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Table of Contents

EXECUTIVE SUMMARY


Poverty is a multifaceted phenomenon that includes, but goes beyond lack of adequate income. It is inevitable and it can be reduce through a number of resources. Microfinance is one of the means for the poor and low-income people to enhance their standards of living and thus reduce poverty. Microfinance Institutions (MFIs) are organization—credit union, down-scaled commercial bank, financial NGO, or credit cooperative—that provides financial services for the poor.
The poor rarely access services through the formal financial sector and they prefer and address their need for financial services through a variety of informal financial relationships. This is because:

  • They neither have enough money to open a savings account nor do they have any collateral to secure a loan.

  • They don't have a credit record as they are never been formally employed nor have ever taken out a loan.

  • They are illiterate and it is almost impossible for them to complete the necessary paperwork.

Formal financial institutions were not designed to help those who don't already have financial assets – they were designed to help those who do, which bring in the need for the formation of MFIs.


Households around the world consider housing from three perspectives: Housing as Shelter, Housing as Commodity and Housing an Investment. The two classification of Housing Microfinance programs are Micro-credit to Housing Finance (MCHF) and Shelter Advocacy to Housing Finance (SAHF).
In order to reduce poverty, countries around the world are working in Microfinance, noticeably South Asian countries, South American countries and some African countries and most of them are successful as well.
Though microfinance in Pakistan started way back in 1960s and 1970s, but it did not progressed well due to the country’s unsustainable systems. It was however, in 1980s when Aga Khan Rural Support Program (AKRSP) and the Orangi Pilot Project were introduced, marked the true foundation of microfinance in Pakistan. These two programs were such a success that their concepts were adopted by the communities across most developing countries.
The supplier of Microfinance services includes informal, semi-formal and formal sources and institutions. Informal services accounts for approximately 83% of the total credit supply. The semi-formal sector includes the NGOs and the participatory organizations such as Rural Support Programs (RSPs). The formal sector comprised of Commercial financial institutions, belonging to the mainstream financial sector and that consider microfinance as one of many product lines. Compared to other sources of microfinancing, interest rates from informal sources are much higher, ranging from 50% to 120% per annum.
Today, Microfinance in Pakistan is now in full swing. Some new Microfinance Banks are established since the introduction of the Microfinance Ordinance in 2001 and later the Prudential Regulations by State Bank of Pakistan.
While the progress has been made, the performance reveals a persistent structural flaw – a reluctance to increase the revenue earned from lending to fully cover costs.

MICROFINANCE
Introduction

Poverty is a multifaceted phenomenon that includes, but goes beyond lack of adequate income. The overarching objective of development in many countries has been and continues to be the eradication of all facets of poverty. Rapid as well as well distributed growth in income has always been viewed as an instrument for achieving this objective.


Approximately about 1.2 Billion people are living on less than Rs. 100 a day and according to an estimate 75% of these people are women. A greater percentage of these people lack the means to provide sufficient nutritional food for themselves and for their families. Some have no access to health care; others don’t have a place to live in. This level of poverty is associated with a sense of powerlessness and vulnerability, as well as the physical and social underdevelopment of children.
Microfinance is one of the means for the poor and low-income people to enhance their standards of living and thus reduce poverty. Microfinance is the deliverance of loans, savings, and other basic financial service to the poor. Financial services requirement by the poor include working capital loans, consumer credit, savings, pensions, insurance, and money transfer services.
PRINCIPLES OF MICROFINANCE

The key principles of Microfinance are



  • Poor people need a variety of financial services, not just loans.

  • Microfinance is a powerful tool to fight poverty.

  • Microfinance means building financial systems that serve the poor.

  • Microfinance can pay for itself, and must do so if it is to reach very large numbers of poor people.

  • Microfinance is about building permanent local financial institutions.

  • Micro-credit is not always the answer. Micro-credit is not the best tool for everyone or every situation.

  • Interest rate ceilings hurt poor people by making it harder for them to get credit.

  • The role of government is to enable financial services, not to provide them directly.

  • Donor funds should complement private capital, not compete with it.

  • The key bottleneck is the shortage of strong institutions and managers.

  • Microfinance works best when it measures—and discloses—its performance.


MICROFINANCE INSTITUTIONS

A microfinance institution (MFI) is an organization that provides microfinance services, ranging from small non-profit organizations to large commercial banks.


With a hope to raise the productivity and income of the poor and low-income individuals, government and donors during 1950s and mid 1970s, started concentrating on providing subsidized agricultural credit to small and marginal farmers.
In the 1980s, micro-enterprise credit focused on delivering loans to the poor women to enable them to accumulate assets by investing in small businesses and thereby to raise household income and welfare. This resulted in the emergence of nongovernmental organizations (NGOs) that provided financial services for the poor.
In order to enhance the outreach of these institutions, the 1990s was marked by the transformation of these institutions into formal financial institutions, and resulted in the emergence of Microfinance Institutions or MFIs.
Therefore, an MFI can be broadly defined as any organization—credit union, down-scaled commercial bank, financial NGO, or credit cooperative—that provides financial services for the poor.
The Need for MICROFINANCE INSTITUTIONS

Poor people save all the time, although mostly in informal ways. They invest in assets such as gold, jewelry, domestic animals, building materials, and things that can be easily exchanged for cash. They participate in informal savings groups where everyone contributes a small amount of cash each day, week, or month, and is successively awarded the pot on a rotating basis.


However, informal savings mechanisms have serious limitations. Savings are subject to fluctuations in commodity prices, destruction by insects, fire, thieves, or illness (in the case of livestock). Informal rotating savings groups tend to be small and rotate limited amounts of money. Even with these limitations, the poor rarely access services through the formal financial sector and they prefer and address their need for financial services through a variety of informal financial relationships. This is because:


  • They neither have enough money to open a savings account nor do they have any collateral to secure a loan.

  • They don't have a credit record as they are never been formally employed nor have ever taken out a loan.

  • They are illiterate and it is almost impossible for them to complete the necessary paperwork.

Formal financial institutions were not designed to help those who don't already have financial assets – they were designed to help those who do, which brings in the need for the formation of MFIs.


Effects of microfinance

The introduction of MFIs in particular is overwhelming substantiating a beneficial effect on income smoothing and increase to the income of poor and low-income individuals.




  • Microfinance has helped the very poor households to meet their basic needs and have protected them against risks.

  • The use of financial services has helped the poor household to improve their household economic welfare and to enterprise stability or growth.

  • It has helped to empower women, thus promoting gender-equity and improving household well-being.

  • It has helped the poor people to be more resilient and to better be able to cope with the everyday crises they face.

  • Studies show that microfinance can smooth consumption levels and significantly reduce the need to sell assets to meet basic needs.

  • Poor people can now cope better with sudden increased expenses associated with death, serious illness, and loss of assets.

  • It has allowed poor people to take advantage of economic opportunities.

  • It has helped many clients over the long period to actually graduate out of poverty.

  • It has also allowed poor households to make the transformation from "every-day survival" to "planning for the future."

  • It has helped poor households to be able to send more children to school for longer periods and to make greater investments in their children's education. Increased earnings from financial services lead to better nutrition and better living conditions, which translates into a lower incidence of illness.

  • In Bangladesh, Bangladesh Rural Advancement Committee (BRAC) clients increased household expenditures by 28% and assets by 112%.

  • The incomes of Grameen members were 43% higher than incomes in non-program villages.

  • In El Salvador, the weekly income of FINCA clients increased on average by 145%.

  • In India, half of SHARE clients graduated out of poverty.

  • In Ghana, 80% of clients of Freedom from Hunger had secondary income sources, compared to 50% for non-clients.

  • In Lombok, Indonesia, the average income of Bank Rakyat Indonesia (BRI) borrowers increased by 112%, and 90% of households graduated out of poverty.

  • In Vietnam, Save the Children clients reduced food deficits from three months to one month.

HOUSEHOLDS HOUSING PERSPECTIVE

Households around the world consider housing from three perspectives:
Housing as Shelter

Households allocate 10% to 15% of their earnings to shelter and inhabit whatever product this amount will buy (tent, hut, shack, or discarded automobile body). Even when income rises, households will not spend more than 15% on shelter without some assurance regarding security of occupancy as owners or renters.


Housing as a Commodity

Housing offers financial security and social status. It accounts for over 60% of the total assets owned by limited income families. As renters, families rarely allocate more than 20% of their income to expenditures on housing, despite assurances regarding long-term tenancy rights. However, as property owners, they are willing to invest over 30% to acquire land and build and improve their houses.


Housing as an Investment

Housing offers prospects of lucrative returns. The property is used to generate revenues while it appreciates in value over time. Land and buildings account for 25% to 45% of the investment required for setting up a micro-enterprise. Between 30% and 60% of housing microfinance clients are engaged in some type of home-based micro-enterprise. Some households generate additional income by renting out space in their building for residential accommodations and commercial micro-enterprises.



Classification and Differences of Housing Microfinance Programs

 

From Micro-credit to Housing Finance (MCHF)

From Shelter Advocacy to Housing Finance (SAHF)

Origin

Micro-credit programs for small and micro-enterprises

Advocacy groups for low-income households’ right to access land, shelter and services

Core Belief

Micro-credit is financially viable and the poor are bankable

Shelter is a right and the poor are entitled to a more equitable redistribution of resources

Vision

Unconditional access to credit for the poor

Equitable access to land and shelter for the poor

Objective

Facilitate access to credit to low-income households to improve their living conditions due to the linkage between the home and the income-generating enterprise

Address the inequitable resource distribution as it relates to land, infrastructure, services and shelter

Focus

Housing construction and home improvements

Land and infrastructure

Services Provided

Micro-credit for housing construction and improvements
Minimal technical assistance

Community organization and mobilization for land, shelter and infrastructure acquisition
Micro-credit for land, infrastructure and housing acquisition
Substantial technical assistance

Eligibility requirements and loan terms and conditions

  • Individual or collective loans

  • Participation in a savings scheme to develop savings habit and create a reserve against default: minimum periodic deposits are required for 12-18 months

  • Co-signatures and collective liability for individual default

  • Legal land title or occupancy right required

  • Market interest rate on own funds and below-market rate on subsidized funds

  • Other requirements: concurrent operation of a micro-enterprise; Successful completion of one or more micro-enterprise loan cycles; Minimum length of residency in the community

  • Collective loans

  • Participation in a savings scheme to develop savings habit: deposits are often left to the individual’s ability to pay

  • Collective liability for group default

  • No land title is required

  • Below-market rate on subsidized funds: terms are structured according to the terms of the capital source

  • No other requirements: flexible operation

Driving Concern

Performance-driven:
Empowering the poor by providing credit in a financially sustainable way

Process-driven:
Empowering the poor by addressing the structural causes of poverty

Main Performance indicators

Financial sustainability criteria

Human development criteria

Blockage

Access to credit is the constraint and not the cost of money

Inequity in access to resources is the constraint

Client

The entrepreneurial poor in the informal sector, with a special focus on women

The poorest of the poor, with a special focus on the homeless

Variations and Examples of Housing Microfinance Programs

 

From Micro-credit to Housing Finance (MCHF)

From Shelter Advocacy to Housing Finance (SAHF)

Variations and Examples

MCHF with a specialized housing products administered by the same entity

  • Center for Agricultural and Rural Development CARD, Philippines

  • Activists for Social Alternatives ASA, India

  • SPMS, India

  • SHARE, India

  • SIDA, India

  • Women’s Thrift and Credit Cooperative Society, Sri Lanka

  • Federation of Thrift and Credit Cooperatives Sanasa, Sri Lanka

  • Human Development Foundation, Sri Lanka

  • Diaconia, Bolivia

  • Cooperative Bank of Kenya Ltd, Kenya

MCHF with a specialized housing program administered under a subsidiary or affiliated entity (with separate administration and staff)



  • Mahila SEWA Housing Trust, SEWA Bank’s Parivartan and housing loan programs (SEWA), India

  • Grameen Housing Program (Grameen Bank), Bangladesh

  • Housing by People Program, (PWDS), India

  • KREP Housing Program (KREP), Kenya

  • Rural Housing Finance RHF (Rural Finance Facility RFF), South Africa

  • Community Infrastructure Loan Program (Genesis), Guatemala

MCHF in partnership with a specialized housing program



  • FINCA Africa (Habitat for Humanity), Uganda, Malawi and Tanzania

  • FINCA Uganda (Finance Company of Uganda), Uganda

SAHF with specialized housing products as well as micro-enterprise loans administered by the same entity

  • Negros Women for Tomorrow Foundation, Philippines

  • Squatter and Urban Poor Federation, Cambodia

SAHF with specialized housing products as well as micro-enterprise loans administered under a subsidiary or affiliated entity (with separate administration and staff)



  • LPUPA Scheme (Payatas Scavengers’ Association), Philippines

  • NGO Revolving Fund (Several NGOs), Philippines

  • Savings and Credit Groups (Urban Community Development Office UCDO, People’s Bank), Thailand

  • Home Development Mutual Fund (Group Land Acquisition and Development GLAD), Philippines

  • Dialogue for Shelter and the uTshani Fund (Homeless People’s Federation), South Africa

  • Housing Cooperative Investment Trust (Housing People of Zimbabwe), Zimbabwe

SAHF specialized housing program only



  • Casa Melhor / PAAC, Fortaleza, Brazil

SAHF with specialized housing products only providing bridge financing as an intermediary between communities and public subsidy programs



  • FUSAI (FONAVIPO national housing subsidy program), El Salvador

  • Cobijo (Progressive Housing Program), Chile

  • Fundacion de la Vivienda Popular (Barrio Improvement Program), Venezuela

  • Cooperative Housing Foundation CHF/South Africa (National Housing Subsidy Program), South Africa

  • The uTshani Fund and SAHPF (National Housing Subsidy Program), South Africa

  • Community Housing Development Groups (Build Together), Namibia

MICROFINANCE IN PAKISTAN

Microfinance in Pakistan is started way back in the 1960s and mid 1970s when subsidized micro-credit was provide in rural areas. This, however, fails to reach the poor households due to the unsustainable systems and the funds were diverted to higher income groups. Later in the 1980s, Agha Khan Rural Support Program (AKRSP) was introduced to support the northern region in building up community-based organizations and infrastructure. This program was aim to assist in resource mobilization through credit and savings. This program was a major success and it has led to the formation of Pakistan’s other RSPs.


The RSPs formed a primary approach to microfinance in the 1980s and mid 1990s by accessing the lines of credit from commercial banks to provide micro-credit to low-income people living in rural areas. Another important project, the Orangi Pilot Project (OPP) developed on the individual lending methodology by targeting entrepreneurs in Karachi region. This was adapted to the urban slums.
NGOs specialized in microfinance such as Kashf Foundation, Taraqee and Damen started their operations in 1990s. Till 1990s, the microfinance sector was marked with slow progress on sustainability and efficiency due to narrow institutional base. The microfinance landscapes are changed considerably since 2000. Growth and diversity have been encouraged.
The new initiatives launched by the Government of Pakistan have benefited the Microfinance sector considerably which have been marked by the formation of a micro finance retail bank, the Khushali Bank and an apex organization, the Pakistan Poverty Alleviation Fund (PPAF).

The Microfinance Ordinance in 2001 and introduction of the Microfinance Prudential Regulations by State Bank has resulted in the establishment of microfinance banks, such as The First Microfinance Bank, which was created by transforming the microfinance activities of the Aga Khan Rural Support Program. Developed in the 1990s, other Rural Support Programs (RSPs) have had a major impact on the development of microfinance in Pakistan and they continue to represent the highest number of MFIs and the largest coverage in Pakistan.


In parallel, more ‘traditional’ NGOs and microfinance institutions, such as Kashf Foundation, have posted high growth in outreach, while maintaining low delinquency levels.
In the banking sector, a public commercial bank specialized in serving women; the First Women Bank is active in microfinance, while the Bank of Khyber in the North West Frontier Province (NWFP) develops new products and partnerships with NGO and RSPs in order to serve lower income populations.
In the last two years, Pakistan microfinance providers have posted faster growth in terms of outreach, with ‘transformed’ or ‘created’ dedicated microfinance organizations starting to realize their full potential through a conducive regulatory environment. This growth is the result of investments from international donors, the Government of Pakistan, and some private organizations.
Over the past seven years, Pakistan has made notable progress towards microfinance by generating growth, minimizing costs, and ensuring repayment. While progress has been made, the performance data reveals a persistent structural flaw – a reluctant to increase the revenue earned from lending to fully cover costs.
THE MICROFINANCE ORDINANCE 2001

The Microfinance Ordinance is an Ordinance to regulate the establishment, business and operations of microfinance institutions.


The Microfinance Ordinance 2001 was promulgated by the Government of Pakistan with the sole purpose of promoting access to sustainable microfinance for the poor and to ultimately lead to poverty alleviation, and this has brought the country abreast with other regions of the world.
Keeping the poverty alleviation mandate in view, the ordinance states that a microfinance client must be below a certain income level (the non-taxable amount as mandated by the taxation level), while a micro-loan cannot be over Rs 150,000. The focus behind this requirement is to ensure that formalized MFIs cater to the needs of poorer segments of society and are not prone to lending to the larger enterprises.
Under the law there are several grades that an MFI can register itself under and which have differing capitalization requirements: at a district level the requirement is Rs 100 million, at the provincial level it is Rs 250 million while at the national level it is Rs 500 million. However, not less than fifty-one per cent of the paid up capital of a microfinance institution shall be subscribed by the promoters or sponsor members and the shares subscribed to by the promoters or sponsor members shall remain in the custody of State Bank
Keeping in view the above capital requirements, the AKRSP has transformed itself in to the First Microfinance Bank early this year. The Bank currently has opened 3 urban branches in the major cities and over the next year or so will take on 11 of the AKRSP branch offices in the Northern Areas.

MICROFINANCE PRUDENTIAL REGULATIONS

A set of prudential regulations applicable to all microfinance banks (MFBs)/ microfinance institutions (MFIs) has been introduced by SBP in 2001. The regulations contain guidelines for MFIs.
Under the regulation, the MFI shall maintain capital equivalent to at least 15% of its risk weighted assets and a cash reserve equivalent to and not less than 5% of its Time and Demand Liabilities.
A reserve fund should be created to which MFI shall credit an amount equal to at least 20% of its annual profits after taxes till the reserve funds is equal to the paid-up capital of MFI. MFI shall credit not less than 5% of MFIs annual profit after taxes to Depositors’ Protection Fund. The loans to single borrower shall not exceed Rs. 150,000.
A General Provision equivalent to 1.5% of the net outstanding advances shall be maintained. The investments shall be valued on mark-to-market basis.
Only the Board of Directors shall reschedule/restructure the Non-Performing Loans and NPLs can be written off, one month after the loan is classified as Loss.
Pricing policies shall ensure access to affordable financial services by the poor (Poor means persons who have meager means of subsistence and whose total income during a year is less than Rs. 150,000. The maximum investment shall be 15% of the paid-up share capital of MFI or as per the limit approved by SBP.
No members of the Board of Directors of an MFB holding 5% or more of the paid-up capital of the MFI shall be appointed in the MFI in any capacity save as the Chief Executive of the MFI.
The MFB shall submit all operational policies for areas of operations including microcredit, investments, internal audit, human resource and rescheduling/restructuring/write-off of loans/advances etc. to State Bank within 6 months of commencement of its operations.
The MFBs shall get themselves rated by any of the rating agencies on the panel of State Bank of Pakistan within three years of grant of license or within one year of commencement of deposit mobilization services which ever is earlier.
CURRENT PRACTICES

The majority of microfinance organizations operating in Pakistan, particularly RSPs, use community-based organizations as conduits for their financial services.


Other organizations use the solidarity group model, adapted from the Grameen Bank to the Pakistan context, the best example being Kashf Foundation.
Some organizations use a mix of individual lending and partnerships with community-based organizations.
Some microfinance providers are offering innovative products, such as skills training, emergency loans, and life insurance, while adopting innovative management practices in scaling up their operations or establishing partnerships between commercial bank and MFIs.
Adaptations of the Grameen Bank model have been innovative and very successful, as demonstrated by the Kashf Foundation and UPAP.
The Performance Indicators report compiled by the Pakistan Micro-financing Network (PMN) provides a benchmarking tool to share best practices and standards in Pakistan.
In addition, Swiss Agency for Development Corporation (SDC) has provided support to the development of micro-leasing products and providers through support to Network Leasing, Orix Leasing and other leasing companies operating in Pakistan.
The Leasing to Small and Micro Scale Enterprises Program (LMSE) project aims to increase earning and employment in the MSE sector in NWFP and Northern Areas through an improvement in access to leasing services on a sustainable basis.
SUPPLIER OF MICROFINANCE

Microfinance services are supplied by informal, semi-formal and formal sources and institutions.


Informal sources of finance are provided by moneylenders, shopkeepers, traders, middlemen, family and friends for consumption and production purposes and it accounts for approximately 83% of the credit supply. Every village has at least one informal committee that collects regular savings and offers loans to members in a similar management arrangement to ROSCAS (Rotating Savings and Credit Associations). Compared to the other sources of micro financing, interest rates from informal sources are much higher, ranging from 50% to 120% per annum.
In the semi-formal sector, NGOs and participatory organizations such as Rural Support Programs (RSP) have been the primary promoters of microfinance services in Pakistan. RSPs are multi-functional as they provide a range of services and aim to achieve provincial and national coverage. These participatory bodies operate in urban or rural areas, sometimes in both, focusing anywhere from one village to the entire nation.
The Rural Support Programs in Pakistan consist of the National Rural Support Program (NRSP), the largest, Balochistan Rural Support Program, Sarhad Rural Support Program (SRSP) and the Aga Khan Rural Support Program (AKRSP). Originally seen as a group of government assisted NGOs with a mandate to promote rural development, they now see themselves as something between a government body and an NGO.
NRSP has the largest member base in Pakistan, with approximately 293,000 members gathered in Community Organizations (COs). Some NGOs, like Kashf Foundation and the Orangi Pilot Project, now specialize in microfinance and have reached a substantial and growing number of clients.
In the formal sector, two commercial banks, the Bank of Khyber and the First Women Bank, provide microfinance services to low-income clients, directly through their branches, or as wholesale funds to partner MFIs.
The microfinance specific ordinances promulgated in 2000 and 2001 by SBP allowed for the establishment of two specialized microfinance institutions, the Khushhali Bank, a retail microfinance bank jointly owned by public and private banks, and the First Micro Finance Bank Limited, established from the transformation of the microfinance activities of the Aga Khan Rural Support Program.
Orix Leasing and Network Leasing are two leasing companies involved in microfinance by providing leasing products to low-income clients. Some leasing companies strive to increase their share in the microfinance market by proposing other financial products, and potentially to set up their own microfinance banks.
Pakistan also has a rating agency, JCR-VIS, which has initiated ratings of NGOs and specialized microfinance organizations, such as The First MicroFinance Bank. NGOs are rated on a corporate governance scale while the full credit rating of MFIs applies only to institutions regulated by SBP.
ANALYSIS & TRENDS

Pakistan experienced tremendous growth since last seven years. Starting form the Pakistan Poverty Alleviation Fund when began its investment in the early 2000 with soft loans and operating grants to the introduction of Khushhali Bank - the largest provider of micro-credit and the Microfinance Ordinance of 2001. Pakistan also experienced an unprecedented investment growth during the last seven years, that is, from under US$20 million to over US$300 million.




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