Housing Microfinance Seminar Karachi, September 06, 2012 Regulatory Framework of Housing Microfinance Qazi Shoaib Ahmad Agricultural Credit & Microfinance Department State Bank of Pakistan Housing Microfinance Seminar Karachi, September 06, 2012

Legal & Regulatory Framework Microfinance Institutions Ordinance 2001 Prudential Regulations for MFBs Microfinance Licensing Criteria NGO Transformation Guidelines Branchless Banking Regulations Guidelines for Commercial Banks to undertake Microfinance Business Guidelines for Islamic Microfinance Business by Financial Institutions MFIs Ordinance authorize SBP to make rules and regulations to govern affairs of MFBs. Back

International Recognition In 2010 & 11 Consecutively Pakistan has been Ranked First in Overall Regulatory Framework and Practices for Microfinance; Ranking Improved in Other Categories. The Economist Intelligence Unit (EIU) of The Economist Magazine has issued its latest Annual Study (2011) ranking the Microfinance business environment in 55 countries and provides a perspective on both country-specific and global trends. It evaluates the counties on following distinct microfinance criteria: Sr. Criteria Ranking 2010 2011 1 Overall regulatory framework and practices 1st 2 Overall microfinance business environment ranking 5th 3rd 3 Supporting institutional framework 12th 4 Stability/Investment Climate 20th 31st Back

Strategic Framework for Sustainable Microfinance (2011-2015) Deposits (deposit protection, clearing house etc) Remittances Insurance Up-scaling MF services through trainings and regulatory guidelines on enterprise lending 1. Inclusive Financial Services Governance Management Development Programs Trainings on HR capacity development on all levels and sharing international best practices Robust MIS 2. Institutional Strengthening National BB Consultative Group Develop Supervisory Mechanism for Agents Network Development of Retail Agents Network Trainings / Seminars 3. Alternative Delivery Channels Credit Enhancement Mechanisms (MFCG, PPAF-PRISM etc.) Pakistan MF Fund FCY Borrowing Deposits Mobilization 4. Funding Regulating MFIs Consumer Protection and Financial Literacy Establishment of MF Credit Bureau 5. Sector Discipline / Transparency Back

Financial Inclusion Programme (£50m) FIP aims to promote inclusive growth through provision of market based financial services to mostly the poor, small entrepreneurs, women and marginalized communities Microfinance Credit Guarantee Facility (£10m) Institutional Strengthening Fund (£10m) Financial Innovation Challenge Fund (£10m) Small and Rural Guarantee Facility (£10m) These facilities were envisioned to address specific challenges in mind. 1. Credit enhancement for mobilization of Commercial credit to resolve funding constraints 2. Institutional Strengthening Fund for addressing capacity constraints, developing systems and controls and organizational development and use of Technology 3. Financial innovation challenge fund to promote innovation for cost reduction and breaking the geographical barriers to access through branchless banking 4. TA was to leverage to all these areas Leverage technical assistance, surveys and technology across all facilities Back

Branchless Banking Models in Pakistan Tameer Microfinance Bank Limited (Easy Paisa) Partnership of Telenor and Tameer Largest agent networking in Pakistan Retailers Acting as Agent MCB Bank Limited (MCB Mobile) Recently obtained BB License. Offering services to existing customers since long Extended Services United Bank Limited (Omni) Three Telco companies are registered with UBL Omni Direct Agent Back

Advances & Deposits Growth Advances and deposits have been on increasing trend over the years. Initially the deposits were on the lower side, but after 2008 it has increased sharply and by 2011, deposits have almost caught up with the advances. Advances of MFBs have increased to Rs 15 billion whereas the deposits have risen to approximately Rs 14 billion in 2011. MF sector of Pakistan constitute approximately 2 million borrowers. MFIs constitute around 1.2 million whereas MFBS constitute 0.8 million borrowers. Back

Portfolio Quality Pakistan MF Sector Portfolio at Risk of the industry has remained below the international benchmark of 5% over the years but has remained a bit high compared to the Asia’s benchmark of 2.1% over the last three years. PAR in 2010 was highest among 5 years due to devastating flooding in the country. Back

Yield on Loan Portfolio The nominal yields on GLP have been increasing over the years which at start were quite low due to low interest rate scenario and reluctance to charge high rate. SBP-led MF Strategy 2007 encourage MFBs to commercialize their operations to grow and become sustainable. The increase in the yield on GLP has been sustainable as PAR also remained within limits. Back

Profitability Operational Self Sufficiency of MFIs is higher than the MFBs. This is due to high operating cost of MFBs. But over the passage of time, the OSS of MFBs has come close to MFIs which shows that MFBs take some time to become operationally self sufficient. Back

Housing Finance Regulation Regulation 10: Maximum Loan Size and Disclosure of Basic Terms & Conditions of Financial Products: (Revised through MFD Circular No. 02 of 2009 dated August 27, 2009) “Housing Loans: Maximum Loan size up to Rs. 500,000/- to a single borrower with household annual income up to Rs. 600,000/-. However, at least 60% of housing loan portfolio of an MFB should be within the loan limit of Rs. 250,000/- or below.” MFBs’ HF Portfolio as of 30 June 2012 GLP as of 30th June 2012: Rs. 17.2 billion Housing Finance Portfolio: Rs. 168 million Tameer has 98% share in Housing Finance Back

Financial Exclusion The Formally Served The Financially Excluded 56% of the adult population does not have access to financial services The Informally Served Pakistan has one of the lowest financial penetration in the world with only 12 percent adult population formally served. Source: Access to Finance Survey 12

Financial Inclusion Number of Deposit Accounts = 30 million Inclusion and Access are likely to radically change in future as a result of growth in areas of microfinance and branchless banking. Number of Deposit Accounts = 30 million Number of M-wallets = 1.44 million 13

MF Industry Infrastructure Industry Players and their market share in terms of GLP Infrastructure 10 Microfinance Banks (MFBs) 5 Rural Support Programs (RSPs) 9 Specialized Microfinance Institutions (MFIs) 9 NGOs Outlets: 1739 Clients 2.2 M MFB 54% MFI 22% NGO 6% RSP 18% MFBs growth is likely to further accelerate, and they would become dominating players. 14

Journey of Microfinance Micro Credit to Microfinance Brick and Mortar to Branchless Banking Non Licensed to SBP regulated Social safety net to Access to finance Legal & Regulatory Framework Features Global recognition National MF strategies (I&II) Financial Inclusion Program (FIP) BB models creating space for com. banks and telcos in MF space Industry Consultative Groups – MFCG/BBCG Coordination among regulators (SBP- SECP-PTA) Financial Literacy / Capacity Development Programs MF-specific Bureau Historical Trends loans & deposits Portfolio at Risk (PAR) Loan yields Profitability There have been broadly three phases i) Pre-2000, ii) 2000-2006, and iii) 2007-onward. The MFIs Ordinance 2001 marked the beginning of a new era in microfinance, which allowed creation of micro-banking industry in Pakistan and allowed commercialisation of microfinance. The MFIs Ordinance provides multi-institutional approach by encouraging not only setting up of new MFBs at District, Regional, Provincial, and National level with varying capital requirements, but also an opportunity to NGOs/MFIs to transform into a Microfinance Bank. EMO Strategy 2007 accelerated SBP’s role in promoting growth and innovation in the sector. 15

Types of Micro-Credit S.No. Type Cap (Rs.) Eligibility 1 General Loan 150,000 Household annual income up to Rs. 300,000. 2 Housing Loan 500,000 Household annual income up to Rs. 600,000. 3 Microenterprise Loan Self-employed or employ few individuals not exceeding 10 (excluding seasonal labor). Loan classification / provisioning partnerships Funding – no restriction Note: At least 60% of housing loan portfolio of an MFB should be within the loan limit of Rs. 250,000/- or below. 16

How are Micro Housing Loans Different from Micro Enterprise Loans? Individual Liability 5-10 years loan May or may not be secured Size is larger Usage can be better tracked Enterprise loans Joint Liability 1 Year loan Unsecured Size is smaller Loan usage is fungible 17

SBP Regulation (basic) Market Response Regulatory Adjustment Conclusion SBP Regulation (basic) Market Response Regulatory Adjustment 18

Thank you!