ahsannisar.files.wordpress.com€¦ · Web viewAccess to financing is now widely acknowledged as a path to meaningful economic inclusion and reduction in poverty. Policy efforts

Financing Sustainable Development: Ideas For Action 2017

Ideas for Action

A Mutually Inclusive Model of Remittances & Entrepreneurship

Implementing policies and mechanisms to direct remittances towards development of SMEs by increasing access to financial services through financial inclusion in Pakistan

Team RemitOne Ahsan Nisar

M. Yousuf Siddiqui

February 2017

This paper aims to analyze and propose a mutually inclusive model of remittances & entrepreneurship based on 3 E’s (Education, Engagement & Empowerment) that subsequently

has a positive effect on the youth and SME development in Pakistan.

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Abstract

Access to financing is now widely acknowledged as a path to meaningful economic inclusion and reduction in poverty. Policy efforts to increase access to finance in Pakistan have taken time to bear fruit, but now access is indeed expanding quickly in certain financial sectors (microfinance, remittances) albeit from a very low base. Nevertheless, policy measures cannot single-handedly increase financial access; financial institutions’ willingness to expand access in Pakistan has been stinted by slow technologic advances, weak legal foundations, and unsuitable financial processes and products. Poor socioeconomic conditions, gender bias, and low levels of basic education and financial literacy remain barriers, but perhaps the single strongest driver of low demand for financial access has been income.

Major constraints to financial access, in spite of policy reforms, arise from the high levels of poverty, combined with low awareness of and information about available financial services, as well as gender bias. Technology can be harnessed to help expand geographical outreach, as well as overcome low literacy levels. Physical access can be stepped up using a two-pronged strategy, in view of limited financial infrastructure and penetration via existing agencies with higher penetration as well as via new technology solutions such as branchless banking and mobile banking. New approaches suitable for smaller enterprises, such as bank downscaling, are workable tools to achieve sustainable small and medium enterprise (SME) lending products.

Problem & ContextThe extension of credit to remittance clients by banks or other FIs has extraordinary development potential in terms of added value creation and employment opportunities. Banks who have built significant professional relationships with remittance clients are more likely to extend credit, which is crucial to a number of development-related purposes, from poverty alleviation to business development. In other words, there exists an opportunity for the development of instruments to leverage remittances specifically for productive purposes which is essential to capture their developmental value, hence incentivizing the growth of the remittance inflow, which, as also noted above, serves to foster the development of the local financial system, thus generating a self-reinforcing virtuous circle.

Remittance-based credit products are of particular interest not only for their developmental impact, but also because those are the products that the poor struggle the most to get access to. Traditional constraints in accessing credit include the facts that most remittance clients generally do not have established credit histories, do not have adequate collateral against which loans can be extended, or do not have viable business plans in the case of small business loans. However, many institutions and individuals are realizing the potential for remittances to fill many of these gaps. Where access to credit is limited, potential loan recipients can leverage stable remittance inflows as a substitute for collateral and credit histories or alternatively can be used as an alternative cash inflow which is taken into account in the risk assessment of the remittance receiving client. Remittances would then permit either to get access to a loan otherwise unavailable, or to be offered a loan with better terms, i.e., lower interest rate or larger amount. But because a relatively small amount of remittances are directed into formal bank accounts, this potential has still gone largely unrealized. In sum, remittance flows make it easier for banks to extend credit, or may even decrease a recipient’s need for credit because of increased income.

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Our SolutionOur proposal recommends launching a pilot project that aims at leveraging migrant remittances to empower small and medium enterprises (SMEs) to get greater and cheaper access to much-needed credit, which can be channeled to growing the SME, thus generating employment and income opportunities in Pakistan. The objective of the project is to demonstrate that it is possible to channel remittance flows to productive purposes, specifically to improve a remittance-receiving entrepreneur’s access to business credit.

The basic structure of the project is as follows: 1. Identify an entrepreneur that meets the following criteria: a. Owns a high-potential SME/SBV* (For the purpose of this report, we would like to

coin the term of “Small Business Vehicle” ~SBVs) b. Is based in Pakistan c. Is in need of credit to capture growth opportunity d. Is willing to collaborate e. Receives a stable flow of remittances from the Gulf countries as they are the largest source of remittances to Pakistanf. Whose remitter is stably resident in the Gulf countries

2. Prepare a business plan for the SMEs, including the impact the loan would have on the SME’s financial performance (to be performed by the bank)

3. Prepare a comprehensive credit profile of the remittance-receiving entrepreneur [to be performed by an outsourced firm], which includes: (a) Legal, migratory and employment status (b) Financial/credit situation and (c) Track record of remittances received in the past 2+ years

4. Assist the negotiation between the FI and the entrepreneur

5. Monitor the performance both of the loan and of the business after the loan has been disbursed

Basic financial flows of a small entrepreneur

For a remittance-receiving entrepreneur, the typical cash flow is simple: the ‘family account’ has two basic inflows: the income of the business and the remittances, plus, potentially, the loan. This money is used either for consumption or for reinvestment in the business. As illustrated in the chart, in this project the inflow of cash from the business is documented by means of a detailed business plan, whereas the bank can document the flow of remittances by liaising with the remitter to collect the necessary material, as listed above.

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In other words, the purpose of this project is to monetize the information related to the remittances, in a way that is ultimately profitable to all parties involved: - The FI, who can reduce the risk exposure, better assess the risk profile of its clients, and thus disburse more credit more profitably - The entrepreneur, who receives a cheaper, larger loan - The provider of credit information, which can generate income from the credit profile, for instance via a fixed fee or via profit sharing arrangement. This setup ensures that a remittance-based loan product is sustainable in the long term, as all actors have a stake in it. The value of the information will be split three ways, as described above, but, while the fee to the credit profile provider and the better terms of the loan are clearly measurable, the way in which the FI monetizes the gain will vary according to risk management and accounting policies.

Relevance

Pakistan is currently passing through a demographic transition which has resulted in a “youth bulge” (approx. 30 million plus population in the age group of 25-35)1 and an increase in the working-age population as a share of the total population. To reap the “demographic dividend” of this change, the economy needs to create productive and remunerative employment for young workforce entrants.

It is estimated that SMEs constitute around 90% of the 3.2 million private enterprises in the industrial, services and trade sectors in Pakistan and employ around 70% of the non-agriculture labor force2. These enterprises also contribute over 30% to GDP and 25% to the country’s total export earnings. Their share in value-added manufacturing is estimated at 35%. In view of the critical importance of SMEs in low-cost job creation and poverty reduction, successive governments have tried in the past to focus on their development, but the sector remains uncompetitive in world markets owing to structural weakness, obsolete technology, lack of access to credit and marketing and management skills, unfriendly business and regulatory environment, and other factors, despite various initiatives both at the federal and provincial levels.

Expected Impact

Apart from addressing at least six UNGA’s Sustainable Development Goals, our solution offers following benefits:

1. Improved accessibility of finance for people in all parts of Pakistan including rural and

remote areas specially women and youth thus creating gender equality

2. Provides a solution that overcomes challenges of low literacy and lack of understanding

of benefits of financial services

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3. Leverage private sector interest and investment through partnering with public initiatives

like BISP, TEVTA, PMYSDP, PMSIHPP and PMYBL3 etc. (G2P payments digitization)

4. Leverage ICT (digital financial services) and other innovations (Big Data, Peer-to-Peer

lending) in financial services delivery to counter the impact of de-risking

5. Poverty reduction

6. Community empowerment

7. Export oriented SMEs will further augment money transfer business thus creating a

cyclical effect

8. Increased labor force participation

9. Reduce brain drain through entrepreneurship

10. Mobilize savings and investments

11. Fall back option for the expatriates upon their return in case of external shocks

12. Capacity building of existing financial ecosystem

Operation/Project Name

Implementing policies and mechanisms to direct remittances towards development of SMEs by increasing access to financial services through financial inclusion in Pakistan

Region PakistanSector Remittances, payment systems, financial servicesImplementing Agency(ies) SBP, PRI, SMEDA, SECP, Pakistan Post, PBAEstimated Date of Appraisal/Authorization

31.12.2017

Estimated Date of Approval 30.06.2018

Major Stakeholders

1. Government of Pakistan2. State Bank of Pakistan (Pakistan Remittance Initiative)3. Small & Medium Enterprises Development Authority (SMEDA)4. Commercial Banks5. Pakistan Banks’ Association6. Exchange companies7. Securities & Exchange Commission Pakistan8. Post offices9. Microfinance institutions10. Telco / Fintech companies11. Academia, 12. Incubators, accelerators and start-ups

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Roadmap to Adoption

State Bank of Pakistan in liaison with the Government of Pakistan is determined to develop an inclusive financial sector for expanded outreach and increased access to finance besides promoting transparency, cost‐effectiveness and efficiency. Acknowledging the need for training and capacity building initiatives focusing all stakeholders and initiatives for improving financial & basic literacy amongst current/potential clients, a fund titled “Access to Finance Fund” (A2FF) needs to be established at State Bank with the assistance of WB to provide grants to selected program/initiatives. The Fund will be used to support:

Capacity building and training of financial services providers to promote expansion into rural areas; product and service innovation, including savings, remittances and digital financial services; adoption and integration of new technologies and applications for improving access to financial services;

Capacity building and training of Government and regulatory authorities to support development of an inclusive financial sector and implementation of measures under the Program; and

Literacy programs (financial and basic) conducted by or on behalf of financial services providers for clients and potential clients to improve access to financial services and the utilization of finance.

Initially the fund will support capacity building initiatives of FIs which are undergoing transformation. The fund will assign priority to the following initiatives: ‐i. Development of Resource Mobilization Strategy specially savingsii. Product innovation / new product developmentiii. Development of MIS (software only) and trainings thereofiv. Use of technology for improving financial accessv. Corporate Brand Development Strategyvi. Capacity building support for FIsvii. Credit Rating of FIsviii. Preparation and revision of manuals (e.g., operations, credit risk, financial risk,human resources and treasury management)ix. Preparation of business plans, strategic plans and training materials, including plansfor increasing resources from grants, loans, and/or equity investorsx. Trainings (e.g., for boards of directors, internal auditors, financial planning, cashmanagement/treasury, financial management, loan portfolio management, productpricing, analysis and reduction of operational costs).

Criteria for approving grants under the Fund6


In line with the above objectives, proposals for seeking grants under A2FF shall be evaluatedbased on the following:

(A) Criteria for capacity building grants• Organization Profile• Systems and Controls• Strategy and Management• Profitability and Efficiency• Social Performance

(B) Criteria for literacy program grantso Clear & compatible vision for increasing access to financial services to poor and marginalizedgroups;o Resolve to create awareness about/ demand for financial services and raise literacy levels;o Legally recognized entity (not necessarily an MFP)o Experience in family literacy programs that target both parents (adults) and children(optional)o Appropriate levels of portfolio quality (only for‐MFPs)o Appropriate levels of transparencyo Adequate human resourceo Outreach to present /potential microfinance clients specially womeno Rural outreacho Estimated number beneficiaries shall be at least 100 individuals.

The A2FF aims to reduce poverty; build a more inclusive, competitive, and efficient financial sector; and promote sustainable economic growth. Its objective is to ensure access to sustainable institutional financial services at competitive prices for poor and low-income households and their microenterprises. Under the program, the State Bank of Pakistan will enact an enabling policy, legal, and regulatory framework, and implement other actions to remove constraints to the growth of financial institutions. These actions include (i) promotion of technology and applications to achieve a national scale of financial services at reduced cost; (ii) expansion of the range and quality of financial products and services provided by financial institutions (FIs); (iii) development of public–private partnerships to expand outreach; (iv) development of reliable business and credit information and systems; (v) provision of fast, reliable, and lower cost remittance services for overseas workers; and (vi) financial literacy and capacity building.

The A2FF has four components: (i) development of policy, legal, and regulatory frameworks for improving access to finance; (ii) SME finance product diversification and innovation; (iii) capacity building, institutional strengthening, and restructuring of FIs; and (iv) basic financial literacy.

Similar Example (Where & How)7


In December 2007, TechnoServe and Microfinance International Corporation (MFIC) launched a pilot project that aims at leveraging migrant remittances to empower small and medium enterprises (SMEs) to get greater and cheaper access to much-needed credit, which can be channeled to growing the SME, thus generating employment and income opportunities in developing countries.

TechnoServe is a US-based nonprofit development organization established in 1968, whose mission is to help reduce poverty by working with entrepreneurial people to create competitive and sustainable businesses. TechnoServe works in Latin America, Africa and Eastern Europe to implement economic opportunities with high potential for creating jobs and income for the poor. TechnoServe experience has contributed to the development of competitive strategies in a variety of sectors, from rural crops to tourism and light manufacturing in urban areas. The technological packages developed by TechnoServe are derived from a business approach that allows client small enterprises to address and solve the constraints to profitably accessing markets. TechnoServe is involved in executing projects related to SME development, through value chain enhancement, business plan competitions and youth & women entrepreneurship development programs, among others. TechnoServe has deep experience in delivering cross-sector entrepreneurship development via a business plan competition methodology, implemented 10 times since 2002 across the target countries.

Microfinance International Corporation (MFIC) is a for-profit company founded in 2003 by banking, microfinance and remittance professionals whose mission is to make affordable and professional financial services available to underserved markets worldwide. The company is supported by close to 100 social and commercial investors, ranging from foundations to listed multinational trading companies and a US government agency. MFIC has developed a remittance platform for banks, microfinance institutions (MFIs) and other financial institutions, named ARIAS, which since its creation in 2004, has been introduced to more than forty financial institutions in seventeen countries across Latin America and has processed tens of millions of dollars in remittances.

Key Issues, Constraints, and Opportunities Facing the Development of an

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Inclusive Financial Sector

Item Action Proposed Current Results of Action Taken

Lack of a national strategy for aninclusive sustainable financial sector

Adopt a national strategyNational Financial Inclusion Strategy 4 (NFIS) adopted by

State Bank of Pakistan

Overdependence on donor funds for both wholesale finance and operating costs

The frequency of fintech startup innovation challenge should be

increased

Linkage between academia and incubators/accelerators

established

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Technical challenges and hightransaction costs because of anabsence of infrastructure and a lack of mobility of clients, in particular women and people living in rural areas

Adoption of a modelagreement for using existing

agency with higher penetration to provide services to

financial institutions

Pakistan Post is already disbursing loans formicrofinance banks

Lack of reliable business and credit information that impedes the access of credit and increases delivery costs

Create a credit informationbureau

Credit Information Bureau created under the aegis of SBP

Lack of diverse financial services and products to meet local needs and priorities

Promotebranchless banking and

mobile banking

Mobile banking & Branchless banking: Several initiativeshave recently been launched.

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Additional relevant information

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Demand Side Statistics

Percentage of Adult population:

A2FS 2015

A2FS

2008

A. Banked 16% 11%

B. Other formal 7% 1%

Formally Served (A+B) 23% 12%

C. Informally Served 24% 32%

Financially Served (A+B+C) 47% 44%

Financially Excluded 53% 56%

Source: Access to Finance Survey, 2015

Supply Side Statistics

May 31, 2016 Number of Banks 54

Number of Branches 13,134

ATMs 12,000

POS 44,000

BB Agents 310,000

Total No. of Accounts 43,000,000

Total No. of Borrowers 7,000,000

Source: SBP


Key points of the proposal

Migrant remittances can play a critical role in the economic development of low/middle-income countries. Remittances to developing countries are generally seen as an instrument to reduce poverty and inequality, to provide social benefits and multiplier effects, and to act as buffers against economic shocks. However, the full developmental potential of remittances is far from being realized.

While the relevant stakeholders, from the financial institutions to actors from the public sector and the civil society, seem to appreciate the opportunity remittances represents, effective best practices to harness this opportunity are still to be identified.

Additionally, expanded access to the financial sector helps finance small business and microenterprise: a positive correlation has been found between financial inclusion and employment opportunities, and it is generally believed to positively affect economic growth.

This report will endeavor to outline existing as well as new solutions to maximize the impact of remittances for economic development underscoring the role that each stakeholder can play. It will also analyze the pilot project by TechnoServe / Microfinance International Corporation (MFIC) which took place in El Salvador in 2008, and was aimed at helping small entrepreneurs leverage remittances to fund and grow their businesses.

Appendix

Illustrative example

1. A livestock farmer, wishing to purchase more cattle 2. An owner of taxis, wishing to expand his fleet 3. A restaurant owner, wishing to expand into hospitality 4. A photocopier, wishing to restructure previous loans and to purchase new machinery

Results

Livestock Transport Hotel/restaurant PhotocopierValue of assets 700,000 1,500,000 15,000,000 7,500,000Avg. annual 1,100,000 1,600,000 7,900,000 17,000,000

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revenueYearly avg. income

9,00,000 8,00,000 2,500,000 2,200,000

Yearly average remittances

700,000 700,000 2,100,000 800,000

Loan requested 700,000 800,000 2,000,000 4,000,000Loan offered 300,000 800,000 1,100,000 4,000,000Guarantee No No Trustee YesInt. rate/no rem. 28% 26% 19% 19%Int. rate/rem 12% 24% 15% 15%Loan period 1 year 2 years 7 years 5 yearsValue of rem. To client

60,000 80,000 300,000 1,100,000

Financial cost saving5

57% 14% 21% 21%

Outcome Disbursed Pending Finalized Rejected

This table illustrates how the cases vary significantly. The absolute value of the remittance information to the client/entrepreneur is estimated simply in the saving in the financial cost thanks to the lower interest rate, because that is the only data reliably available. Hence, it doesn’t take into consideration the possibility of the loan being larger or with a longer period than it would have been without the entrepreneur’s credit profile. Yet, that value is an approximation of the monetization of the credit profile information as described above. It can be seen that this varies significantly with the size and the duration of the loan, from Rs. 60,000 to Rs. 1,100,000. In relative terms, the savings range from 57% to 14%. It is to be noted that this is the value to the client/entrepreneur only, and doesn’t take into account the value to the FI that provides the loan, as mentioned above. In the medium-to-long term the provision of credit information for entrepreneur can become a sustainable additional income stream for FIs. __________________________

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References

ADB Report on Pakistan: Improving Access to Financial Services, December 2009

Nenova, Niang, Ahmad, Bringing Finance to Pakistan’s Poor: A Study on Access to Finance for the Underserved and Small Enterprises, May 2009

Financial Stability Review 2007-08, Chapter 9, Promoting Inclusive Finance, State Bank of Pakistan

Rukhsana, Shahbaz, International Research Journal of Finance and Economics, Remittances and Poverty Nexus: Evidence from Pakistan 2009

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Comstock, Iannone, Bhatia, Maximizing the Value of Remittances for Economic Development, 2009

http://sbp.org.pk/Finc/finc.asp

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ahsannisar.files.wordpress.com€¦ · Web viewAccess to financing is now widely acknowledged as a path to meaningful economic inclusion and reduction in poverty. Policy efforts