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| Liquidity trickling in microfinance sector |
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A lot more needed for including poor in financial system
Thursday, November 19, 2009
By Saad Hasan
KARACHI: A microfinance bank is near signing an agreement with commercial banks to borrow money to lend onwards to low-worth customers under a central bank credit guarantee facility, industry officials say.
Tameer Micro Finance Bank, says its CEO Nadeem Hussain, is close to securing financing from five banks under the State Bank of Pakistan’s (SBP) initiative to channel liquidity into the cash-strapped microfinance lenders.
“It took time to make commercial banks understand our business but we have done it and soon a substantial amount will be available with us,” he said without disclosing the size of the credit and names of the banks.
At least two such other deals have taken place since the Micro Finance Credit Guarantee Facility (MCGF) was launched late last year as part of the SBP initiative to bring more people into the formal financial system.
The facility covers risk for commercial banks which lend to their microfinance counterparts as the SBP guarantees up to 40 per cent of loss in case of default.
It was introduced in the wake of growing concerns that commercial banks serve only those customers who have high credit worthiness, depriving a large part of the population from banking service.
A recent World Bank-sponsored survey showed that 85 per cent of Pakistanis are either served by the informal financial system or are completely excluded. It also said moneylenders in the informal system charge as much as 57 per cent annual interest rate.
Illiteracy, fear of paper work and unavailability of collateral, are some of the reasons which keep many people away from the financial system, the report said.
While MCGF has helped few microfinance lenders overcome the liquidity shortfall, industry people say a lot more needs to be done for bringing about a big change. They say authorities have not yet taken the development of microfinance seriously.
Moazzam Khan, President of Network Microfinance Bank, explained that microfinance banks operate under a tough regulatory regime with little fiscal incentives to grow upon.
“We need some sort of concessional financing like export refinance,” he said, alluding to loans given to industrialists at less then half the prevailing market interest rate. “The loan at the interest rate being offered under MCGF is just not viable for us.”
The facility dictates that commercial banks can not charge more than 2 per cent plus the discount rate from borrowing microfinance banks. The interest over the discount rate reflects the risk premium in lending to the microfinance banks.
Microfinance has prospered in countries like Bangladesh because of interest-free loans and grants extended to the lenders, he said. “Grameen Bank has survived because of government support. You pull out foreign grants and funding from it and it will collapse. We also need soft loans.”
The prudential regulations for microfinance banks in Pakistan are also considered to be very harsh. These banks have to make provisioning of 25 per cent of the principal amount if a loan installment is not recovered within 60 days after it is due. Even commercial banks do not operate under such regulations.
“We already have a lot of overhead costs. Can you imagine our recovery officer has to travel 10 km into a katcha area to receive an installment of a few thousand rupees. SBP must realise this.”
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ISSN 1563-9479 
