M – ANOVERVIEW · No. MFI Ordinance 2001MFI Ordinance 2001 SBP 10 The Voluntary Social Welfare Agencies Ordinance, 1961 [ORDINANCE No. XLVI] Provincial Government 2 S i ti R i t

MICROFINANCE SECTOR

– AN OVERVIEW

March 2013

What and Why of Microfinance Global Trends

Demand-Supply

Dynamics -Pakistan

Regulatory Framework

Sector Performance ||

Branchless Banking

Risk Assessment and Outlook

WHAT ||WHY || WHO of micro-FINANCE

•Means of providing financial services to poor

•Average transaction size is very small

•Services offered by profit and non-profit organizations

Mi di i i i i d h•Microcredit, micro savings, micro insurance, and other transactional products

What :Why : Who of

MicrofinanceGlobal Trends

Demand-Supply

Dynamics -Pakistan



Branchless Banking


Micro-Finance || Finance for poor || Social cause || Business case ||

WHAT ||WHY || WHO of micro-FINANCE

Poor

IIncome level of belowbelow

US$1.25 per day

1

day


Demand-Supply

Dynamics -Pakistan



Branchless Banking


Global TrendsNo of MFPs % No of Offices/Branches %

Type of Microfinance Institutions as on Dec-11

No. of MFPs % No. of Offices/Branches %NGO 488 35% 20,040 38%NBFI 433 31% 18,138 34%Bank 147 11% 9,991 19%Credit Union / Cooperative 233 17% 3,554 7%Rural Bank 54 4% 875 2%Other 36 3% 453 1%Total* 1,391 53,051

Country Gross Loan Portfolio (US$ in mln) % GDP

2

*There is slight variation in reported number of regionwise and legalstatuswise MFIs in MIX market data1 Bolivia 3,048 12.5%2 Kenya 1,719 5.1%3 Peru 8,768 5.0%4 Vietnam 5,477 4.4%5 Bangladesh 2,819 2.5%6 Colombia 5,311 1.6%7 South Africa 2,560 0.6%8 India 4,318 0.2%9 China 13,293 0.2%

10 Mexico 1,986 0.2%

Pakistan 232 0.1%


Demand-Supply

Dynamics -Pakistan



Branchless Banking


Pakistan 232 0.1%

Global Trends

201195mln

World2007

68mln2010

102mln Africa9%

Middle East and North

Africa South Asia

World | Microcredit Pie

# of micro borrowers

9%Africa1% 10%

200884mln

200998mln

East Asia and the Pacific

36%

Latin America and

The Caribbean

32%

Eastern Europe and Central Asia

12%


Demand-Supply

Dynamics -Pakistan



Branchless Banking


System Share as on Dec-11 Assets Gross Loan Portfolio (GLP) Deposits Equity

Global Trends( )

Bank 67% 63% 77% 49%Credit Union / Cooperative 18% 21% 12% 26%NBFI 7% 9% 2% 16%NGO 4% 5% 5% 5%Other 4% 3% 5% 2%R l B k 0% 0% 0% 1%Rural Bank 0% 0% 0% 1%Total (US$ in mln) 118,780 87,650 67,202 17,674


Demand-Supply

Dynamics -Pakistan



Branchless Banking


Global TrendsWorld | Gross Loan Portdolio

100 000

120,000

140,000

World | Gross Loan Portdolio

40 000

60,000

80,000

100,000

US

$ i

n m

ln

2007 2008 2009 2010 2011-

20,000

40,000

Total Assets 47,122 55,189 92,661 98,747 118,780Gross Loan Portfolio 38,279 44,871 75,336 90,113 87,650


Demand-Supply

Dynamics -Pakistan



Branchless Banking


Global Trends

According to differentMicrofinance Pentration |

Microborrowers as % of worldestimates and surveys,around 23% of theworld’s population

3

Microborrowers as % of world poor population2011 %world s population

(~1.6bln people) is poor(Less than US$1.25 perday) with 66% residing

World Population ~ 7.0 blnPoor Poulation 1.6blnMicro-borrowers 95mlnday) with ~66% residing

in Asia.Micro-borrowers 95mlnPenetration 6%


Demand-Supply

Dynamics -Pakistan



Branchless Banking


Pakistan || Demand Side

N i lPopulation expected to use financial services | Employed Labor Force

Total % Working Age % Labor Force % Employed Labor ForceRural 113.2 63% 83.9 65% 41.2 69% 39.2 70%Urban 67.6 37% 46.0 35% 18.2 31% 16.6 30%

180.7 129.8 59.3 55.8

Nos. in mln

31%

Source: Economic Survey of Pakistan (2011-2012), Chapter 12, Table 12.9

Financially Served Voluntarily Excluded

Involuntarily Excluded

Formally Included

Informally Served (Organized Sector)

Inf. Served (unorg- Financially Excluded

* Bringing Finance to Pakistan’s Poor, Page 9, worldbank.org

( g ) ( gsector)

0% 14.3% 45.5% 50.5% 81.4% 100%


Demand-Supply

Dynamics -Pakistan



Branchless Banking


Pakistan || Demand SideNumber of Borrowers and Depostors in Pakistan | At end Jun-12

Total Banks/DFIs MFB/MFIsNumber of Depsoitors 32.0 27.7 4.31*No of Borrowers 5.71 3.5 2.2*

p |

* Microwatch

Main Source: Inuagural Address by Deputy Govrener, SBP, 6th Pakistan Microfinance Country Forum, Dec-2012

Province No. in mln No. in mln %

Potential Microfinance Market

Penetration Rate

Active Borrowers

Country %Bangladesh 39.7

Microfinance Pentration | Pakistan and others>> *

Balochistan 1.7 0.0 1.0 KP 4.1 0.1 1.8 Punjab 15.2 1.6 10.7 Sindh 6.4 0.6 9.2 AJK - 0.0 -

Peru 39.6India 7.3Pakistan 5.3

World Average (55 countries) 19 0GB - 0.0 - ICT 0.1 0.0 6.0

27.4 2.4 8.6

* Source: Microwatch, Issue 26 (Oct-Dec2012)

World Average (55 countries) 19.0>>Number of borrowers as % of poor poulation* Source: Microscope on Microfinance 2012: Index, EIU


Demand-Supply

Dynamics -Pakistan



Branchless Banking


Pakistan || Supply Side

End- 2012 2011

Microfinance Banks in Pakistan | Timeline with ownership# Year License Date Name Ownership

1-Aug-00 Khushhali Bank Ltd. UBL:67.4%1 2000Feb13

Microfinance Banks 10 10 9Microfinance 12 12 9

2 2002 2-Jan-02 The First Microfinance Bank Ltd. Agha Khan Development Agency:100%

3 1-Jan-05 Apna Microfinance Bank Ltd* GOI: 91%4 1-Aug-05 Tameer Microfinance Bank Ltd. Telenor: 51%

2005

Institutions Rural Support Programs 6 6 5

Oth 7 7 9

18-Feb-09 NRSP Microfinance Bank Ltd. NRSP: 52%1-Jun-08 Kashf Microfinance Bank Ltd. Kashf Holding Private Limited: 51%

13-Apr-06 Pak Oman Microfinance Bank Ltd. Govt. of Oman: 67%

18 F b 09 NRSP Mi fi B k L d NRSP 52%

6

7

5 2006

2009

2008

Others 7 7 9Total 35 35 32Source: Microwatch

8

9 2012 1-Nov-12 Advans Pakistan Microfinance Bank Ltd.** Advans SA:70%; FMO:30%

2011 12-Sep-11 Waseela Microfinance Bank Ltd. Orascom Telecom; 100%

18-Feb-09 NRSP Microfinance Bank Ltd. NRSP: 52%7 2009

* District license ** Province license

10 2013 1-Feb-13 U Microfinance Bank Ltd. PTCL: 100%


Demand-Supply

Dynamics -Pakistan



Branchless Banking


Microfinance|| Regulatory Frame

Licensing Framework Regulatory Authority

No.

MFI Ordinance 2001 SBP 10MFI Ordinance 2001 SBP 10The Voluntary Social Welfare Agencies Ordinance, 1961 [ORDINANCE No. XLVI]

Provincial Government

2

S i ti R i t ti A t [1860 A t XXI] P i i l 10Societies Registration Act [1860 Act XXI] (The “Societies Act”)

Provincial Government

10

The Companies Ordinance 1984 : Section 42 SECP 12

The Trust Act 1882 Provincial Government

1

Total 35Total 35


Demand-Supply

Dynamics -Pakistan



Branchless Banking


Microfinance|| Regulatory Frame || MFI Ordinance 2001

O i R l i d

Establishment and Winding upAllowed Function

Specified Area of operations• District

Capitalization• Minimum

capital of the bank

• At least 51%

Licensing Requirement• Conversi

Ongoing Regulation and Supervision• Management and

Administration• Accounts and AuditAllowed Function

of MFBRestrictions [Creating of Floating Charge on

t ith t SBP

District • Regions (up

to 5 adjacent districts)

• Province

At least 51% of Paid-up Capital to be subscribed by sponsor

• Conversion of existing MFIs into MFBs

Accounts and Audit• Filing of Returns• Liquidity and Reserves• Depositors Protection Fund• Inspectionassets without SBP

permission]• Whole of

PakistanMFBs

• New MFBs

p• Powers to give directions ;

to remove BoD; to supersede BoD


Demand-Supply

Dynamics -Pakistan



Branchless Banking


Microfinance || Regulatory Frame || India & Bangladesh

Andhra Pradesh Crises 2010

..Rethink Regulatory F k

Various Regulatory Bodies

[NGO-MFIs|| MRA]Funding Mix||Poor

[Need to establish core f di i ]Crises 2010 Framework [Banks | BB]

[Grameen Bank | GBO, 1983]

funding mix]

RBI|| Regulatory

India Bangladesh

Microfinance Bill approved May-12

RBI|| Regulatory Authority for

NBFC-MFI and informal SHG (>20

members)

Restriction on mobilization of deposits except

GB

Cap of 27% on interest rates

members)


Demand-Supply

Dynamics -Pakistan



Branchless Banking


Pakistan | Microfinance Industry | Asset Growth Gross Loan Portfolio | Growth Trend

Sector Performance | Penetration & Asset Growth

50%

60%

70%

80%

50,000

60,000

70,000

80,000

40%

50%

60%

70%

30 000

35,000

40,000

45,000 Gross Loan Portfolio | Growth Trend

10%

20%

30%

40%

10,000

20,000

30,000

40,000

PK

R in

mln

10%

20%

30%

40%

15,000

20,000

25,000

30,000

PK

R i

n m

ln

Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 (P)

-20%

-10%

0%

(20,000)

(10,000)

-

Dec-08 Dec-09 Dec-10 Dec-11 Dec-12-20%

-10%

0%

-

5,000

10,000

Total Assets 33,194 30,473 35,826 48,623 70,152 Growth 45% -8% 18% 36% 44%

GLP 20,001 16,758 20,296 24,903 38,238 Growth 57% -16% 21% 23% 54%


Demand-Supply

Dynamics -Pakistan



Branchless Banking


Sector Performance | GLP Market Share

5%

GLP | Market Share | At end Dec-12

Market Share |Active Borrowers | At end Dec-12

18%

5%

39%24%

7%

56%

22% 30%

MFBs MFIs RSPs Others

22%

MFBs MFIs RSPs Others


Demand-Supply

Dynamics -Pakistan



Branchless Banking


Savings | Growth Trend

Funding Structure

Funding Structure60%

75%

20,000

25,000 Savings | Growth Trend

Equity17%Depsoits

22%30%

45%

10,000

15,000

PK

R i

n m

ln

Commercial

Liabilities 0%

15%5,000

Debt41%

Liabilities20% Dec-08 Dec-09 Dec-10 Dec-11 Dec-12

Savings 5,384 8,554 11,863 15,508 24,974 Growth 35% 59% 39% 31% 61%

0%-


Demand-Supply

Dynamics -Pakistan



Branchless Banking


Performance

100%

120%Industry | Business Profile

Overall performance of

40%

60%

80%p

the industry improved during CY11 as it booked consolidated

Dec-07 Dec-08 Dec-09 Dec-10 Dec-11OSS 89% 81% 105% 100% 108%

0%

20%booked consolidated profitability of PKR 665mln (CY10: Loss of PKR 16 l ) Thi

Yield on GLP (%) MFIs MFBs RSPs Weighted A

OSS 89% 81% 105% 100% 108%FSS 74% 71% 87% 82% 101%

PKR 16mln). This was mainly generated by RSPs (74%), followed

AverageNominal 37.5 33.5 32.0 35.2

Real 23.6 20.0 18.7 21.6Expenses as % GLP 30.8 39.1 39.4 37.5

( ),by MFBs (14%), and MFIs (12%).


Demand-Supply

Dynamics -Pakistan



Branchless Banking


Expenses as % GLP 30.8 39.1 39.4 37.5

Assessment | Credit RiskMicrofinance industry entails different business models, each of them exposing y , p g

the industry to credit risk with varied level of vulnerability. The borrowers of the industry are low-income individuals – male (42%), and females (58%).

With 56% of total borrowers residing in rural areas macro economic factorsWith 56% of total borrowers residing in rural areas, macro-economic factors -economic growth, inflation trends, natural calamities, and to some extend political environment - play a key role in repayment ability and willingness

Types of Collateral used by 25 Microfinance Providers in Pakistan

1 2 3 4 5 6 7 8 9

Microfinance Sector | Credit Risk Management

#Category

8 6 8 4 7 7 3 2 2 1

Asset Ownership

-

Compulsory Savings

Asset Leasing

Live Stock

MFB

Group Guarent

ee

Personal Guarentee

Post Dated Cheks

Promisory Note Gold

8 6 8 4 7 7 3 2 2 1 9 6 5 5 2 - 1 - 1 - 3 3 2 1 1 - - 1 - - 5 4 3 3 2 - 3 1 - - 25 19 18 13 12 7 7 4 3 1

MFIsRSPs

Others

MFBs


Demand-Supply

Dynamics -Pakistan



Branchless Banking


Credit Risk || Lending Methodology || Sector Concentration

100%GLP | Lending Methodology

GLP | Sector wise Expsoure | at end Dec-12

30% 31% 30% 32%

80%

90%

100%

Others, 15%

GLP | Sector wise Expsoure | at end Dec 12

70% 69% 70% 68%

50%

60%

70%Trade, 30%

Services, 8%

Housing, 0%

%

20%

30%

40%Manufacturing/Production, 9%

0%

10%

Mar-12 Jun-12 Sep-12 Dec-12Group Individual

Agriculture, 22%

Livestock/Poultry, 16%

Group Individual


Demand-Supply

Dynamics -Pakistan



Branchless Banking


Credit Risk || Asset Quality

Africa LAC* World ECA** EAP*Pakistan Asia MENA****

Asset Quality | Comparison with World | at end Dec-11

PAR > 30% 6.6 4.8 3.8 3.7 3.4 3.2 2.5 2.1Write-off to GLP 0.7 1.4 0.5 0.3 0.4 2.1 0 0.3

* Latin America and the Caribbean ** Eastern Europe and Central Asia

*** East Asia and the Pacific **** Middle East and North Africa


Demand-Supply

Dynamics -Pakistan



Branchless Banking


Credit Risk || PAR trend

A l i f l t i ht t

7.0

8.0Portfolio at Risk | Quarterly Trend

An analysis of last eight quarters reveal that ::PAR follows a seasonal trend with highest level of PAR at the

4.0

5.0

6.0

% G

LP

gbeginning of the years, gradually reducing to a low level towards the end of year. MFB’s on average maintained a

1.0

2.0

3.0

PA

R MFB s on average maintained a

higher PAR. During 4QCY12, PAR has reduced to a very low level. Although detailed data for PAR is

1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12Industry 4.2 3.7 3.0 3.3 3.9 3.8 3.1 1.4MFBs 4.9 4.6 3.0 3.3 4.7 5.0 3.5 1.1

0.0 not available, this decline in ratios can be attributed to any of the following two reasons i) all portfolio greater than 90 days

MFIs 2.6 2.1 1.2 1.5 2.1 1.9 2.3 2.1RSP 5.0 2.5 4.1 4.8 3.2 2.2 1.5 0.4Other MFPs 2.8 5.5 5.4 4.9 5.4 5.5 7.3 5.8

portfolio greater than 90 days crossing one month age; thus invoking write-offs, or ii) high recoveries.


Demand-Supply

Dynamics -Pakistan



Branchless Banking


Credit Risk || Punjab Delinquency Case [08-09]

Groups : Refusal to repay loans

Groups: Connections with local politicians

Result: Intentional defaults

PAR Increased from 1% to 10%

Highlights Gaps in business models, internal controls and Risk management


Demand-Supply

Dynamics -Pakistan



Branchless Banking


Credit Risk || Industry Practices that lead to bad Asset Quality

MFPs following herd behavior; clustering of

Delegation of responsibilities [client; g

MPs in same areas

Extra focus on growth; compromise on

responsibilities [client selection] to Group

Leaders

Manipulation of other MPs clientele to shift to ownp

internal controls

Pressure on LOs to meet targets; incentive

clientele to shift to own MFPs through Group

leaders

Dependence of potential customers on Groupmeet targets; incentive

systems non aligned

Same LOs working for

customers on Group leaders [commission

agents]

Multiple Borrowing;Same LOs working for multiple MFPs

Multiple Borrowing; Use of credit bureaus (X)


Demand-Supply

Dynamics -Pakistan



Branchless Banking


T th lit f l b k

Credit Risk || What to analyze?

To assess the quality of loan book:

i) credit approval process,i) credit approval process,ii) credit verification, disbursements, and monitoring of credit process,iii) Internal controls and MIS generated by MFP,iv) loan to value ratios (if secured against physical security)security),v) proportion of repeat and roll-over loans,vi) MFPs client assessment frequency and analysis ofvi) MFPs client assessment frequency and analysis of clients’ repayment behavior


Demand-Supply

Dynamics -Pakistan



Branchless Banking


Financial Risk

Minimum Liquidity Requirement:: MaintainMinimum Liquidity Requirement:: Maintaini) maintain at least 5% cash,ii) 10% liquid reserves against deposits of less than one years.

Deposit Protection Fund :: Credit 5% of profits to Depositor Protection Fund (DPF). The amount is allowed to be invested in government securities or gto be deposited with SBP. Protection of up to PKR10,000 per depositors in case of liquidation.

Currently all banks maintain strong liquidity positions owing to initial roll-out of business operations and fresh capital.

Mi i it l (PKR 300 l PKR 1 000 l ) d it lMinimum capital (PKR 300mln –PKR 1,000mln) and capital adequacy requirements (15%) are also laid by SBP. Currently one bank is non-compliant with minimum capital and CAR requirements


Demand-Supply

Dynamics -Pakistan



Branchless Banking


requirements.

Conclusion | Opportunities & Challenges

Young & Growing

Untapped potential

Supportive Regulatory

Role

Microfinance Sector

CY12 ||Conversion of MFIs in

MFBs

Branchless

CY12 || Launch of nationwide MF specific

CIBBranchless Banking || The hottest

Trend


Demand-Supply

Dynamics -Pakistan



Branchless Banking


Conclusion | Opportunities & Challenges

B i &Ownership & Governance

Business & Financial Profile

• Requires attention• MFBs are better placed

• Requires improvement in Credit risk management

• Yet to achieve sustainable profitability: BB an additional revenue streamframework

MFBs are better placed• Need to bring

Professional Board & Management

BB an additional revenue stream• Funding Constraints• Need to establish Retail Deposit base


Demand-Supply

Dynamics -Pakistan



Branchless Banking


Bibliography

1. PovcalNet – an analytical tool for measuring poverty developed by worldbankhttp://iresearch.worldbank.org/PovcalNet/index.htm?1)

2. Worldbank | www.worldbank.org/3. Human Development Report 2011 - Sustainability and Equity: A Better Future for All,

HDR_2011_Statistical Tables4. State Bank of Pakistan (SBP) website, ‘Microfinance Institutions Ordinance 2001’, Last Updated on

1st July 2007, Viewed on 2nd February 2013, http://www sbp org pk/1 frame/MF Inst Ord 20001 pdfhttp://www.sbp.org.pk/1_frame/MF_Inst_Ord_20001.pdf

5. Pakistan Microfinance Connect | www.microfinanceconnect.info6. Economic Survey of Pakistan | 2011-20127. State of microcredit Summit Campaign Report 2012, Note 45 , Further referenced to :

http://iresearch worldbank org/PovcalNet/povDuplic html)http://iresearch.worldbank.org/PovcalNet/povDuplic.html)8. MIX market data , cross market analysis report : 2011, last viewed in Mar-13

9. US Department of State, http://www.state.gov/s/inr/rls/4250.htm, last viewed in Mar-13.10 i i i ki ’ ldb k10. Bringing Finance to Pakistan’s poor, worldbank.org11. Microwatch Oct-Dec1212. Global microscope on the microfinance business environment 2012, Economic Intelligence Unit, The

Economist13 l i ki b k i fi i i i i h f h13. Regulating Pakistan’s Nonbank Microfinance Institutions, Micronote Dec11, PMN with further

reference to www.amlaw.pk14. The Microfinance Crisis in Andhra Pradesh, India: A Window on Rural Distress? By Marcus

Taylor)

Analysts Rana Muhammad [email protected]

Samiya [email protected]

Naureen [email protected]

Humza [email protected]

C b 92 35869504Contact number: +92 35869504

DISCLAIMERSCPACRA has used due care in preparation of this document. Our information has been obtainedfrom sources we consider to be reliable but its accuracy or completeness is not guaranteed. Theinformation in this document may be copied or otherwise reproduced, in whole or in part,

id d th i d l k l d d Th t ti h ld t b li dprovided the source is duly acknowledged. The presentation should not be relied upon asprofessional advice.

Documents

M – ANOVERVIEW · No. MFI Ordinance 2001MFI Ordinance 2001 SBP 10 The Voluntary Social Welfare Agencies Ordinance, 1961 [ORDINANCE No. XLVI] Provincial Government 2 S i ti R i t