash Philippines Wizzit Bank South Africa
Clarity on policy and regulatory issues

Thank You

Asset Utilization
Total Assets Translated into Active Loans
41% of assets
250

48% of assets

34% of assets

23% of assets

200

39% of assets

34% of assets

42% of assets

Regional Benchmarks (2004)

East Europe & Central Asia: 83% Latin America & Caribbean: 80% South & East Asia: 71% Middle East & North Africa: 69%

$ Millions

150 100 50 -

1999

2000

2001

2002 Year

2003

2004

2005

Sub-Sahara Africa: 68%

Gross Loan Portfolio

Total Assets